Check whether the issuer (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See
definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is an emerging
growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities
Exchange Act of 1934 (§240.12b-2 of this chapter).
Indicate by check mark whether the
registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
State the number of shares outstanding
of each of the issuer’s classes of common equity, as of May 15,
2018: 8,646,003
sha
res of common stock.
Part 1. Financial Information
Item 1. Consolidated
Financial Statements
OPTEX SYSTEMS HOLDINGS,
INC.
UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 1,
2018
Optex Systems Holdings, Inc.
Condensed Consolidated Balance Sheets
|
|
(Thousands, except share and per share data)
|
|
|
|
April 1, 2018
(Unaudited)
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,831
|
|
|
$
|
1,682
|
|
Accounts Receivable, Net
|
|
|
1,401
|
|
|
|
3,125
|
|
Net Inventory
|
|
|
7,937
|
|
|
|
7,614
|
|
Prepaid Expenses
|
|
|
137
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
11,306
|
|
|
|
12,484
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
1,316
|
|
|
|
1,460
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid Royalties - Long Term
|
|
|
45
|
|
|
|
60
|
|
Security Deposits
|
|
|
23
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
68
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
12,690
|
|
|
$
|
14,027
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
812
|
|
|
$
|
1,362
|
|
Dividends Payable
|
|
|
262
|
|
|
|
261
|
|
Federal Income Taxes Payable
|
|
|
7
|
|
|
|
-
|
|
Accrued Expenses
|
|
|
899
|
|
|
|
1,450
|
|
Accrued Warranties
|
|
|
122
|
|
|
|
174
|
|
Customer Advance Deposits
|
|
|
677
|
|
|
|
927
|
|
Credit Facility
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
3,079
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
1,601
|
|
|
|
3,607
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4,680
|
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred Stock Series C ($0.001 par 400 authorized, 78 and 174 issued and outstanding, respectively)
|
|
|
-
|
|
|
|
-
|
|
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,646,003 and 8,190,101 shares issued and outstanding, respectively)
|
|
|
9
|
|
|
|
8
|
|
Additional Paid-in-capital
|
|
|
26,461
|
|
|
|
26,411
|
|
Accumulated Deficit
|
|
|
(18,460
|
)
|
|
|
(20,473
|
)
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
8,010
|
|
|
|
5,946
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
12,690
|
|
|
$
|
14,027
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of
Operations
(Unaudited)
|
|
(Thousands, except share and per share data)
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,550
|
|
|
$
|
4,040
|
|
|
$
|
9,327
|
|
|
$
|
7,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
3,557
|
|
|
|
3,271
|
|
|
|
7,218
|
|
|
|
6,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
993
|
|
|
|
769
|
|
|
|
2,109
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expense
|
|
|
786
|
|
|
|
840
|
|
|
|
1,559
|
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
207
|
|
|
|
(71
|
)
|
|
|
550
|
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Change in Fair Value of Warrants
|
|
|
2,350
|
|
|
|
(72
|
)
|
|
|
2,006
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(9
|
)
|
|
|
(6
|
)
|
|
|
(12
|
)
|
|
|
(10
|
)
|
Other (Expense) Income
|
|
|
2,341
|
|
|
|
(78
|
)
|
|
|
1,994
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
2,548
|
|
|
|
(149
|
)
|
|
|
2,544
|
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Income Tax (Benefit) Expense
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
2,631
|
|
|
$
|
(149
|
)
|
|
$
|
2,536
|
|
|
$
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.31
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.30
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
- basic
|
|
|
8,417,438
|
|
|
|
8,188,591
|
|
|
|
8,482,273
|
|
|
|
8,181,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
0.30
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.29
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - Diluted
|
|
|
8,744,759
|
|
|
|
8,188,591
|
|
|
|
8,815,922
|
|
|
|
9,606,950
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
(Thousands)
|
|
|
|
Six months ended
|
|
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,536
|
|
|
$
|
205
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
161
|
|
|
|
168
|
|
Gain on change in fair value of warrants
|
|
|
(2,006
|
)
|
|
|
(358
|
)
|
Noncash interest expense
|
|
|
2
|
|
|
|
1
|
|
Stock compensation expense
|
|
|
81
|
|
|
|
129
|
|
Accounts receivable
|
|
|
1,724
|
|
|
|
161
|
|
Inventory
|
|
|
(323
|
)
|
|
|
(960
|
)
|
Prepaid expenses
|
|
|
(74
|
)
|
|
|
58
|
|
Accounts payable and accrued expenses
|
|
|
(1,102
|
)
|
|
|
(233
|
)
|
Federal income taxes payable
|
|
|
7
|
|
|
|
-
|
|
Accrued warranty costs
|
|
|
(53
|
)
|
|
|
-
|
|
Prepaid royalties - long term
|
|
|
15
|
|
|
|
15
|
|
Customer advance deposits
|
|
|
(250
|
)
|
|
|
18
|
|
Total adjustments
|
|
|
(1,818
|
)
|
|
|
(1,001
|
)
|
Net cash provided by (used in) operating activities
|
|
|
718
|
|
|
|
(796
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(17
|
)
|
|
|
(130
|
)
|
Net cash used in investing activities
|
|
|
(17
|
)
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(522
|
)
|
|
|
-
|
|
Cash paid for taxes withheld on net settled restricted stock unit share issue
|
|
|
(30
|
)
|
|
|
(15
|
)
|
Net cash used in financing activities
|
|
|
(552
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
149
|
|
|
|
(941
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,682
|
|
|
|
2,568
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,831
|
|
|
$
|
1,627
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Exchange of common stock for non-trade accounts receivable
|
|
$
|
-
|
|
|
$
|
155
|
|
Exchange of preferred stock for common stock
|
|
|
480
|
|
|
|
90
|
|
Dividends declared and unpaid
|
|
|
262
|
|
|
|
-
|
|
Cash paid for interest
|
|
|
10
|
|
|
|
9
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
Note 1 - Organization and Operations
Optex
Systems Holdings, Inc. (“The Company”) manufactures optical sighting systems and assemblies for the U.S.
Department of Defense, foreign military applications and commercial markets. Its products are installed on a variety of U.S.
military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and
have been selected for installation on the Stryker family of vehicles. Optex Systems Holdings also manufactures and delivers
numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems
Holdings’ products consist primarily of build to customer print products that are delivered both directly to the
military and to other defense prime contractors or commercial customers. The Company’s consolidated revenues are
derived from the U.S. government, 34%, one major U.S defense contractor, 24%, one commercial customer, 29%, and all other
customers, 13%. Approximately 87% of the total company revenue is generated from domestic customers and 13% is derived from
Canada. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising
93,967 square feet. As of April 1, 2018, Optex Systems Holdings operated with 89 full-time equivalent employees.
Note 2 - Accounting
Policies
Basis of Presentation
Principles
of Consolidation:
The consolidated financial statements include the accounts of Optex Systems Holdings, Inc. (“The
Company”) and its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have
been eliminated in consolidation.
The condensed
consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings, without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information
and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading.
These condensed
consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the
notes thereto included in the Optex Systems Holdings’ Form 10-K for the year ended October 1, 2017 and other reports filed
with the SEC.
The accompanying
unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the
opinion of management, necessary to present fairly the financial position, results of operations and cash flows of Optex Systems
Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative
of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required for interim
financial reporting purposes has been omitted.
Use of Estimates:
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
Inventory:
As of April 1, 2018 and October
1, 2017, inventory included:
|
|
(Thousands)
|
|
|
|
April 1, 2018
|
|
|
October 1, 2017
|
|
Raw Material
|
|
$
|
4,735
|
|
|
$
|
5,931
|
|
Work in Process
|
|
|
4,048
|
|
|
|
2,859
|
|
Finished Goods
|
|
|
771
|
|
|
|
441
|
|
Gross Inventory
|
|
$
|
9,554
|
|
|
$
|
9,231
|
|
Less: Inventory Reserves
|
|
|
(1,617
|
)
|
|
|
(1,617
|
)
|
Net Inventory
|
|
$
|
7,937
|
|
|
$
|
7,614
|
|
Warranty Costs:
As of April 1, 2018 and October
1, 2017, the Company had warranty reserve balances of $122 thousand and $174 thousand, respectively. During the three and six months
ending April 1, 2018 the Company recognized $134 thousand and $211 thousand in warranty expenses related to quality issues encountered
on Applied Optics Center optical assemblies for returned products requiring repairs or replacements. There were no warranty expenses
recognized during the three and six months ending April 1, 2017. We believe we have made sufficient improvements to the production
process to minimize the return rate on future shipments but we will continue to review and monitor the reserve balances related
to this product line against any existing warranty backlog and current trend data on an interim basis until the current warranty
backlog is depleted.
Fair Value
of Financial Instruments:
Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of the financial statement presentation date.
The carrying value of the balance sheet
cash and cash equivalents, accounts and notes receivable, accounts payable, accrued liabilities, and notes payable, are carried
at, or approximate, fair value as of the reporting date because of their short-term nature. Fair values for the Company’s
warrant liabilities and derivatives are estimated by utilizing valuation models that consider current and expected stock prices,
volatility, dividends, market interest rates, forward yield curves and discount rates. Such amounts and the recognition of such
amounts are subject to significant estimates that may change in the future.
The fair value hierarchy prioritizes the
inputs to valuation techniques used to measure fair value and requires that assets and liabilities carried at fair value be classified
and disclosed in one of the following three categories:
Level 1: Quoted market prices in active
markets for identical assets or liabilities.
Level 2: Observable market-based inputs
or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting
the reporting entity’s own assumptions.
The accounting guidance establishes a hierarchy
which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability’s
level is based on the lowest level of input that is significant to the fair value measurement. Fair value estimates are reviewed
at the origination date and again at each applicable measurement date and interim or annual financial reporting dates, as applicable
for the financial instrument, and are based upon certain market assumptions and pertinent information available to management at
those times.
Each of the measurements is considered
a Level 2 or Level 3 measurement based on the availability of market data and inputs and the significance of any unobservable inputs
as of the measurement date. The methods and significant inputs and assumptions utilized in estimating the fair value of the warrant
liabilities, as well as the respective hierarchy designations are discussed further in Note 6 “Warrant Liabilities”.
Income Tax/Deferred Tax:
As
of April 1, 2018 Optex Systems, Inc. has a deferred tax asset valuation allowance of ($4.6) million against deferred tax assets
of $4.6 million, as compared to a valuation allowance of ($4.6) million against deferred tax assets of $4.6 million as of October
1, 2017. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for
each of the fiscal years 2010 through 2016. During the six months ended April 1, 2018, our deferred tax assets and corresponding
valuation account decreased by $1.8 million as a result of the Tax Cuts and Jobs Act of 2017 enacted on December 22, 2017 which
changed the Corporate tax rate from 34% to 21% effective as of January 1, 2018. We intend to continue maintaining a full valuation
allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these
allowances.
Earnings per Share:
Basic earnings per share
is computed by dividing income available for common shareholders (the numerator) by the weighted average number of common shares
outstanding (the denominator) for the period. Diluted earnings per share reflect the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common stock.
The Company has
potentially dilutive securities outstanding which include convertible preferred stock, unvested restricted stock units, stock options
and warrants. In computing the dilutive effect of convertible preferred stock, the numerator is adjusted to add back any convertible
preferred dividends and the denominator is increased to assume the conversion of the number of additional common shares. The Company
uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Convertible preferred stock, unvested restricted
stock units, stock options and warrants that are anti-dilutive are excluded from the calculation of diluted earnings per common
share.
For the three and six months ended April
1, 2018, 78 preferred Series C shares (which converts to 325,000 common shares), and 33,000 unvested restricted stock units were
included in the diluted earnings per share calculation and 66,000 unvested restricted stock units, 60,000 stock options and 4,125,200
warrants were excluded from the earnings per share calculation as they were antidilutive. For the three and six months ended April
2, 2017, zero and 342 preferred Series C shares (which converts to 1,425,000 common shares) were included in the diluted earnings
per share calculation, respectively, and 132,000 unvested restricted stock units, 56,280 stock options and 4,125,200 warrants were
excluded from the earnings per share calculation as they were antidilutive.
Note 3 - Segment Reporting
The Company’s
reportable segments are strategic businesses offering similar products to similar markets and customers; however, the companies
are operated and managed separately due to differences in manufacturing technology, equipment, geographic location, and specific
product mix. Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was retained.
The Applied Optics
Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies for the Optex
Systems-Richardson (“Optex Systems”) segment. Intersegment sales and transfers are accounted for at annually agreed
to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general and administrative
costs, but exclude profits that would apply to third party external customers.
Optex Systems (OPX) – Richardson,
Texas
Optex Systems revenues are primarily in
support of prime and subcontracted military customers. Approximately 76% of the Optex Systems segment revenue is comprised of domestic
military customers, 23% is comprised of foreign military customers and 1% is attributable to commercial customers. The Optex Systems
segment revenue from the U.S. government and one other major U.S. defense contractor represent approximately 24% and 23% of the
Company’s consolidated revenue, respectively.
Optex Systems is located in Richardson
Texas, with leased premises consisting of approximately 49,100 square feet. As of April 1, 2018, the Richardson facility operated
with 51 full time equivalent employees in a single shift operation. Optex Systems, Richardson serves as the home office for both
the Optex Systems and Applied Optics Center segments.
Applied Optics Center (AOC) – Dallas, Texas
The Applied Optics Center serves primarily
domestic U.S. customers. Sales to commercial customers represent 65% and military sales to prime and subcontracted customers represent
35% of the total segment revenue. Approximately 84% of the AOC revenue is derived from external customers and approximately 16%
is related to intersegment sales to Optex Systems in support of military contracts. The AOC segment revenue from the U.S. government
and one major commercial customer represents approximately 10% and 29% of the Company’s consolidated revenue, respectively.
The Applied Optics Center is located in
Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of April 1, 2018, AOC operated with
38 full time equivalent employees in a single shift operation.
The financial table below presents the
information for each of the reportable segments profit or loss as well as segment assets for each year. The Company does not allocate
interest expense, income taxes or unusual items to segments.
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
Three months ended April 1, 2018
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics
Center
Dallas
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,322
|
|
|
$
|
2,228
|
|
|
$
|
-
|
|
|
$
|
4,550
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
457
|
|
|
|
(457
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
2,322
|
|
|
$
|
2,685
|
|
|
$
|
(457
|
)
|
|
$
|
4,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
8
|
|
|
$
|
71
|
|
|
$
|
-
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
16
|
|
|
$
|
228
|
|
|
$
|
2,304
|
|
|
$
|
2,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(161
|
)
|
|
$
|
161
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain on change in fair value of warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,350
|
)
|
|
$
|
(2,350
|
)
|
Stock compensation expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37
|
|
|
$
|
37
|
|
Royalty expense amortization
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,703
|
|
|
$
|
3,987
|
|
|
$
|
-
|
|
|
$
|
12,690
|
|
Expenditures for segment assets
|
|
$
|
17
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17
|
|
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
Three months ended April 2, 2017
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics
Center
Dallas
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,404
|
|
|
$
|
1,636
|
|
|
$
|
-
|
|
|
$
|
4,040
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
431
|
|
|
|
(431
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
2,404
|
|
|
$
|
2,067
|
|
|
$
|
(431
|
)
|
|
$
|
4,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
15
|
|
|
$
|
70
|
|
|
$
|
-
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes(1)
|
|
$
|
63
|
|
|
$
|
(69
|
)
|
|
$
|
(143
|
)
|
|
$
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(169
|
)
|
|
$
|
169
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Loss on Change in Fair Value of Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72
|
|
|
$
|
72
|
|
Stock option compensation expense(1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
65
|
|
|
$
|
65
|
|
Royalty expense amortization
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,308
|
|
|
$
|
4,046
|
|
|
$
|
-
|
|
|
$
|
12,354
|
|
Expenditures for segment assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1) General and administrative expenses for the three months
ending April 2, 2017 of $65 thousand associated with the amortized stock compensation on executive/director restricted stock units
has been restated from Optex Richardson to Other (non allocated costs). Operating income (loss) for Optex Richardson and Other
(non allocated costs) has been restated to reflect the change.
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
Six months ending April 1, 2018
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics
Center
Dallas
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
4,988
|
|
|
$
|
4,339
|
|
|
$
|
-
|
|
|
$
|
9,327
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
829
|
|
|
|
(829
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
4,988
|
|
|
$
|
5,168
|
|
|
$
|
(829
|
)
|
|
$
|
9,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
19
|
|
|
$
|
142
|
|
|
$
|
-
|
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
154
|
|
|
$
|
477
|
|
|
$
|
1,913
|
|
|
$
|
2,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(317
|
)
|
|
$
|
317
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain on change in fair value of warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,006
|
)
|
|
$
|
(2,006
|
)
|
Stock compensation expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
81
|
|
|
$
|
81
|
|
Royalty expense amortization
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,703
|
|
|
$
|
3,987
|
|
|
$
|
-
|
|
|
$
|
12,690
|
|
Expenditures for segment assets
|
|
$
|
17
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17
|
|
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
Six months ending April 2, 2017
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics
Center
Dallas
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
4,442
|
|
|
$
|
3,110
|
|
|
$
|
-
|
|
|
$
|
7,552
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
893
|
|
|
|
(893
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
4,442
|
|
|
$
|
4,003
|
|
|
$
|
(893
|
)
|
|
$
|
7,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
30
|
|
|
$
|
138
|
|
|
$
|
-
|
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes(1)
|
|
$
|
86
|
|
|
$
|
(100
|
)
|
|
$
|
219
|
|
|
$
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(335
|
)
|
|
$
|
335
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain on change in fair value of warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(358
|
)
|
|
$
|
(358
|
)
|
Stock option compensation expense(1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
129
|
|
|
$
|
129
|
|
Royalty expense amortization
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,308
|
|
|
$
|
4,046
|
|
|
$
|
-
|
|
|
$
|
12,354
|
|
Expenditures for segment assets
|
|
$
|
4
|
|
|
$
|
126
|
|
|
$
|
-
|
|
|
$
|
130
|
|
(1) General and administrative expenses for the three months
ending April 2, 2017 of $129 thousand associated with the amortized stock compensation on executive/director restricted stock units
has been restated from Optex Richardson to Other (non allocated costs). Operating income (loss) for Optex Richardson and Other
(non allocated costs) has been restated to reflect the change.
Note 4 - Commitments
and Contingencies
Rental Payments
under Non-cancellable Operating Leases
As of April 1, 2018, the remaining minimum lease and estimated
adjusted common area maintenance (CAM) payments under the non-cancelable office and facility space leases are as follows:
Non-cancellable Operating Leases Minimum
Payments
|
|
(Thousands)
|
|
|
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
|
|
Fiscal Year
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Total
Payments
|
|
2018
|
|
$
|
138
|
|
|
$
|
54
|
|
|
|
120
|
|
|
$
|
30
|
|
|
$
|
342
|
|
2019
|
|
|
281
|
|
|
|
110
|
|
|
|
248
|
|
|
|
61
|
|
|
|
700
|
|
2020
|
|
|
291
|
|
|
|
112
|
|
|
|
255
|
|
|
|
62
|
|
|
|
720
|
|
2021
|
|
|
147
|
|
|
|
57
|
|
|
|
262
|
|
|
|
63
|
|
|
|
529
|
|
2022
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
5
|
|
|
|
27
|
|
Total minimum lease payments
|
|
$
|
857
|
|
|
$
|
333
|
|
|
$
|
907
|
|
|
$
|
221
|
|
|
$
|
2,318
|
|
Total
facilities rental and CAM expense for both facility lease agreements as of the three and six months ended April 1, 2018 was $174
and $341 thousand. Total expense under facility lease agreements as of the three and six months ended April 2, 2017 was $161 thousand
and $327 thousand.
As of April 1,
2018, the unamortized deferred rent was $119 thousand as compared to $123 thousand as of October 1, 2017. Deferred rent expense
is amortized monthly over the life of the lease.
Note 5 - Debt
Financing
Credit Facility
— Avidbank
As of April 1,
2018 and October 1, 2017, the outstanding principal balance on the line of credit was $300 thousand. For the three months and six
months ended April 1, 2018 and April 2, 2017, the total interest expense against the outstanding line of credit balance was $9
and $12 thousand and $6 and $10 thousand.
The Company amended
its revolving credit facility with Avidbank pursuant to a Seventh Amendment to Amended and Restated Loan Agreement, dated as of
April 5, 2018. The substantive amendments are as follows:
|
●
|
The new revolving maturity date is April 21, 2020.
|
|
●
|
On April 21, 2018 and each anniversary thereof for so long as the Revolving Facility is in effect, the Company shall pay a facility fee equal to one half of one percent (0.5%) of the Revolving Line.
|
|
●
|
The Company can maintain accounts at third party banks so long as the total in those other bank accounts does not exceed 20% of the total on deposit at Avidbank, and it shall remit to Avidbank monthly statements for all of those accounts within 30 days of the end of each month.
|
Note 6-Warrant
Liabilities
On August 26, 2016, Optex Systems Holdings,
Inc. issued 4,125,200 warrants to new shareholders and the underwriter, in connection with a public share offering. The warrants
entitle the holder to purchase one share of our common stock at an exercise price equal to $1.50 per share at any time on or after
August 26, 2016 (the “Initial Exercise Date”) and on or prior to the close of business on August 26, 2021 (the “Termination
Date”). The Company determined that these warrants are free standing financial instruments that are legally detachable and
separately exercisable from the common stock included in the public share offering. Management also determined that the warrants
are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability
pursuant to ASC 480
“Distinguishing Liabilities from Equity”
. The company has no plans to consummate a
fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding
warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance
sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being
recorded as a component of other income in the statement of operations.
As of April 1, 2018, the company reviewed
the valuation technique and inputs used to determine the fair value of the outstanding warrants. For each of the prior period measurement
dates, the company engaged an outside valuation company to calculate the fair value of warrants based on both the binomial lattice
model (“Binomial”) and the Black Scholes-Merton option pricing model (“BSM”). For each of the periods previously
presented, the Company disclosed the valuation technique as binomial, although the two models yielded comparable results with minimal
or no variation in the fair value calculation of the warrants at each of the respective measurement dates. As the BSM model yielded
similar results with the Binomial model and can be completed with in-house expertise at a lower cost, the company has determined
the BSM model will be used exclusively to value the outstanding warrants as of April 1, 2018 and future measurement dates throughout
the term of the warrants. Further, the company reviewed the model volatility rate input by comparing the historical 3.4 years volatility
of the traded common stock (OPXS) against similarly traded equities over the same time period, the historical volatility of the
Optex common stock subsequent to the August 26, 2016 public offering, and the implied volatility based on the Optex warrant shares
traded on the over-the-counter market (“OTC”) under ticker OPXXW as of April 1, 2018. A summary table of the comparison
is below.
Evaluated Model Input Criteria
|
|
Volatility
|
|
|
Lowest
Volatility
|
|
|
Highest
Volatility
|
|
Optex common shares (OPXS) 3.4 year history from 11/7/2014
|
|
|
162.4
|
%
|
|
|
|
|
|
|
|
|
Optex common shares (OPXS) trading history from 8/29/16 (1.6 years)
|
|
|
66.3
|
%
|
|
|
|
|
|
|
|
|
Optex warrants (OPXXW) implied volatility based on 3/29/18 closing price
(1)
|
|
|
65.1
|
%
|
|
|
|
|
|
|
|
|
Similarly traded equities, 3.4 year history from 11/7/2014
(2)
|
|
|
92.5
|
%
|
|
|
53.6
|
%
|
|
|
121.9
|
%
|
|
(1)
|
Implied volatility rate for OPXXW assuming Interest rate for U.S. Treasury Bonds of 2.39%, term
of 3.4 years and OTC market closing price of $0.38 per warrant on 3/29/18.
|
|
(2)
|
The average 3.4 year historical volatility across the 5 similarly traded companies is 92.5%,
the lowest volatility and the highest volatility is for a single company within the range of 5 similar traded companies.
|
Based on the review, the Company believes
the historical 3.4 year (period based on the remaining term of the warrants) volatility rate on the common shares, which includes
significantly lower volume trading data that precedes the public offering, is not representative of the expected volatility over
the remaining life of the warrants. Recent trend information indicates the increase in common share float subsequent to the public
offering combined with the concurrent preferred share conversions have significantly increased the frequency of trades and the
average daily volume levels from 6,392 daily shares to 25,245 daily shares, thereby minimizing the volatility fluctuations which
had previously existed on the common shares prior to the capitalization change. In addition, the implied volatility on the warrants
based on the available OTC market data indicate that current market participants have assumed a future volatility comparable to
the more recent experience rate. Accordingly, the current period BSM model fair value measurement assumes the adjusted 1.6 year
historical volatility input rate of 66.3%, which is comparable to the implied volatility rate of 65.1% derived from the OTC market
data as of the measurement date.
The fair value of the warrant liabilities
presented below were measured using either a Binomial (through October 1, 2017) or BSM (effective as of April 1, 2018) valuation
model. Significant inputs into the respective model at the inception and reporting period measurement dates are as follows:
Binomial Assumptions
|
|
Issuance
date
(1)
August
26, 2016
(4)
|
|
|
Period ending
October 2,
2016
(4)
|
|
|
Period ending
October 1,
2017
(4)
|
|
|
Period
ending April
1, 2018
(5)
|
|
Exercise Price
(1)
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
Warrant Expiration Date
(1)
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
Stock Price
(2)
|
|
$
|
0.95
|
|
|
$
|
0.77
|
|
|
$
|
0.98
|
|
|
$
|
1.02
|
|
Interest Rate (annual)
(3)
|
|
|
1.23
|
%
|
|
|
1.14
|
%
|
|
|
1.62
|
%
|
|
|
2.39
|
%
|
Volatility (annual)
(4)(5)
|
|
|
246.44
|
%
|
|
|
242.17
|
%
|
|
|
179.36
|
%
|
|
|
66.25
|
%
|
Time to Maturity (Years)
|
|
|
5
|
|
|
|
4.9
|
|
|
|
3.9
|
|
|
|
3.4
|
|
Calculated fair value per share
|
|
$
|
0.93
|
|
|
$
|
0.76
|
|
|
$
|
0.87
|
|
|
$
|
0.38
|
|
(
1) Based on the terms provided in the
warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26, 2016.
(2) Based on the trading value of common
stock of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending date.
(3) Interest rate for U.S. Treasury
Bonds, as of August 26, 2016 and each presented period ending date, as published by the U.S. Federal Reserve.
(4) Based on the historical daily volatility
of Optex Systems Holdings, Inc. for the term of the warrants as of August 26, 2016 and each presented period ending date through
January 1, 2017. The original fair value calculations were derived using the Binomial model, however, the yielded results were
consistent with fair market valuation using the Black Scholes Merton Option Pricing model for each of the respective periods.
(5) Based on the historical daily volatility
of Optex Systems Holdings, Inc. from the consummation of the public raise on August 26, 2016 through the current presented measurement
date. The company determined that the historical volatility prior to the August 26, 2016 public offering was not representative
of the current market expectations due to the significant change in company capital structure and increase in public float shares
(liquidity) arising from the common stock issued during the public offering and concurrent conversions of outstanding preferred
shares into common stock. The fair value calculation was derived using the Black Scholes Merton Option Pricing model.
The warrants outstanding and fair values
at each of the respective valuation dates are summarized below:
Warrant Liability
|
|
Warrants
Outstanding
|
|
|
Fair Value
per Share
|
|
|
Fair Value
(000’s)
|
|
Fair Value at initial measurement date of 8/26/2016
|
|
|
4,125,200
|
|
|
$
|
0.93
|
|
|
$
|
3,857
|
|
(Gain) on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
(739
|
)
|
Fair Value as of period ending 10/2/2016
|
|
|
4,125,200
|
|
|
$
|
0.76
|
|
|
$
|
3,118
|
|
Loss on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
489
|
|
Fair Value as of period ending 10/01/2017
|
|
|
4,125,200
|
|
|
$
|
0.87
|
|
|
$
|
3,607
|
|
(Gain) on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
(2,006
|
)
|
Fair Value as of period ending 04/01/2018
|
|
|
4,125,200
|
|
|
$
|
0.38
|
|
|
$
|
1,601
|
|
In accordance with the guidance in ASC
820-10-35-25 through ASC 820-10-35-26 regarding changes in valuation techniques, we have treated the change in technique from the
Binomial to the BSM model and the adjustment in the stock volatility input, as a change in accounting estimate. The Company believes
the resulting fair value measurement of the warrant liability is more representative of the current market fair value due to the
significant change in capital structure arising from the public offering. In addition, the resulting fair valuation measurement
has a strong correlation to the most recent closing price and implied market volatility and is within the range of the bid-ask
spread of the warrants on the OTC market as of the April 1, 2018 measurement date.
The Company has presented the fair
value measurement as a Level 3 measurement, relying on unobservable inputs reflecting the reporting entity’s own
assumptions. The company determined the OTC market for the warrants is not an actively traded market given the infrequency of
trading days, small lot trades and often significant spreads between bid and ask prices of the warrants, and is unreliable as
a Level 1 or Level 2 valuation on an ongoing basis. Level 3 measurements, which are not based on quoted prices in active
markets, introduce a higher degree of subjectivity and may be more sensitive to fluctuations in stock prices, volatility
rates and U.S. Treasury Bond rates and could have a material impact on future fair value measurements.
The Company anticipates using the
BSM model, based on the adjusted historical volatility rates subsequent to the change in capital structure, for fair
value measurements from April 1, 2018 through expiration of the warrants. Management has determined the BSM model, to be the
most reliable and least volatile determinate of the current fair value of the warrants. It is the Company expectation to
maximize on all observable market inputs for the warrants and calibrate the BSM model to incorporate relevant observable
market data into the fair value measurement at each future measurement date, if applicable.
During the six months ending April 1, 2018,
none of the warrants have been exercised. During the three and six months ending April 1, 2018, the company recognized a ($2.35)
million and a ($2.0) million gain on the change in fair value of warrants, respectively. During the three and six months ending
April 2, 2017, the Company recognized a $72 thousand loss and a ($358) gain on change in the fair value of warrants.
Note 7-Stock
Based Compensation
Stock Options issued to Employees, Officers
and Directors
The Optex Systems Holdings 2009 Stock Option
Plan provides for the issuance of up to 75,000 shares to the Company’s officers, directors, employees and to independent
contractors who provide services to Optex Systems Holdings as either incentive or non-statutory stock options determined at the
time of grant. As of April 1, 2018, there were 60,000 fully vested stock options outstanding at an exercise price of $10 per share. During the
six months ended April 1, 2018 3,750 stock options vested and 10 stock options forfeited.
Restricted Stock Units issued to Officers
and Employees
The following
table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock units granted under the Company’s
2016 Restricted Stock Unit Plan:
|
|
Outstanding
Unvested
RSU’s
|
|
Unvested as of October 2, 2016
|
|
|
200,000
|
|
Granted - year ended 2017
|
|
|
50,000
|
|
Vested - year ended 2017
|
|
|
(68,000
|
)
|
Unvested as of October 1, 2017
|
|
|
182,000
|
|
Granted – six months ended April 1, 2018
|
|
|
—
|
|
Vested - three months ended April 1, 2018
|
|
|
(83,000
|
)
|
Unvested as of April 1, 2018
|
|
|
99,000
|
|
During the six months ended April 1, 2018,
there were 83,000 shares vested in relation to restricted stock units issued to Danny Schoening, Karen Hawkins, and Bill Bates,
and there were 55,902 common shares issued in settlement of the vested shares, net of 27,098 shares representing $30 thousand of
tax obligations withheld. During the six months ended April 2, 2017, there were 68,000 shares vested in relation to restricted
stock units issued to Danny Schoening and Karen Hawkins and there were 45,799 common shares issued in settlement of the vested
shares, net of 22,201 shares representing $15 thousand of tax obligations withheld.
There were no new grants of restricted
stock units during the six months ended April 1, 2018 and 50,000 restricted stock units granted to Bill Bates in the twelve months
ending October 1, 2017.
Stock Based Compensation Expense
Equity
compensation is amortized based on a straight line basis across the vesting or service period as applicable. The recorded compensation
costs for options and shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized
in the table below:
|
|
Stock Compensation
|
|
|
|
(thousands)
|
|
|
|
Recognized Compensation Expense
|
|
|
Unrecognized Compensation Expense
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
As of period ending
|
|
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
April 1, 2018
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
8
|
|
|
$
|
20
|
|
|
$
|
-
|
|
|
$
|
8
|
|
Restricted Stock Units
|
|
|
37
|
|
|
|
31
|
|
|
|
73
|
|
|
|
62
|
|
|
|
121
|
|
|
|
194
|
|
Consultant Shares (IRTH)
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
Total Stock Compensation
|
|
$
|
37
|
|
|
$
|
65
|
|
|
$
|
81
|
|
|
$
|
129
|
|
|
$
|
121
|
|
|
$
|
202
|
|
Note 8 Stockholders’ Equity
Dividends
On June 26, 2017, the board of directors
approved a resolution authorizing a $0.02 per share (and per warrant) dividend payment on July 12, 2017, for common and preferred
series C shareholders and warrant holders of record as of July 5, 2017 and for three subsequent quarterly record dates thereafter.
Quarterly dividends of $261 thousand were paid out to share and warrant holders on July 12, 2017. Optex Systems Holdings recorded
an additional $261 thousand in dividends payable as of October 1, 2017 for declared dividends paid on October 19, 2017. During
the six months ending April 1, 2018, Optex Systems Holdings recorded $522 in declared dividends for dividends paid to share and
warrant holders of record as of January 12, 2018 and April 12, 2018. As of period ending April 1, 2018 there was $262 thousand
in dividends payable, which was paid on April 19, 2018. There are no additional dividend payments declared or anticipated dividend
declarations for the remainder of the fiscal year.
Common stock
As of October
2, 2016, Optex Systems Holdings had 8,266,601 common shares outstanding.
As of October 1, 2017, the outstanding
common shares were 8,190,101. During the six months ending April 1, 2018, Optex Systems Holdings issued 400,000 common shares due
to conversions of Series C preferred stock and 55,902 common shares related to the vesting of restricted stock units. There were
no other issuances of common or preferred stock during the six months ended April 1, 2018. As of April 1, 2018, the outstanding
common shares were 8,646,003.
Series C
Preferred Stock
As of October 1, 2017 there were 174 preferred
Series C shares outstanding. During the six months ending April 1, 2018, there were no new issues of preferred Series C shares,
and conversions of 96 preferred Series C shares, or $0.5 million, into 400,000 common shares. As of April 1, 2018 there were 78
preferred Series C shares outstanding, convertible into 325,000 common shares. During the six months ending April 1, 2017 there
were no new issues of preferred Series C shares, and conversions of 18 preferred Series C shares, or $0.1 million, into 75,000
common shares.
Note 9 Subsequent Events
The Company
amended its revolving credit facility with Avidbank pursuant to a Seventh Amendment to the Amended and Restated Loan
Agreement, dated as of April 5, 2018. The substantive amendments are as follows:
|
●
|
The new revolving maturity date is April 21, 2020:
|
|
●
|
On April 21, 2018 and each anniversary thereof for so long as the Revolving Facility is in effect, the Company shall pay a facility fee equal to one half of one percent (0.5%) of the Revolving Line.
|
|
●
|
The Company can maintain accounts at third party banks so long as the total in those other bank accounts does not exceed 20% of the total on deposit at Avidbank, and it shall remit to Avidbank monthly statements for all of those accounts within 30 days of the end of each month.
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Executive and Board Compensation
On December 19, 2017 the Board of Directors approved bonuses
in the amount of $152,432 for Danny Schoening and $55,691 for Karen Hawkins which were paid on January 5, 2018. On January 2, 2018, the Company issued 55,902 Common Shares to officers and directors in settlement of
restricted stock units vested on January 1, 2018.
Dividends
On June 26, 2017,
our board of directors approved a resolution declaring a $0.02 per share dividend payment on July 12, 2017, for common and Series
C preferred shareholders and warrant holders of record as of July 5, 2017 and for the three subsequent quarters with the last dividend
payment to occur on April 19, 2018. On October 19, 2017, we paid a second $0.02 per share dividend to holders of record as of October
12, 2017, and on January 19, 2018, we paid a third $0.02 per share dividend to holders of record as of January 12, 2018 and on
April 19, 2018, we paid a fourth $0.02 per share dividend to holders of record as of April 12, 2018. We do not anticipate payment
of further dividends in fiscal 2018.
Results of
Operations
Non GAAP Adjusted
EBITDA
We use adjusted
earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the performance
of our business as “net income” includes the significant impact of noncash valuation gains and losses on warrant liabilities,
noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest expenses and federal
income taxes. We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because it permits period-over-period
comparisons of our ongoing core operations before the excluded items. Adjusted EBITDA is a financial measure not required by, or
presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).
Adjusted EBITDA
has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This
non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may
calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA
as a comparative measure.
The table below
summarizes our three and six month operating results for periods ending April 1, 2018 and April 2, 2017, in terms of both the GAAP
net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both measures allows the reader to have
a “complete picture” of our overall performance.
|
|
(Thousands)
|
|
|
|
Three months ending
|
|
|
Six months ending
|
|
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Applicable to Common Shareholders (GAAP)
|
|
$
|
2,631
|
|
|
$
|
(149
|
)
|
|
$
|
2,536
|
|
|
$
|
205
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Change in Fair Value of Warrants
|
|
|
(2,350
|
)
|
|
|
72
|
|
|
|
(2,006
|
)
|
|
|
(358
|
)
|
Federal Income Tax (Benefit) Expense - Current
|
|
|
(83
|
)
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
Depreciation
|
|
|
79
|
|
|
|
85
|
|
|
|
161
|
|
|
|
168
|
|
Stock Compensation
|
|
|
37
|
|
|
|
65
|
|
|
|
81
|
|
|
|
129
|
|
Royalty License Amortization
|
|
|
8
|
|
|
|
8
|
|
|
|
15
|
|
|
|
15
|
|
Interest Expense
|
|
|
9
|
|
|
|
6
|
|
|
|
12
|
|
|
|
10
|
|
Adjusted EBITDA - Non GAAP
|
|
$
|
331
|
|
|
$
|
87
|
|
|
$
|
807
|
|
|
$
|
169
|
|
Our adjusted EBITDA
increased by $0.2 million to $0.3 million and by $0.6 million to $0.8 million during the three and six months ending April 1, 2018
as compared $0.1 million and $0.2 million during the three and six months ending April 2, 2017. EBITDA improvements are directly
correlated with significant increases in revenue, improvements in our gross margins, combined with cost reductions in general and
administrative costs. During the three and six months ending April 1, 2018, we experienced product revenue growth of 15.0% and
22.4%, and improved gross margin percentages of 2.8% and 2.2% over the prior year three and six months ending April 2, 2017. In
addition, we have reduced general and administrative expenses by 6.4% and 7.4% during the three and six months ending April 1,
2018 as compared to the prior year periods. We experienced our most significant revenue and margin growth for the first six months
of 2018 within the Applied Optics Center segment on military laser filters and commercial optical assemblies, however, each of
our operating segments realized impressive revenue growth and lower administrative costs from the prior year. Operating segment
performance is discussed in greater detail throughout the following sections.
During the three
and six months ending April 1, 2018, we recognized a gain on the change in fair value of warrants of $2.4 million, and $2.0 million
as compared to a loss of $0.1 million and a gain of ($0.4) million in the prior year quarter and six months. As this is a non-cash
gain driven by the current fair market value of our outstanding 4,125,200 warrants and unrelated to our core business operating
performance, the gain has been excluded from our adjusted EBITDA calculations presented above. Further discussion regarding the
gain on changes in fair value of the warrants and the related warrant liability can be found under “Other Income (Expense)”
in the three and six months comparative narratives of this report, as well as in Item 1, “Consolidated Financial Statements,
Note 6 - Warrant Liabilities”.
Segment Information
We have presented
the operating results by segment to provide investors with an additional tool to evaluate our operating results and to have a better
understanding of the overall performance of each business segment and its ability to perform in subsequent periods. Management
of Optex Systems Holdings uses the selected financial measures by segment internally to evaluate its ongoing segment operations
and to allocate resources within the organization accordingly. Segments are determined based on differences in products, location,
internal reporting and how operational decisions are made. Management has determined that the Optex Systems, Richardson plant and
the Applied Optics Center, Dallas plant, which was acquired on November 3, 2014, are separately managed, organized, and internally
reported as separate business segments. The table below provides a summary of selective statement of operations data by operating
segment for the three and six months ended April 1, 2018 and April 2, 2017 reconciled to the Consolidated Results of Operations
as presented in Item 1, “Consolidated Financial Statements.”
Results of Operations Selected Financial
Info by Segment
(Thousands)
|
|
Three months ending
|
|
|
|
April
1, 2018
|
|
|
April
2, 2017
|
|
|
|
Optex
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non allocated
costs and
eliminations)
|
|
|
Consolidated
|
|
|
Optex
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non allocated
costs and
eliminations)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from External Customers
|
|
$
|
2,322
|
|
|
$
|
2,228
|
|
|
$
|
-
|
|
|
$
|
4,550
|
|
|
$
|
2,404
|
|
|
$
|
1,636
|
|
|
$
|
-
|
|
|
$
|
4,040
|
|
Intersegment Revenues
|
|
|
-
|
|
|
|
457
|
|
|
|
(457
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
431
|
|
|
|
(431
|
)
|
|
|
-
|
|
Total Segment Revenue
|
|
|
2,322
|
|
|
|
2,685
|
|
|
|
(457
|
)
|
|
|
4,550
|
|
|
|
2,404
|
|
|
|
2,067
|
|
|
|
(431
|
)
|
|
|
4,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
1,853
|
|
|
|
2,161
|
|
|
|
(457
|
)
|
|
|
3,557
|
|
|
|
1,863
|
|
|
|
1,839
|
|
|
|
(431
|
)
|
|
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
469
|
|
|
|
524
|
|
|
|
-
|
|
|
|
993
|
|
|
|
541
|
|
|
|
228
|
|
|
|
-
|
|
|
|
769
|
|
Gross Margin %
|
|
|
20.2
|
%
|
|
|
19.5
|
%
|
|
|
0.0
|
%
|
|
|
21.8
|
%
|
|
|
22.5
|
%
|
|
|
11.0
|
%
|
|
|
0.0
|
%
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
Expense
(1)
|
|
|
614
|
|
|
|
135
|
|
|
|
37
|
|
|
|
786
|
|
|
|
647
|
|
|
|
128
|
|
|
|
65
|
|
|
|
840
|
|
Segment Allocated G&A Expense
|
|
|
(161
|
)
|
|
|
161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(169
|
)
|
|
|
169
|
|
|
|
-
|
|
|
|
-
|
|
Net General & Administrative Expense
|
|
|
453
|
|
|
|
296
|
|
|
|
37
|
|
|
|
786
|
|
|
|
478
|
|
|
|
297
|
|
|
|
65
|
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
16
|
|
|
|
228
|
|
|
|
(37
|
)
|
|
|
207
|
|
|
|
63
|
|
|
|
(69
|
)
|
|
|
(65
|
)
|
|
|
(71
|
)
|
Operating (Loss) %
|
|
|
0.7
|
%
|
|
|
8.5
|
%
|
|
|
8.1
|
%
|
|
|
4.5
|
%
|
|
|
2.6
|
%
|
|
|
(3.3
|
)%
|
|
|
15.1
|
%
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Change in Fair Value of Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
2,350
|
|
|
|
2,350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(72
|
)
|
|
|
(72
|
)
|
Interest Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) before taxes
|
|
$
|
16
|
|
|
$
|
228
|
|
|
$
|
2,304
|
|
|
$
|
2,548
|
|
|
$
|
63
|
|
|
$
|
(69
|
)
|
|
$
|
(143
|
)
|
|
$
|
(149
|
)
|
Net Income (Loss) %
|
|
|
0.7
|
%
|
|
|
8.5
|
%
|
|
|
(504.2
|
)%
|
|
|
56.0
|
%
|
|
|
2.6
|
%
|
|
|
(3.3
|
)%
|
|
|
33.2
|
%
|
|
|
(3.7
|
)%
|
(1) General
and administrative expenses for the three months ending April 2, 2017 of $65 thousand associated with amortized stock compensation
attributable to executive/director restricted stock units has been restated from Optex Richardson to Other (non-allocated costs).
Operating income (loss) for Optex Richardson and Other has been restated to reflect the change.
Our total revenues
increased by $0.6 million or 15.0% during the three months ending April 1, 2018 as compared to the three months ending April 2,
2017. Increased revenues during the quarter were driven by increased revenue of $0.6 million at the Applied Optics Center. Applied
Optics revenue increases were driven by increased deliveries for commercial optical assemblies of $0.3 million and military coated
filters of $0.3 million. Current quarter Optex Richardson and intersegment revenues are consistent with the prior year level. Intersegment
revenues relate primarily to coated filters provided by the Applied Optics Center to Optex Richardson in support of the Optex Systems
periscope line. We anticipate a strong third quarter 2018 revenue as compared to our prior year third quarter and the first half
of fiscal year 2018. The projected increase is driven by an uptick in orders and production rates for the Optex Richardson periscopes
product line and the Applied Optics Center military filter and commercial optical assembly product lines. We anticipate significantly
higher revenues for the Optex Richardson segment in the second half of fiscal 2018 as compared to the first half of the fiscal
year on increased production for the periscope and sighting systems product lines.
Both the gross
margin and the gross margin percentages increased on a consolidated basis during the three months ending April 1, 2018 as compared
to the prior year period. Total gross margin increased by $0.2 million, and 2.8% to 21.8% from 19.0%. The most significant gross
margin improvement was realized in our Applied Optics Center which increased from 11.0% to 19.5% and by $0.3 million from the prior
year period. The increased gross margins are driven by increased revenue and the corresponding contribution margin towards
fixed costs, a more favorable pricing structure in addition to improvements in labor and product yield efficiencies for our optical
assemblies and laser filters. The Optex Richardson gross margin decreased by ($0.1) million and the gross margin percentage decreased
by (2.3%) from 22.5% to 20.2% on changes in product mix in the current period as compared to the prior year period. We expect consolidated
gross margin rates in the second half of 2018 to remain consistent with the first half performance, with slight shifts between
segments for revenue and product line mix changes.
During the three
months ending April 1, 2018 and April 2, 2017, the Applied Optics Center absorbed $0.2 million of fixed general and administrative
costs incurred by Optex Systems for support services. These expenses cover accounting, executive, human resources, information
technology, board fees and other corporate expenses paid by Optex Systems and shared across both operating segments.
Our operating income increased by $0.3
million in the three months ending April 1, 2018, to $0.2 million, as compared to the prior year period operating loss of ($0.1)
million. Increased operating income was primarily attributable to the increase in revenue and gross margin at our Applied Optics
Center segment.
During the three
months ending April 1, 2018 we recognized a $2.4 million gain on change in valuation of warrant liabilities as compared to a ($0.1)
million loss in the prior year quarter. The changes in valuation on warrants are not allocated by segment as they relate to non-cash
expenses which recognize fair value changes on warrants due to market conditions beyond the control of the segment operating activities.
Results of Operations Selected Financial
Info by Segment
(Thousands)
|
|
Six months ending
|
|
|
|
April
1, 2018
|
|
|
April
2, 2017
|
|
|
|
Optex
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non allocated
costs and
eliminations)
|
|
|
Consolidated
|
|
|
Optex
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non allocated
costs and
eliminations)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from External Customers
|
|
$
|
4,988
|
|
|
$
|
4,339
|
|
|
$
|
-
|
|
|
$
|
9,327
|
|
|
$
|
4,442
|
|
|
$
|
3,110
|
|
|
$
|
-
|
|
|
$
|
7,552
|
|
Intersegment Revenues
|
|
|
-
|
|
|
|
829
|
|
|
|
(829
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
893
|
|
|
|
(893
|
)
|
|
|
-
|
|
Total Segment Revenue
|
|
|
4,988
|
|
|
|
5,168
|
|
|
|
(829
|
)
|
|
|
9,327
|
|
|
|
4,442
|
|
|
|
4,003
|
|
|
|
(893
|
)
|
|
|
7,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
3,925
|
|
|
|
4,122
|
|
|
|
(829
|
)
|
|
|
7,218
|
|
|
|
3,389
|
|
|
|
3,515
|
|
|
|
(893
|
)
|
|
|
6,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
1,063
|
|
|
|
1,046
|
|
|
|
-
|
|
|
|
2,109
|
|
|
|
1,053
|
|
|
|
488
|
|
|
|
-
|
|
|
|
1,541
|
|
Gross Margin %
|
|
|
21.3
|
%
|
|
|
20.2
|
%
|
|
|
0.0
|
%
|
|
|
22.6
|
%
|
|
|
23.7
|
%
|
|
|
12.2
|
%
|
|
|
0.0
|
%
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
Expense
(1)
|
|
|
1,226
|
|
|
|
252
|
|
|
|
81
|
|
|
|
1,559
|
|
|
|
1,302
|
|
|
|
253
|
|
|
|
129
|
|
|
|
1,684
|
|
Segment Allocated G&A Expense
|
|
|
(317
|
)
|
|
|
317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(335
|
)
|
|
|
335
|
|
|
|
-
|
|
|
|
-
|
|
Net General & Administrative Expense
|
|
|
909
|
|
|
|
569
|
|
|
|
81
|
|
|
|
1,559
|
|
|
|
967
|
|
|
|
588
|
|
|
|
129
|
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
154
|
|
|
|
477
|
|
|
|
(81
|
)
|
|
|
550
|
|
|
|
86
|
|
|
|
(100
|
)
|
|
|
(129
|
)
|
|
|
(143
|
)
|
Operating Income (Loss) %
|
|
|
3.1
|
%
|
|
|
9.2
|
%
|
|
|
9.8
|
%
|
|
|
5.9
|
%
|
|
|
1.9
|
%
|
|
|
(2.5
|
)%
|
|
|
14.4
|
%
|
|
|
(1.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Change in Fair Value of Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
2,006
|
|
|
|
2,006
|
|
|
|
-
|
|
|
|
-
|
|
|
|
358
|
|
|
|
358
|
|
Interest Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) before taxes
|
|
$
|
154
|
|
|
$
|
477
|
|
|
$
|
1,913
|
|
|
$
|
2,544
|
|
|
$
|
86
|
|
|
$
|
(100
|
)
|
|
$
|
219
|
|
|
$
|
205
|
|
Net
Income (Loss) %
|
|
|
3.1
|
%
|
|
|
9.2
|
%
|
|
|
(230.8
|
%)
|
|
|
27.3
|
%
|
|
|
1.9
|
%
|
|
|
(2.5
|
)%
|
|
|
(24.5
|
%)
|
|
|
2.7
|
%
|
(1) General and administrative expenses for the six months
ending April 2, 2017 of $129 thousand associated with amortized stock compensation attributable to executive/director restricted
stock units has been restated from Optex Richardson to Other (non-allocated costs). Operating income (loss) for Optex Richardson
and Other has been restated to reflect the change.
Our total revenues
increased by $1.7 million or 22.4% during the six months ending April 1, 2018 as compared to the six months ending April 2, 2017.
Increased revenues during the six month period were primarily driven by increased revenue of $0.5 at the Optex Richardson plant
and increased revenues of $1.2 million at the Applied Optics Center plant. Intersegment revenues decreased slightly ($0.06) million
during the period, from $0.89 million to $0.82 million. Intersegment revenues relate primarily to coated filters provided by the
Applied Optics Center to Optex Systems in support of the Optex Systems periscope line. We anticipate a strong revenue in the second
half of fiscal year 2018 as compared to the fiscal year 2017 second half. The projected increase is driven by an uptick in orders
and production rates for the Optex Richardson periscopes product line and the Applied Optics Center military filter and commercial
optical assembly product lines. We anticipate significantly higher revenues for the Optex Richardson segment in the second half
of fiscal 2018 as compared to the first half of the fiscal year on increased production for the periscope and sighting systems
product lines.
The consolidated
gross margin and gross margin percentages increased by $0.6 million, and 2.2% during the six months ending April 1, 2018 as compared
to the prior year period. Total gross margin increased to 22.6% from 20.4%. The gross margin dollar and percentage increase is
primarily due to improvements of the Applied Optics Center which increased from 12.2% to 20.2% and by $0.6 million from the prior
year period. The increased Applied Optics Center margins are driven by increased revenue and the corresponding contribution
margin towards fixed costs, a more favorable pricing structure in addition to improvements in labor and product yield efficiencies
for optical assemblies and laser filters. The Optex Richardson experienced a nominal gross margin increase on higher revenue, and
a decrease in gross margin percentage of (2.4%) from 23.7% to 21.3% on changes in product mix in the current year period as compared
to the prior year period. We expect consolidated gross margin rates in the second half of 2018 to remain consistent with the first
half performance, with slight shifts between segments for revenue and product line mix changes.
During the six
months ending April 1, 2018 and April 2, 2017, the Applied Optics Center absorbed $0.3 million of fixed general and administrative
costs incurred by Optex Systems for support services. These expenses cover accounting, executive, human resources, information
technology, board fees and other corporate expenses paid by Optex Systems and shared across both operating segments.
Our consolidated operating income increased
by $0.7 million, in the six months ending April 1, 2018, to $0.6 million, as compared to the prior year period operating loss of
($0.1) million. An increase in operating profit of $0.6 million is primarily attributable to the Applied Optics Center revenue
growth and gross margin improvements, combined with a $0.1 million reduction in general and administrative spending in Optex Richardson
and other unallocated segment costs. We anticipate a continued favorable operating profit trend during the remainder of the 2018
fiscal year on additional revenue growth in the Optex Richardson segment, continued gross margin improvements at the Applied Optics
Center segment, changes in product mix, and lower general and administrative spending across the segments.
During the six
months ending April 1, 2018 we recognized a $2.0 million gain on change in valuation of warrant liabilities as compared to a ($0.4)
million loss in the prior year period. The changes in valuation on warrants are not allocated by segment as they relate to non-cash
expenses which recognize fair value changes on warrants due to market conditions beyond the control of the segment operating activities.
Backlog
Backlog as of
April 1, 2018, was $18.6 million as compared to a backlog of $15.7 million as of October 1, 2017, representing an increase of $2.9
million or 18.5%. Backlog as of April 1, 2018 is $1.6 million, or 9.5% higher than ending backlog as of April 2, 2017. During the
six months ending April 1, 2018, Optex Systems booked $12.2 million in new orders, representing a ($0.2) million, or (1.6%), decrease
from the booked orders of $12.4 million in the prior year six months. We attribute the slightly lower orders in the current year
period as compared to the prior year period to changes in customer and product mix as well as the timing of customer orders.
The following
table depicts the current expected delivery by period of all contracts awarded as of April 1, 2018 in millions of dollars:
|
|
(Millions)
|
|
Product Line
|
|
Q3
2018
|
|
|
Q4
2018
|
|
|
2018
Delivery
|
|
|
2019+
Delivery
|
|
|
Total Backlog
4/1/2018
|
|
|
Total
Backlog
10/1/2017
|
|
|
Variance
|
|
|
% Chg
|
|
Periscopes
|
|
|
2.5
|
|
|
|
2.1
|
|
|
|
4.6
|
|
|
|
2.3
|
|
|
|
6.9
|
|
|
|
4.9
|
|
|
|
2.0
|
|
|
|
40.8
|
%
|
Sighting Systems
|
|
|
1.6
|
|
|
|
0.2
|
|
|
|
1.8
|
|
|
|
1.8
|
|
|
|
3.6
|
|
|
|
4.1
|
|
|
|
(0.5
|
)
|
|
|
(12.2
|
%)
|
Other
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
1.1
|
|
|
|
1.8
|
|
|
|
0.6
|
|
|
|
1.2
|
|
|
|
200.0
|
%
|
Optex Systems - Richardson
|
|
|
4.3
|
|
|
|
2.8
|
|
|
|
7.1
|
|
|
|
5.2
|
|
|
|
12.3
|
|
|
|
9.6
|
|
|
|
2.7
|
|
|
|
28.1
|
%
|
Applied Optics Center - Dallas
|
|
|
1.3
|
|
|
|
1.5
|
|
|
|
2.8
|
|
|
|
3.5
|
|
|
|
6.3
|
|
|
|
6.1
|
|
|
|
0.2
|
|
|
|
3.3
|
%
|
Total Backlog
|
|
|
5.6
|
|
|
|
4.3
|
|
|
|
9.9
|
|
|
|
8.7
|
|
|
|
18.6
|
|
|
|
15.7
|
|
|
|
2.9
|
|
|
|
18.5
|
%
|
Optex Systems - Richardson:
During the six
months ending April 1, 2018, backlog for the Optex Systems Richardson segment increased by $2.7 million, or 28.1%, to $12.3 million
from the fiscal year-end backlog of $9.6 million. The increased backlog was primarily driven by an increase of $2.0 million, or
40.8% in the periscope product group and an increase of $1.2 million, or 200% in other products, including window, objective cell
and muzzle reference assemblies. Sighting Systems backlog declined by ($0.5) million, or (12.2%) from our fiscal year-end backlog
as we continue to ship sighting systems against our existing contracts.
During the six
months ending April 1, 2018 we booked new periscope orders of $5.1 million, a reduction of ($1.0) million from the prior year period.
In fiscal year 2017, periscope orders of $6.1 million in the first six months were exceptionally high as a result of delays in
government procurements during the last quarter of fiscal year 2016 which pushed awards into the first quarter of 2017. We booked
an additional $1.4 million in periscope orders subsequent to the period ended April 1, 2018 for task order awards on existing IDIQ
contracts as well as new contract awards.
We experienced
increases in new orders for Sighting Systems of $0.6 million and other product lines of $0.9 million during the six months ending
April 1, 2018 for a total of $2.5 million in new orders as compared to the prior year levels of $1.0 million, offsetting a portion
of the lower periscope and Applied Optics Center orders. We anticipate additional new orders throughout the year across all product
lines for deliveries within the current fiscal year and beyond.
Applied Optics
Center – Dallas
During the six
months ending April 1, 2018, the Applied Optics Center backlog increased by 3.3%, or $0.2 million, to $6.3 million from the fiscal
year end level of $6.1 million. New orders for our Applied Optics Center were $4.6 million in the six months ending April 1, 2018
as compared to $5.3 million in the prior year six month period, a reduction of ($0.7) million. We anticipate increased orders during
the six months for deliveries within the current fiscal year and beyond.
The Applied Optics
Center also serves as a primary filter supplier to the Optex Systems – Richardson plant. During the six months ending April
1, 2018, the Applied Optex Center received intracompany orders for laser coated filters in support of the Optex periscope product
line of $0.8 million, slightly below the prior year intracompany orders of $0.9 million. The decrease in intercompany orders is
primarily related to changes in periscope mix and production schedules as compared to the prior year six months.
The Company
continues to aggressively pursue international and commercial opportunities in addition to maintaining its current
footprint with U.S. vehicle manufactures, with existing as well as new product lines. We continue exploring new market
opportunities for our M17 day/thermal periscopes and digital optics for commercial applications. We are also reviewing
potential products, outside our traditional product lines, which could be manufactured using our current production
facilities in order to capitalize on our existing capacity. Further, we continue to look for strategic businesses to acquire
that will strengthen our existing product line, expand our operations, and enter new markets.
Three Months Ended April 1, 2018
Compared to the Three Months Ended April 2, 2017
Revenues
.
In the three months ended April 1, 2018, revenues increased by $0.6 million or 15% from the respective prior period in fiscal year
2017 as set forth in the table below:
|
|
Three months ended
|
|
|
|
|
|
|
(Millions)
|
|
|
|
|
Product Line
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
Variance
|
|
|
% Chg
|
|
Periscopes
|
|
$
|
1.6
|
|
|
$
|
1.8
|
|
|
$
|
(0.2
|
)
|
|
|
(11.1
|
)
|
Sighting Systems
|
|
|
0.4
|
|
|
|
-
|
|
|
|
0.4
|
|
|
|
100.0
|
|
Other
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
(0.2
|
)
|
|
|
(33.3
|
)
|
Optical Systems – Richardson
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
-
|
|
|
|
-
|
|
Applied Optics Center – Dallas
|
|
|
2.2
|
|
|
|
1.6
|
|
|
|
0.6
|
|
|
|
37.5
|
|
Total Revenue
|
|
$
|
4.6
|
|
|
$
|
4.0
|
|
|
$
|
0.6
|
|
|
|
15.0
|
|
Revenues on our
periscope line decreased by ($0.2) million during the three months ended April 1, 2018 as compared to the three months ended April
2, 2017 based on timing of customer awards and delivery schedules. Based on our current backlog, we anticipate an increase in periscope
revenues over the next quarter and second half of fiscal year 2018 over the prior six months and the fiscal year 2017 level.
Sighting systems revenues for the three
months ending April 1, 2018 increased by $0.4 million or 100% from revenues in the prior year period. Deliveries on our current
backlog for DDAN sighting systems were delayed during the first half of 2017 pending product configuration changes and export licenses.
We have resumed full production on the current orders and expect to continue shipments at a significantly higher pace through the
fourth quarter of fiscal 2018.
Applied Optics Center revenue increased
$0.6 million or 37.5% during the three months ended April 1, 2018 as compared to the three months ended April 2, 2017 primarily
due to increased deliveries on commercial optical assemblies and military laser filters. After a strong first half revenue for
our Applied Optics products in 2018, our current backlog indicates the second half revenue will approximate the second half revenue
in 2017, with a strong third quarter, decreasing into the fourth quarter on lower customer demand and changes in mix for commercial
optical assemblies. As we continue to book new orders against the Applied Optics Center segment, our fourth quarter projections
could increase.
Other product
revenues declined by ($0.2) million to $0.4 million during the three months ending April 1, 2018 as compared to $0.6 million in
the prior year period primarily due to reductions in component spare orders from the prior year level. Based on our current backlog
as compared to our backlog level at the end of the second quarter in 2017, we expect lower revenues in the other product group
during the fiscal year 2018 as compared to the prior year. Many of these orders have a long material lead time and often require
first article testing prior to production. Reductions in other revenues are expected to be fully offset by increased revenues in
each of the other product groups.
Gross Margin
.
The gross margin during the period ending April 1, 2018 was 21.8% of revenue as compared to a gross margin of 19.0% of revenue
for the period ending April 2, 2017. Cost of sales increased to $3.6 million for the current period as compared to the prior year
period of $3.3 million on increased revenues of $0.6 million. The gross margin increased by $0.2 million in the current year period
to $1.0 million as compared to the prior year period of $0.8 million. We attribute the improvement in gross margin to higher revenue
combined with cost efficiency and pricing improvements and changes in product mix between the respective periods.
G&A Expenses
.
During the three months ended April 1, 2018, we recorded operating expenses of $0.79 million as opposed to $0.84 million, during
the three months ended April 2, 2017, a net decrease of $0.05 million. Decreased general and administrative costs during the current
year period were primarily driven by decreases in stock compensation expenses, board of director fees and investor relations costs
in the current year quarter as compared to the prior year quarter. We expect our total fiscal year 2018 spending for general and
administrative cost to remain at the lower levels from the spending trend in fiscal year 2017.
Operating Income
(Loss)
. During the three months ended April 1, 2018, we recorded an operating income of $0.2 million, as compared to an operating
loss of ($0.1) million during the three months ended April 2, 2017. The $0.3 million increased operating income in the current
year period over the prior year period is primarily due to increased gross margin on higher revenue and lower general and administrative
costs in the current year quarter as compared to the prior year quarter.
Other Income (Expense).
During the
three months ended April 1, 2018, we recognized a $2.4 million gain on change in the fair value of warrants as compared to a ($0.1)
million loss in three months ending April 2, 2017. The change in gain on fair value is attributable to a change in accounting estimate
on the warrant liability of our outstanding 4,125,200 warrants to incorporate new market information into the valuation model related
to the volatility of the stock prices and OTC market trading data. Additional information related to the change in valuation is
discussed under Item 1, “Consolidated Financial Statements, Note 6 – Warrant Liability”
Net Income (Loss) applicable to common
shareholders
. During the three months ended April 1, 2018, we recorded a net income applicable to common shareholders of $2.6
million as compared to net a net loss applicable to common shareholders of ($0.1) million during the three months ended April 2,
2017. The increase in net income of $2.7 million is primarily attributable to increased operating income of $0.3 million and changes
in the gain on the fair value of warrant liabilities of $2.4 million.
Six Months Ended April 1, 2018 Compared
to the Six Months Ended April 2, 2017
Revenues
.
In the six months ended April 1, 2018, revenues increased by $1.7 million or 22.4% from the respective prior period in fiscal year
2017 as set forth in the table below:
|
|
Six months ended
|
|
|
|
|
|
|
(Millions)
|
|
|
|
|
Product Line
|
|
April 1, 2018
|
|
|
April 2, 2017
|
|
|
Variance
|
|
|
% Chg
|
|
Periscopes
|
|
$
|
3.2
|
|
|
$
|
3.3
|
|
|
$
|
(0.1
|
)
|
|
|
(3.0
|
)
|
Sighting Systems
|
|
|
1.2
|
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
1,100.0
|
|
Other
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
(0.5
|
)
|
|
|
(45.5
|
)
|
Optical Systems – Richardson
|
|
|
5.0
|
|
|
|
4.5
|
|
|
|
0.5
|
|
|
|
11.1
|
|
Applied Optics Center – Dallas
|
|
|
4.3
|
|
|
|
3.1
|
|
|
|
1.2
|
|
|
|
38.7
|
|
Total Revenue
|
|
$
|
9.3
|
|
|
$
|
7.6
|
|
|
$
|
1.7
|
|
|
|
22.4
|
|
Revenues on our
periscope line decreased slightly by (3.0%), or ($0.1) million from $3.3 million to $3.2 million during the six months ended April
1, 2018 as compared to the six months ended April 2, 2017 due to the timing of customer awards and delivery schedules. Based on
our current backlog, we anticipate an increase in periscope revenues over the next quarter and second half of fiscal year 2018
over the prior six months and the fiscal year 2017 level.
Sighting systems revenues for the six months
ending April 1, 2018 increased by $1.1 million or 1,100% from revenues in the prior year period. Deliveries on our current backlog
for DDAN sighting systems were delayed during the first half of 2017 pending product configuration changes and export licenses.
We have resumed full production on the current orders and expect to continue shipments at a significantly higher pace through the
fourth quarter of fiscal 2018.
Applied Optics Center revenue increased
$1.2 million or 38.7% during the six months ended April 1, 2018 as compared to the six months ended April 2, 2017 primarily due
to increased deliveries on commercial optical assemblies and military laser filters. After a strong first half revenue for our
Applied Optics products in 2018, our current backlog indicates the second half revenue will approximate the second half revenue
in 2017, with a strong third quarter, decreasing into the fourth quarter on lower customer demand and changes in mix for commercial
optical assemblies. As we continue to book new orders against the Applied Optics Center segment, our fourth quarter projections
could increase.
Other product
revenues declined by ($0.5) million, or (45.5%), to $0.6 million during the six months ending April 1, 2018 as compared to $1.1
million in the prior year period primarily due to reductions in component spare orders from the prior year level. Based on our
current backlog as compared to our backlog level at the end of the first six months in 2017, we expect lower revenues in the other
product group during the fiscal year 2018 as compared to the prior year. Many of these orders have a long material lead time and
often require first article testing prior to production. Reductions in other revenues are expected to be fully offset by increased
revenues in each of the other product groups.
Gross Margin
.
The gross margin during the period ending April 1, 2018 was 22.6% of revenue as compared to a gross margin of 20.4% of revenue
for the period ending April 2, 2017. Cost of sales increased to $7.2 million for the current period as compared to the prior year
period of $6.0 million on increased revenues of $1.7 million. The gross margin increased by $0.6 million in the current year period
to $2.1 million as compared to the prior year period of $1.5 million. We attribute the improvement in gross margin to higher revenue,
cost efficiency and pricing improvements and changes in product mix between the respective periods.
G&A Expenses
.
During the six months ended April 1, 2018, we recorded operating expenses of $1.6 million as opposed to $1.7 million, during the
six months ended April 2, 2017, a net decrease of $0.1 million. Decreased general and administrative costs during the current year
period were primarily driven by decreases in stock compensation expenses, board of director fees and investor relations costs in
the current year period as compared to the prior year period. We expect our total fiscal year 2018 spending for general and administrative
cost to remain at the lower levels from the spending trend in fiscal year 2017.
Operating Income
(Loss)
. During the six months ended April 1, 2018, we recorded an operating income of $0.6 million, as compared to an operating
loss of ($0.1) million during the six months ended April 2, 2017. The $0.7 million increased operating income in the current year
period over the prior year period is primarily due to increased gross margin on higher revenue and lower general and administrative
costs in the current year quarter as compared to the prior year period.
Other Income (Expense).
During the
six months ended April 1, 2018, we recognized a $2.0 million gain on change in the fair value of warrants as compared to a $0.4
million gain in six months ending April 2, 2017. The $1.6 million change in the gain on fair value is attributable to a change
in accounting estimate on the warrant liability of our outstanding 4,125,200 warrants to incorporate new market information into
the valuation model related to the volatility of the stock prices and OTC market trading data. Additional information related to
the change in valuation is discussed under Item 1, “Consolidated Financial Statements, Note 6 – Warrant Liability”
Net Income (Loss) applicable to common
shareholders
. During the six months ended April 1, 2018, we recorded a net income applicable to common shareholders of $2.5
million as compared to net income applicable to common shareholders of $0.2 million during the six months ended April 2, 2017.
The increase in net income of $2.3 million is primarily attributable to increased operating income of $0.7 million and the increased
gain on changes in the fair value of warrant liabilities of $1.6 million.
Liquidity and Capital Resources
As of April 1,
2018, Optex Systems Holdings had working capital of $8.2 million, as compared to $8.0 million as of October 1, 2017. During the
six months ended April 1, 2018, the Company experienced a net income of $2.5 million and an increase of 22.4%, or $1.7 million
in revenues to $9.3 million in the current year period as compared to $7.6 million in the prior year period ending April 2, 2017.
The Company’s adjusted EBITDA increased by $0.6 million during the six months ending April 1, 2018 to $0.8 million from $0.2
million during the six months ending April 2, 2017. Backlog as of April 1, 2018 has increased by $2.9 million or 18.5% to $18.6
million as compared to backlog of $15.7 million as of October 1, 2017.
The 2018 National Defense Authorization
Act (“NDAA”) authorizes total spending of $700 billion which includes a base spending authorization of $634 billion
plus the authorization of $65.8 billion in additional funding for the Overseas Contingency Operation (OCO) account. The bill authorizes
a major hike in military spending over the 2017 NDAA authorization amount of $619 billion and sets defense spending well above
the $549 billion base authorization cap under the 2011 Budget Control Act. On February 9, 2018, Congress passed a budget stop gap
resolution which was signed by the president. The resolution lifts the sequestration limits on military spending by $165 billion
over the next two years in line with the 2018 NDAA authorization of $700 billion. We are optimistic that the defense industry effects
of the 2011 budget sequestration have reached a plateau and we will begin to see steady increases in defense military procurement
orders in fiscal year 2018 and upcoming fiscal years. Further, we continue to look for additional strategic businesses to acquire
that will strengthen our existing product line, expand our operations, and enter new markets.
The Company has
historically funded its operations through working capital, convertible notes, preferred stock offerings and bank debt. The Company’s
ability to generate positive cash flows depends on a variety of factors, including the continued development and successful marketing
of the Company’s products. At April 1, 2018, the Company had approximately $1.8 million in cash and an outstanding payable
balance of $0.3 million against our working line of credit. The line of credit allows for borrowing up to a maximum of $2.2 million,
which fluctuates based on our open accounts receivable balance. As of April 1, 2018 our outstanding accounts receivable was $1.4
million. The Company expects to incur net income, increased adjusted EBITDA and positive cash flow from operating activities throughout
2018 on revenue growth, increased product gross margins and lower general and administrative spending. Maintaining the Company
profitability is dependent upon maintaining a level of revenue adequate to support the Company’s cost structure. Management
intends to manage operations commensurate with its level of working capital and facilities line of credit during the next six months;
however, uneven revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program
delays combined with increasing inventory and production costs required to support a higher backlog could create a working capital
shortfall. In the event the Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.
On August 26,
2016, we consummated a public offering of 2,291,000 Class A units consisting of common stock and warrants and 400 Class B units
consisting of shares of Series C convertible stock and warrants for a total gross purchase price of $4.8 million. The net cash
proceeds of the offering were $4.2 million after underwriter expenses of $0.5 million. We used $0.3 million of the proceeds for
offering expenses paid by Optex Systems Holdings and $1.7 million of the proceeds for the redemption of Series A and Series B preferred
shares which were a condition of the offering. The remaining $2.2 million of funds is being used to fund working capital needs
to support revenue growth and acquisitions.
On April 27, 2017, the Board of
Directors of Optex Systems Holdings approved a purchase of 700,000 shares of its common stock in a private transaction from
The Longview Fund, L.P. The transaction was priced at the closing sale price on April 28, 2017 of $0.74 per share for a total
transaction amount of $518 thousand. Upon repurchase on May 1, 2017, the shares were cancelled thereby reducing the total shares
outstanding of its common stock.
On June 26, 2017, our board of
directors approved a resolution declaring a $0.02 per share dividend payment on July 12, 2017, for common and Series C
preferred shareholders and warrant holders of record as of July 5, 2017 and for the three subsequent quarters with the last
dividend payment to occur in April 2018. On October 19, 2017, we paid a second $0.02 per share dividend to holders of record
as of October 12, 2017, and on January 19, 2018, we paid a third $0.02 per share dividend to holders of record as of January
12, 2018. Optex recorded $262 thousand in dividends payable as of April 1, 2018 for the fourth dividend payment paid on April
19, 2018. Our board of directors has determined that it will not authorize declarations beyond the April 2018 dividend date
for the foreseeable future as the Company pursues other business opportunities. The board of directors will revisit the issue
at the end of calendar year 2018.
Cash Flows
for the Period from October 1, 2017 through April 1, 2018
Cash and Cash
Equivalents:
As of April 1, 2018, we had cash and cash equivalents of $1.8 million, representing an increase of $0.1
million during the six month period.
Net Cash Provided
by Operating Activities
. Net cash provided by operating activities during the six months from October 1, 2017 to April 1, 2018
totaled $0.7 million. The primary sources of cash during the period relate to collections against accounts receivable of $1.7 million,
offset by decreases in accounts payable and accrued expenses of ($1.1) million and other working capital changes of $0.1 million.
Net Cash
Used in Investing Activities
. In the six months ended April 1, 2018, cash used in investing activities was insignificant.
We anticipate increased spending up to $0.2 million in the second half of fiscal 2018 for fixed asset acquisitions in support
of our military laser filter and periscope production lines.
Net Cash Used
in Financing Activities
. Net cash used in financing activities was ($0.6) million during the six months ended April 1, 2018
and relate to dividends paid to shareholders on October 19, 2017 and January 19, 2018.
Critical Policies
and Accounting Pronouncements
Our significant
accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies
require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These
policies are described in “Critical Policies and Accounting Pronouncements” and Note 2 (Accounting Policies) to consolidated
financial statements in our Annual Report on Form 10-K for the year ended October 1, 2017.
Cautionary
Factors That May Affect Future Results
This Quarterly
Report on Form 10-Q and other written reports and oral statements made from time to time by Optex Systems Holdings may contain
so-called “forward-looking statements,” all of which are subject to risks and uncertainties. You can identify these
forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,”
“forecasts,” “projects” and other words of similar meaning. You can identify them by the fact that they
do not relate strictly to historical or current facts. These statements are likely to address Optex Systems Holdings’ growth
strategy, financial results and product and development programs. You must carefully consider any such statement and should understand
that many factors could cause actual results to differ from Optex Systems Holdings’ forward-looking statements. These factors
include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that
are not. No forward-looking statement can be guaranteed and actual future results may vary materially.
Optex Systems Holdings does not assume
the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described
in this Form 10-Q. In various filings Optex Systems Holdings has identified important factors that could cause actual results to
differ from expected or historic results. You should understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.
Item 4. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
As of the end
of the period covered by our Quarterly Report on Form 10-Q for the quarter ended April 1, 2018, management performed, with the
participation of our Principal Executive Officer and Principal Financial Officer, an evaluation of the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures
are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated
and communicated to our management including our Principal Executive Officer and our Principal Financial Officer, to allow timely
decisions regarding required disclosures. Based upon the evaluation described above, our Principal Executive Officer and our Principal
Financial Officer concluded that, as of April 1, 2018, our disclosure controls and procedures were effective.
Changes in
Internal Control Over Financial Reporting
During the three
and six months ended April 1, 2018, there were no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
OPTEX SYSTEMS HOLDINGS, INC.
|
|
|
|
|
|
Date: May 15, 2018
|
By:
|
/s/ Danny Schoening
|
|
|
|
Danny Schoening
|
|
|
|
Principal Executive Officer
|
|
|
OPTEX SYSTEMS HOLDINGS, INC.
|
|
|
|
|
|
Date: May 15, 2018
|
By:
|
/s/ Karen Hawkins
|
|
|
|
Karen Hawkins
|
|
|
|
Principal Financial Officer and
|
|
|
|
Principal Accounting Officer
|
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
☒
|
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended December 31, 2017
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from ______to______.
OPTEX
SYSTEMS HOLDINGS, INC.
(Exact
Name of Registrant as Specified in Charter)
Delaware
|
|
000-54114
|
|
90-0609531
|
(State or other jurisdiction
of incorporation)
|
|
(Commission File
Number)
|
|
(IRS Employer
Identification No.)
|
1420
Presidential Drive, Richardson, TX
|
|
75081-2439
|
(Address of principal
executive offices)
|
|
(Zip Code)
|
Registrant’s
telephone number, including area code: (972) 764-5700
Check
whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2
of the Exchange Act (Check one):
Large Accelerated Filer ☐
|
Accelerated Filer ☐
|
Non-Accelerated
Filer ☐
|
Smaller Reporting
Company ☒
|
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate
by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
☐
|
Emerging growth company
|
☐
|
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.
|
Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
Yes ☐ No ☒
State
the number of shares outstanding of each of the issuer’s classes of common equity, as of February 13,
2018:
8,646,003 sha
res of common stock.
OPTEX
SYSTEMS HOLDINGS, INC.
FORM
10-Q
For
the period ended December 31, 2017
INDEX
Part
1. Financial Information
Item
1. Consolidated Financial Statements
OPTEX
SYSTEMS HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2017
Optex
Systems Holdings, Inc.
Condensed
Consolidated Balance Sheets
|
|
(Thousands, except share and per share data)
|
|
|
|
|
|
|
|
December 31, 2017
(Unaudited)
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,546
|
|
|
$
|
1,682
|
|
Accounts Receivable, Net
|
|
|
2,424
|
|
|
|
3,125
|
|
Net Inventory
|
|
|
7,702
|
|
|
|
7,614
|
|
Prepaid Expenses
|
|
|
59
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
11,731
|
|
|
|
12,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
1,378
|
|
|
|
1,460
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid Royalties - Long Term
|
|
|
53
|
|
|
|
60
|
|
Security Deposits
|
|
|
23
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
76
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
13,185
|
|
|
$
|
14,027
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
829
|
|
|
$
|
1,362
|
|
Dividends Payable
|
|
|
262
|
|
|
|
261
|
|
Federal Income Taxes Payable
|
|
|
90
|
|
|
|
—
|
|
Accrued Expenses
|
|
|
1,156
|
|
|
|
1,450
|
|
Accrued Warranties
|
|
|
251
|
|
|
|
174
|
|
Customer Advance Deposits
|
|
|
712
|
|
|
|
927
|
|
Credit Facility
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
3,600
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
3,951
|
|
|
|
3,607
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
7,551
|
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred Stock Series C ($0.001 par 400 authorized, 78 and 174 issued and outstanding, respectively)
|
|
|
—
|
|
|
|
—
|
|
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,590,101 and 8,190,101 shares issued and outstanding, respectively)
|
|
|
9
|
|
|
|
8
|
|
Additional Paid-in-capital
|
|
|
26,454
|
|
|
|
26,411
|
|
Accumulated Deficit
|
|
|
(20,829
|
)
|
|
|
(20,473
|
)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
5,634
|
|
|
|
5,946
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
13,185
|
|
|
$
|
14,027
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Optex
Systems Holdings, Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
(Thousands, except share and per share data)
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
January 1, 2017
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,777
|
|
|
$
|
3,512
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
3,661
|
|
|
|
2,740
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
1,116
|
|
|
|
772
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expense
|
|
|
773
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
343
|
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) Gain on Change in Fair Value of Warrants
|
|
|
(344
|
)
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
(347
|
)
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Taxes
|
|
|
(4
|
)
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
Current Income Taxes
|
|
|
90
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common shareholders
|
|
$
|
(94
|
)
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common
Shares Outstanding - basic
|
|
|
8,319,771
|
|
|
|
8,175,309
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - Diluted
|
|
|
8,319,771
|
|
|
|
9,600,309
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Optex
Systems Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
December 31, 2017
|
|
|
January 1, 2017
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(94
|
)
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
81
|
|
|
|
83
|
|
Loss (gain) on change in fair value of warrants
|
|
|
344
|
|
|
|
(430
|
)
|
Stock compensation expense
|
|
|
44
|
|
|
|
64
|
|
Accounts receivable
|
|
|
701
|
|
|
|
82
|
|
Inventory
|
|
|
(88
|
)
|
|
|
(371
|
)
|
Prepaid expenses
|
|
|
4
|
|
|
|
45
|
|
Accounts payable and accrued expenses
|
|
|
(826
|
)
|
|
|
(131
|
)
|
Federal income taxes payable
|
|
|
90
|
|
|
|
—
|
|
Accrued warranty costs
|
|
|
77
|
|
|
|
—
|
|
Prepaid royalties - long term
|
|
|
7
|
|
|
|
7
|
|
Customer advance deposits
|
|
|
(215
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
219
|
|
|
|
(723
|
)
|
Net cash provided by (used in) operating activities
|
|
|
125
|
|
|
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
—
|
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(261
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(261
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(136
|
)
|
|
|
(499
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,682
|
|
|
|
2,568
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,546
|
|
|
$
|
2,069
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Exchange of common stock for non-trade accounts receivable
|
|
$
|
—
|
|
|
$
|
155
|
|
Exchange of preferred stock for common stock
|
|
|
480
|
|
|
|
90
|
|
Dividends declared and unpaid
|
|
|
262
|
|
|
|
—
|
|
Cash paid for interest
|
|
|
3
|
|
|
|
4
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Note
1 - Organization and Operations
Optex
Systems Holdings manufactures optical sighting systems and assemblies for the U.S. Department of Defense, foreign military applications
and commercial markets. Its products are installed on a variety of U.S. military land vehicles, such as the Abrams and Bradley
fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the Stryker family
of vehicles. Optex Systems Holdings also manufactures and delivers numerous periscope configurations, rifle and surveillance sights
and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products
that are delivered both directly to the military and to other defense prime contractors or commercial customers. Optex Systems
Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of
December 31, 2017, Optex Systems Holdings operated with 94 full-time equivalent employees.
Note
2 - Accounting Policies
Basis
of Presentation
Principles
of Consolidation:
The consolidated financial statements include the accounts of Optex Systems Holdings and its wholly-owned
subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.
The
condensed consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings,
without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included
in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although Optex Systems Holdings believes that the disclosures are adequate to make the information
presented not misleading.
These
condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements
and the notes thereto included in the Optex Systems Holdings’ Form 10-K for the year ended October 1, 2017 and other reports
filed with the SEC.
The
accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which
are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of
Optex Systems Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable
to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is
not required for interim financial reporting purposes has been omitted.
Use
of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from the estimates.
Inventory:
As of December 31, 2017 and October 1, 2017, inventory included:
|
|
(Thousands)
|
|
|
|
December 31, 2017
|
|
|
October 1, 2017
|
|
Raw Material
|
|
$
|
5,372
|
|
|
$
|
5,931
|
|
Work in Process
|
|
|
3,319
|
|
|
|
2,859
|
|
Finished Goods
|
|
|
628
|
|
|
|
441
|
|
Gross Inventory
|
|
$
|
9,319
|
|
|
$
|
9,231
|
|
Less: Inventory Reserves
|
|
|
(1,617
|
)
|
|
|
(1,617
|
)
|
Net Inventory
|
|
$
|
7,702
|
|
|
$
|
7,614
|
|
Warranty
Costs:
As of December 31, 2017 and October 1, 2017, Optex had warranty reserve balances of $251 thousand and $174 thousand,
respectively. The increase in warranty reserves of $77 thousand during the three months ending December 31, 2017 represent additional
expenses recognized during three months ended December 31, 2017 related to quality issues encountered on our Applied Optics Center
optical assemblies for returned products requiring repairs or replacements. We believe we have made sufficient improvements to
the production process to minimize the return rate on future shipments but we will continue to review and monitor the reserve
balances related to this product line against any existing warranty backlog and current trend data on an interim basis until the
current warranty backlog is depleted.
Fair
Value of Financial Instruments:
Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of the financial statement presentation date.
The
carrying value of the balance sheet cash and cash equivalents, accounts and notes receivable, accounts payable, accrued liabilities,
and notes payable, are carried at, or approximate, fair value as of the reporting date because of their short-term nature. Fair
values for the Company’s warrant liabilities and derivatives are estimated by utilizing valuation models that consider current
and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates. Such amounts
and the recognition of such amounts are subject to significant estimates that may change in the future.
The
fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities
carried at fair value be classified and disclosed in one of the following three categories:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level
3: Unobservable inputs reflecting the reporting entity’s own assumptions.
The
accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize
the use of unobservable inputs. An asset or liability’s level is based on the lowest level of input that is significant
to the fair value measurement. Fair value estimates are reviewed at the origination date and again at each applicable measurement
date and interim or annual financial reporting dates, as applicable for the financial instrument, and are based upon certain market
assumptions and pertinent information available to management at those times.
The
methods and significant inputs and assumptions utilized in estimating the fair value of the warrant liabilities are discussed
further in Note 7 “Warrant Liabilities”. Each of the measurements is considered a Level 3 measurement as a result
of at least one unobservable input.
Income
Tax/Deferred Tax:
As of December 31, 2017 Optex Systems Inc. has a deferred tax asset valuation allowance of ($2.8) million
against deferred tax assets of $2.8 million, as compared to a valuation allowance of ($4.6) million against deferred tax assets
of $4.6 million as of October 1, 2017. The valuation allowance has been established due to historical losses resulting in a Net
Operating Loss Carryforward for each of the fiscal years 2010 through 2016. During the three months ended December 31, 2017, our
deferred tax assets and corresponding valuation account decreased by $1.8 million as a result of the Tax Cuts and Jobs Act of
2017 enacted on December 22, 2017 which changed the Corporate tax rate from 34% to 21% effective as of January 1, 2018. We intend
to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the
reversal of all or some portion of these allowances. However, given our improved earnings performance during fiscal year ending
October 1, 2017, and our anticipated future earnings, we believe that there is a reasonable possibility that within the next 12
months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the
valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred
tax assets and a decrease to income tax expense for the period the release is recorded. We believe the change in the valuation
allowance could approximate $2.0 million at the 21% tax rate. However, the exact timing and amount of the valuation allowance
release are subject to change based on the level of profitability that we are able to actually achieve and the corporate tax rate
in effected at that time.
Earnings
per Share:
Basic earnings per share is computed by dividing income available for common shareholders (the numerator) by
the weighted average number of common shares outstanding (the denominator) for the period. Diluted earnings per share reflect
the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock.
The
potentially dilutive securities that Optex Systems Holdings has outstanding are convertible preferred stock, unvested restricted
stock units, stock options and warrants. In computing the dilutive effect of convertible preferred stock, the numerator is adjusted
to add back any convertible preferred dividends and the denominator is increased to assume the conversion of the number of additional
common shares. Optex Systems Holdings uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Convertible
preferred stock, unvested restricted stock units, stock options and warrants that are anti-dilutive are excluded from the calculation
of diluted earnings per common share.
For
the three months ended December 31, 2017, 78 preferred Series C shares (which converts to 325,000 common shares), 182,000 unvested
restricted stock units, 60,000 stock options and 4,125,200 warrants were excluded from the earnings per share calculation as anti-dilutive.
For the three months ended January 1, 2017, 132,000 unvested restricted stock units, 56,290 stock options and 4,125,200 warrants
were excluded from the earnings per share calculation as anti-dilutive.
Note
3 - Segment Reporting
Optex
Systems Holdings reportable segments are strategic businesses offering similar products to similar markets and customers; however,
the companies are operated and managed separately due to differences in manufacturing technology, equipment, geographic location,
and specific product mix. Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was
retained.
The
Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies
for the Optex Systems-Richardson (“Optex Systems”) segment. Intersegment sales and transfers are accounted for at
annually agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general
and administrative costs, but exclude profits that would apply to third party external customers.
Optex
Systems (OPX) – Richardson, Texas
Optex
Systems manufactures optical sighting systems and assemblies, primarily for Department of Defense applications. Its products are
installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and
armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems also manufactures
and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. We have capabilities
which include machining, bonding, painting engraving and assembly and can perform both optical and environmental testing in-house.
Optex Systems products consist primarily of build-to-customer print products that are delivered both directly to the armed services
and to other defense prime contractors. Optex Systems in Richardson is both a prime and sub-prime contractor to the Department
of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems,
Raytheon Corp., BAE, Textron and others. Optex Systems is also a military supplier to foreign governments such as Israel, Australia
and NAMSA and South American countries and as a subcontractor for several large U.S. defense companies serving foreign governments.
During
the three months ended December 31, 2017, approximately 98% of Optex Systems revenues were in support of prime and subcontracted
military customers. The Optex Systems segment serves domestic military customers, 69%, and foreign military customers, 29%, and
commercial customers, 2%. The Optex Systems segment revenue for the year ending December 31, 2017 was derived from external customers
consisting of the U.S. government, 42%, General Dynamics, 47%, and other external customers, 11%.
Optex
Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of December 31,
2017, the Richardson facility operated with 57 full time equivalent employees in a single shift operation. Optex Systems serves
as the home office for both the Optex Systems (OPX) and Applied Optics Center (AOC) segments.
Applied
Optics Center (AOC) – Dallas, Texas
On
November 3, 2014, Optex Systems, Inc. entered into a Purchase Agreement with L-3 pursuant to which Optex Systems, Inc. purchased
from L-3 the assets comprising L-3’s Applied Optics Center Products Line. Applied Optics Center (“AOC”) is engaged
in the production, marketing and sales of precision optical assemblies and components which utilize thin film coating technologies.
Most of the AOC products and services are directly related to the deposition of thin-film coatings. AOC is both a prime and sub-prime
contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General
Dynamics Land Systems, Raytheon Corp., L-3 Communications, Harris Corp and others. AOC also creates a new sector of opportunity
for commercial products
.
Globally, commercial optical products use thin film coatings to create
product differentiation and performance levels. These coatings can be used for redirecting light (mirrors), blocking light (laser
protection), absorbing select light (desired wavelengths), and many other combinations. They are used in telescopes, rifle scopes,
binoculars, microscopes, range finders, protective eyewear, photography, etc. The Applied Optics Center is a key supplier to Nightforce
Optics, Inc. and provides optical assembly components to their markets of interest in commercial sporting optics and select military
optics. Given this broad potential, the commercial applications are a key opportunity going forward. The Applied Optics Center
segment also serves as the key supplier of the laser coated filters used in the production of periscope assemblies at the Optex
Systems segment.
The
Applied Optics Center serves primarily domestic U.S. customers. Approximately 85% of the Applied Optics Center revenue for the
three months ending December 31, 2017 was derived from external customers consisting of Nightforce Optics, Inc., 70%, Harris Corp.,
22%, and other external customers, 8%. Sales to commercial customers represent 74% and military sales to prime and subcontracted
customers represent 26% of the total segment revenue. Intersegment sales to Optex Systems during the year ended October 1, 2017
comprised 15% of the total segments revenue and was primarily in support of military contracts.
The
Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space.
As of December 31, 2017, AOC operated with 37 full time equivalent employees in a single shift operation.
The
financial table below presents the information for each of the reportable segments profit or loss as well as segment assets for
each year. Optex Systems Holdings, Inc. does not allocate interest expense, income taxes or unusual items to segments.
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
Three months ending December 31, 2017
|
|
|
|
|
Optex Systems
Richardson
|
|
|
|
Applied Optics Center
Dallas
|
|
|
|
Other
(non allocated costs and intersegment eliminations)
|
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,665
|
|
|
$
|
2,112
|
|
|
$
|
—
|
|
|
$
|
4,777
|
|
Intersegment revenues
|
|
|
—
|
|
|
|
371
|
|
|
|
(371
|
)
|
|
|
—
|
|
Total Revenue
|
|
$
|
2,665
|
|
|
$
|
2,483
|
|
|
$
|
(371
|
)
|
|
$
|
4,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
10
|
|
|
$
|
71
|
|
|
$
|
—
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
$
|
48
|
|
|
$
|
249
|
|
|
$
|
(391
|
)
|
|
$
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(156
|
)
|
|
$
|
156
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss on change in fair value of warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
344
|
|
|
$
|
344
|
|
Stock compensation expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
44
|
|
Royalty expense amortization
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
Warranty Expense
|
|
$
|
—
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,477
|
|
|
$
|
4,708
|
|
|
$
|
—
|
|
|
$
|
13,185
|
|
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
Three months ending January 1, 2017
|
|
|
|
|
Optex Systems
Richardson
|
|
|
|
Applied Optics Center
Dallas
|
|
|
|
Other
(non allocated costs and intersegment eliminations)
|
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
2,039
|
|
|
$
|
1,473
|
|
|
$
|
—
|
|
|
$
|
3,512
|
|
Intersegment revenues
|
|
|
—
|
|
|
|
462
|
|
|
|
(462
|
)
|
|
|
—
|
|
Total Revenue
|
|
$
|
2,039
|
|
|
$
|
1,935
|
|
|
$
|
(462
|
)
|
|
$
|
3,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
16
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes(1)
|
|
$
|
23
|
|
|
$
|
(31
|
)
|
|
$
|
362
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(166
|
)
|
|
$
|
166
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(Gain) on change in fair value of warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(430
|
)
|
|
$
|
(430
|
)
|
Stock option compensation expense(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
64
|
|
Royalty expense amortization
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,339
|
|
|
$
|
4,052
|
|
|
$
|
—
|
|
|
$
|
12,391
|
|
Expenditures for segment assets
|
|
$
|
4
|
|
|
$
|
126
|
|
|
$
|
—
|
|
|
$
|
130
|
|
(1)
General and administrative expenses for the three months ending January 1, 2017 of $64 thousand associated with the amortized
stock compensation on executive/director restricted stock units has been restated from Optex Richardson to Other (non allocated
costs). Operating income (loss) for Optex Richardson and Other (non allocated costs) has been restated to reflect the change.
Note
4 - Commitments and Contingencies
Rental
Payments under Non-cancellable Operating Leases
As
of December 31, 2017, the remaining minimum lease and estimated adjusted common area maintenance (CAM) payments under the non-cancelable
office and facility space leases are as follows:
Non-cancellable
Operating Leases Minimum Payments
|
|
|
(Thousands)
|
|
|
|
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
|
|
|
Fiscal Year
|
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Total
Payments
|
|
2018
|
|
|
$
|
205
|
|
|
$
|
81
|
|
|
$
|
180
|
|
|
$
|
45
|
|
|
$
|
511
|
|
2019
|
|
|
|
281
|
|
|
|
110
|
|
|
|
248
|
|
|
|
61
|
|
|
|
700
|
|
2020
|
|
|
|
291
|
|
|
|
112
|
|
|
|
255
|
|
|
|
62
|
|
|
|
720
|
|
2021
|
|
|
|
147
|
|
|
|
57
|
|
|
|
262
|
|
|
|
63
|
|
|
|
529
|
|
2022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
5
|
|
|
|
27
|
|
Total minimum lease payments
|
|
|
$
|
924
|
|
|
$
|
360
|
|
|
$
|
967
|
|
|
$
|
236
|
|
|
$
|
2,487
|
|
Total
facilities rental and CAM expense for both facility lease agreements as of the three months ended December 31, 2017 was $168 thousand.
Total expense under facility lease agreements as of the three months ended January 1, 2017 was $166 thousand.
As
of December 31, 2017, the unamortized deferred rent was $121 thousand as compared to $123 thousand as of October 1, 2017. Deferred
rent expense is amortized monthly over the life of the lease.
Note
5 - Debt Financing
Credit
Facility — Avidbank
As
of December 31, 2017 and October 1, 2017, the outstanding principal balance on the line of credit was $300 thousand. For the three
months ended December 31, 2017 and January 1, 2017, the total interest expense against the outstanding line of credit balance
was $3 thousand and $4 thousand.
Note
6-Warrant Liabilities
On
August 26, 2016, Optex Systems Holdings, Inc. issued 4,125,200 warrants to new shareholders and the underwriter, in connection
with a public share offering. The warrants entitle the holder to purchase one share of our common stock at an exercise price equal
to $1.50 per share at any time on or after August 26, 2016 (the “Initial Exercise Date”) and on or prior to the close
of business on August 26, 2021 (the “Termination Date”). The Company determined that these warrants are free standing
financial instruments that are legally detachable and separately exercisable from the common stock included in the public share
offering. Management also determined that the warrants are puttable for cash upon a fundamental transaction at the option of the
holder and as such required classification as a liability pursuant to ASC 480
“Distinguishing Liabilities from Equity”
.
In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet
and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded
as a component of other income in the statement of operations.
The
fair value of the warrant liabilities were measured using a binomial lattice model (“Binomial”). Significant inputs
into the model at the inception and reporting period measurement dates are as follows:
Binomial Assumptions
|
|
Issuance date
(1)
August 26, 2016
|
|
|
Period ending October 2,
2016
|
|
|
Period ending October 1, 2017
|
|
|
Period ending December 31, 2017
|
|
Exercise Price
(1)
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
Warrant Expiration Date
(1)
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
Stock Price
(2)
|
|
$
|
0.95
|
|
|
$
|
0.77
|
|
|
$
|
0.98
|
|
|
$
|
1.1
|
|
Interest Rate (annual)
(3)
|
|
|
1.23
|
%
|
|
|
1.14
|
%
|
|
|
1.62
|
%
|
|
|
1.98
|
%
|
Volatility (annual)
(4)
|
|
|
246.44
|
%
|
|
|
242.17
|
%
|
|
|
179.36
|
%
|
|
|
171.04
|
%
|
Time to Maturity (Years)
|
|
|
5
|
|
|
|
4.9
|
|
|
|
3.9
|
|
|
|
3.7
|
|
Number of Steps (Quarters)
|
|
|
20
|
|
|
|
20
|
|
|
|
16
|
|
|
|
15
|
|
Calculated fair value per share
|
|
$
|
0.93
|
|
|
$
|
0.76
|
|
|
$
|
0.87
|
|
|
$
|
0.96
|
|
(
1)
Based on the terms provided in the warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26,
2016.
(2)
Based on the trading value of common stock of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending
date.
(3)
Interest rate for U.S. Treasury Bonds, as of August 26, 2016 and each presented period ending date, as published by the U.S. Federal
Reserve.
(4)
Based on the historical daily volatility of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending
date.
The
warrants outstanding and fair values at each of the respective valuation dates are summarized below:
Warrant Liability
|
|
Warrants
Outstanding
|
|
|
Fair Value
per Share
|
|
|
Fair
Value
(000’s)
|
|
Fair Value at initial measurement date of 8/26/2016
|
|
|
4,125,200
|
|
|
$
|
0.93
|
|
|
$
|
3,857
|
|
(Gain) on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
(739
|
)
|
Fair Value as of period ending 10/2/2016
|
|
|
4,125,200
|
|
|
$
|
0.76
|
|
|
$
|
3,118
|
|
Loss on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
489
|
|
Fair Value as of period ending 10/01/2017
|
|
|
4,125,200
|
|
|
$
|
0.87
|
|
|
$
|
3,607
|
|
Loss on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
344
|
|
Fair Value as of period ending 12/31/2017
|
|
|
4,125,200
|
|
|
$
|
0.96
|
|
|
$
|
3,951
|
|
The
warrant liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes
various assumptions about future activities and the Company’s stock prices and historical volatility as inputs. During the
three months ending December 31, 2017, none of the warrants have been exercised.
Note
7-Stock Based Compensation
Stock
Options issued to Employees, Officers and Directors
The
Optex Systems Holdings 2009 Stock Option Plan provides for the issuance of up to 75,000 shares to Optex Systems Holdings officers,
directors, employees and to independent contractors who provide services to Optex Systems Holdings as either incentive or non-statutory
stock options determined at the time of grant. As of December 31, 2017, Optex Systems Holdings has granted stock options to officers
and employees as follows:
Date of
|
|
|
Options
|
|
|
Exercise
|
|
|
Options Outstanding
|
|
|
Expiration
|
|
|
Vesting
|
|
Grant
|
|
|
Granted
|
|
|
Price
|
|
|
As of 12/31/17
|
|
|
Date
|
|
|
Period
|
|
12/09/11
|
|
|
|
46,070
|
|
|
$
|
10.00
|
|
|
|
35,000
|
|
|
12/08/2018
|
|
|
4 years
|
|
12/19/13
|
|
|
|
25,000
|
|
|
$
|
10.00
|
|
|
|
25,000
|
|
|
12/18/2020
|
|
|
4 years
|
|
Total
|
|
|
|
71,070
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
The
following table summarizes the status of Optex Systems Holdings’ aggregate stock options granted under the incentive stock
option plan:
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
Remaining
|
|
|
Fair
|
|
|
Average
|
|
|
Value
|
|
Subject to Exercise
|
|
|
Options
|
|
|
Value
|
|
|
Life (Years)
|
|
|
(Thousands)
|
|
Outstanding as of October 2, 2016
|
|
|
|
60,340
|
|
|
$
|
—
|
|
|
|
1.4
|
|
|
$
|
—
|
|
Granted – 2017
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited – 2017
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Exercised – 2017
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Outstanding as of October 1, 2017
|
|
|
|
60,010
|
|
|
$
|
—
|
|
|
|
0.76
|
|
|
$
|
—
|
|
Granted – 2018
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited – 2018
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Exercised – 2018
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Outstanding as of December 31, 2017
|
|
|
|
60,000
|
|
|
$
|
—
|
|
|
|
0.62
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of October 1, 2017
|
|
|
|
56,260
|
|
|
$
|
—
|
|
|
|
0.60
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2017
|
|
|
|
60,000
|
|
|
$
|
—
|
|
|
|
0.62
|
|
|
$
|
—
|
|
There
were no options granted in the three months ended December 31, 2017 or twelve months ending October 1, 2017.
The
following table summarizes the status of Optex Systems Holdings’ aggregate non-vested shares granted under the 2009 Stock
Option Plan:
|
|
|
Number of
Non-vested Shares
Subject to Options
|
|
|
Weighted-
Average Grant-
Date Fair Value
|
|
Non-vested as of October 2, 2016
|
|
|
|
7,500
|
|
|
$
|
8.00
|
|
Non-vested granted — year ended October 1, 2017
|
|
|
|
—
|
|
|
|
—
|
|
Vested — year ended October 1, 2017
|
|
|
|
(3,750
|
)
|
|
|
8.00
|
|
Forfeited — year ended October 1, 2017
|
|
|
|
|
|
|
|
—
|
|
Non-vested as of October 1, 2017
|
|
|
|
3,750
|
|
|
$
|
8.00
|
|
Non-vested granted — three months ended December 31, 2017
|
|
|
|
—
|
|
|
|
—
|
|
Vested — three months ended December 31, 2017
|
|
|
|
(3,750
|
)
|
|
|
8.00
|
|
Forfeited — three months ended December 31, 2017
|
|
|
|
|
|
|
|
—
|
|
Non-vested as of December 31, 2017
|
|
|
|
-0-
|
|
|
$
|
—
|
|
Restricted
Stock Units issued to Officers and Employees
The
following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock units granted under
the Company’s 2016 Restricted Stock Unit Plan:
|
|
|
Outstanding Unvested RSU’s
|
|
Unvested as of October 2, 2016
|
|
|
|
200,000
|
|
Granted - year ended 2017
|
|
|
|
50,000
|
|
Vested - year ended 2017
|
|
|
|
(68,000
|
)
|
Unvested as of October 1, 2017
|
|
|
|
182,000
|
|
Granted – three months ended December 31, 2017
|
|
|
|
—
|
|
Vested - three months ended December 31, 2017
|
|
|
|
—
|
|
Unvested as of December 31, 2017
|
|
|
|
182,000
|
|
During
the three months ended December 31, 2017, there were no new grants of restricted stock units and zero restricted stock units had
vested. On January 1, 2018, 83,000 restricted stock units were vested and on January 2, 2018, 55,902 common shares were issued
net of the tax withholding obligation related to these shares (see subsequent events).
Stock
Based Compensation Expense
Equity
compensation is amortized based on a straight line basis across the vesting or service period as applicable. The recorded compensation
costs for options and shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized
in the table below:
|
|
Stock Compensation
|
|
|
|
(thousands)
|
|
|
|
Recognized Compensation Expense
|
|
|
Unrecognized Compensation Expense
|
|
|
|
Three months ended
|
|
|
As of period ending
|
|
|
|
December 31, 2017
|
|
|
January 1, 2017
|
|
|
December 31, 2017
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Restricted Stock Units
|
|
|
36
|
|
|
|
31
|
|
|
|
158
|
|
|
|
194
|
|
Consultant Shares (IRTH)
|
|
|
—
|
|
|
|
23
|
|
|
|
—
|
|
|
|
—
|
|
Total Stock Compensation
|
|
$
|
44
|
|
|
$
|
64
|
|
|
$
|
158
|
|
|
$
|
202
|
|
Note
8 Stockholders’ Equity
Dividends
On
June 26, 2017, the board of directors approved a resolution authorizing a $0.02 per share (and per warrant) dividend payment on
July 12, 2017, for common and preferred series C shareholders and warrant holders of record as of July 5, 2017 and for three subsequent
quarterly record dates thereafter. Quarterly dividends of $261 thousand were paid out to share and warrant holders on July 12,
2017. Optex Systems Holdings recorded an additional $261 thousand in dividends payable as of October 1, 2017 for the fourth quarter
declared dividends which were paid on October 19, 2017. Optex Systems Holdings recorded an additional $262 thousand in dividends
payable as of December 31, 2017 for the first quarter 2018 which were paid on January 19, 2018.
Common
stock
As
of October 2, 2016, Optex Systems Holdings had 8,266,601 common shares outstanding.
On
October 31, 2016, Longview Fund L.P. authorized the return to Optex Systems Holdings’ treasury of 197,299 common shares,
held by Sileas Corporation in settlement of $155 thousand of accounts receivable due for expenses paid by Optex Systems, Inc.
on behalf of the Sileas Corporation. The shares were subsequently cancelled in satisfaction of the outstanding accounts receivable
balance as of October 31, 2016.
On
April 27, 2017, the Board of Directors of Optex Systems Holdings approved a purchase of 700,000 shares of its common stock in
a private transaction from The Longview Fund, L.P. The transaction was priced at the closing sale price on April 28, 2017 of $0.74
per share for a total transaction amount of $518,000. Upon repurchase on May 1, 2017, the shares were cancelled thereby reducing
the total shares outstanding of its common stock.
During
the twelve months ending October 1, 2017, Optex Systems Holdings issued 775,000 common shares due to conversions of Series C preferred
stock and 45,799 common shares related to the vesting of restricted stock units. There were no other issuances of common or preferred
stock during the twelve months ended October 1, 2017. As of October 1, 2017, the outstanding common shares were 8,190,101.
During
the three months ending December 31, 2017, Optex Systems Holdings issued 400,000 common shares due to conversions of Series C
preferred stock. There were no other issuances of common or preferred stock during the three months ended December 31, 2017. As
of December 31, 2017, the outstanding common shares were 8,590,101.
Series
C Preferred Stock
As
of October 1, 2017 there were 174 preferred Series C shares outstanding. During the three months ending December 31, 2017, there
were no new issues of preferred Series C shares, and conversions of 96 preferred Series C shares, or $0.5 million, into 400,000
common shares. As of December 31, 2017 there were 78 preferred Series C shares outstanding, convertible into 325,000 common shares.
During the three months ending January 1, 2017 there were no new issues of preferred Series C shares, and conversions of 16 preferred
Series C shares, or $0.1 million, into 75,000 common shares.
Note
9 Subsequent Events
On
January 1, 2018, there were 83,000 shares vested in relation to restricted stock units issued to Danny Schoening, Karen Hawkins,
and Bill Bates. On January 2, 2018 Optex Systems Holdings issued 55,902 common shares in settlement of the vested shares, net
of 12,098 shares which were withheld for tax obligations.
On
January 2, 2018, we executed a Fifth Amendment to our Avid Bank letter of credit, extending the maturity date from January
22, 2018 to March 22, 2018 at which date we intend to renew the line of credit for an additional two years.
On
January 5, 2018 we paid annual bonuses for fiscal year 2017 in the amount of $152,432 for Danny Schoening and $55,691 for Karen
Hawkins.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s
Discussion and Analysis or Plan of Operations
This
MD&A is intended to supplement and complement our audited consolidated financial statements and notes thereto for the fiscal
year ended October 1, 2017 and our reviewed but unaudited consolidated financial statements and footnotes thereto for the quarter
ended December 31, 2017, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged
to review our consolidated financial statements in conjunction with your review of this MD&A. The financial information in
this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures
as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally
for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial
results as supplemental information, as we believe their use provides more insight into our performance. When non-GAAP measures
are used in this MD&A, they are clearly identified as non-GAAP measures and reconciled to the most closely corresponding GAAP
measure.
The
following discussion highlights the principal factors that have affected our financial condition and results of operations as
well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please
see “Special cautionary statement concerning forward-looking statements” and “Risk factors” for a discussion
of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods
presented were not significantly affected by inflation.
Background
Optex
Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies, primarily for Department of Defense applications.
Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles,
light armored and armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems,
Inc. (Delaware) also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision
optical assemblies. Optex Systems, Inc. (Delaware) products consist primarily of build-to-customer print products that are delivered
both directly to the armed services and to other defense prime contractors. Less than 1% of today’s revenue is related to
the resale of products substantially manufactured by others. In this case, the product would likely be a simple replacement part
of a larger system previously produced by Optex Systems, Inc. (Delaware).
We
are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major
defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE, NorcaTec and others. We are also a military supplier
to foreign governments such as Israel, Australia and NAMSA and South American countries and as a subcontractor for several large
U.S. defense companies serving foreign governments.
Recent
Orders
●
|
In
October 2016, we received a $0.8 million order from L-3 Communications for night vision
goggle laser interference filter assemblies deliverable through March 2017.
|
●
|
In
October 2016, we were awarded a $1.3 million portion of a commercial multi-year strategic
supplier agreement with a domestic manufacturer of premium optical devices to supply
its optical assemblies. The units will be delivered in fiscal year 2017.
|
●
|
In
November 2016, we were awarded a $1.5 million contract for
laser protected
periscopes from Defense Logistics Agency (DLA)
. The award is the first delivery order against a 5-year Indefinite Delivery,
Indefinite Quantity (IDIQ) contract with DLA totaling $5.99 million. Deliveries for the first order against this contract began
in January 2017 and will continue through August 2017.
|
●
|
In
December 2016, we were awarded a $1.5 million purchase order from one of the world’s
largest defense companies for laser protected periscopes installed into Light Armored
Vehicles in the Middle East. The periscopes will be delivered over three years, with
the first delivery beginning in December 2017.
|
●
|
In
February 2017, we were
awarded a $1.3 million award
with a domestic manufacturer of premium optical devices for deliveries in fiscal year
2017.
|
●
|
In
March 2017, we
received a purchase order from a
domestic defense contractor in the amount of $1.7 million to supply Laser Interference
Filter (LIF) Assemblies supporting the U.S. Government spares for fielded night vision
goggles. Deliveries will begin in June 2017 and continue through January 2018.
|
●
|
On
July 3, 2017, we were awarded a five year Indefinite-Delivery Indefinite-Quantity contract through DLA Land at Aberdeen for
provision of night vision assemblies for the U.S. military. The Laser Interference Filter Assemblies will be manufactured
at the Applied Optics Center (AOC) Division of Optex Systems, Inc. in Dallas, Texas. The contract calls for five one-year
ordering periods running consecutively commencing on July 5, 2017 at pricing set forth in the addenda to the contract. The
contract calls for first article testing and has a guaranteed minimum of $50,000. Given prior contracts awarded to the Company
through DLA, the Company expects to generate between $8.4 and $12.4 million in revenue over the next five year period from
this contract.
|
●
|
On
September 11, 2017 we were awarded a $1.35 million contract by defense industry leader General Dynamics Land Systems-Canada,
to provide LAV 6.0 optimized weapon system support for Optex Systems’ Commander Sighting System. This in-service support
will continue over the next three years for their existing fleet of Light Armored Vehicles.
|
●
|
On
September 18, 2017 we were awarded a five year Indefinite-Delivery Indefinite-Quantity (IDIQ) contract through Defense
Logistics Association (DLA) in support of the Abrams Main Battle Tank platform. The contract is expected to generate
between $1.5M and $2.4 million in revenue over the next five year period for Optex Systems. As of October 30, 2017, three
task delivery orders have been awarded against the IDIQ for a total value of $1.5 million.
|
New
Product Development
We
continue to field new product opportunities from both domestic and international customers. Given continuing unrest in multiple
global hot spots, the need for precision optics continues to increase. Most of these requirements are for observation and situational
awareness applications; however, we continue to see requests for higher magnification and custom reticles in various product modifications.
The basic need to protect the soldier while providing information about the mission environment continues to be the primary driver
for these requirements.
We
are cautiously optimistic that the new government administrations proposed boost in military spending will have a favorable impact
in the direction of funding or product need for the U.S. military. We anticipate that absent any significant changes from the
current defense spending levels, maintenance will still be required, and the opportunities for us to upgrade existing systems
with higher performing systems will continue to present themselves. Spending levels may change, but given the mix between foreign
spending, domestic/prime demand, and the more recent commercial opportunities, we do not expect any negative trends arising from
political domestic changes over the next twelve months.
In
July 2017, Optex Systems, Inc. was awarded a design patent on our “Red Tail” digital spotting scope. This device is
targeted towards long range observation and image recording used by military, border patrol, and select consumer/commercial applications.
The device is designed to deliver high definition images with military grade resolution, but at commercial “off the shelf”
pricing. Using high grade optics to deliver a 45X magnified image onto a 5 megapixel CMOS sensor, the Red Tail device then transmits
this image via Wi-Fi to the user’s smartphone or tablet. Digital still images or videos can then be captured and/or emailed
using a custom Red Tail app available for either iOS or Android devices.
Recent
Events
Changes
to the Board of Directors
Effective
as of January 15, 2018, Owen Naccarato resigned as one of our directors and as a member of the Audit Committee.
Executive
and Board Compensation
On
December 19, 2017 the Board of Directors approved bonuses in the amount of $152,432 for Danny Schoening and $55,691 for Karen
Hawkins. The bonus amounts were paid on January 5, 2018.
Dividends
On
June 26, 2017, our board of directors approved a resolution declaring a $0.02 per share dividend payment on July 12, 2017,
for common and Series C preferred shareholders and warrant holders of record as of July 5, 2017 and for the three subsequent
quarters with the last dividend payment to occur in April 2018. On October 19, 2017, we paid a second $0.02 per share
dividend to holders of record as of October 12, 2017, and on January 19, 2018, we paid a third $0.02 per share dividend to
holders of record as of January 12, 2018. Our board of directors has determined that it will not authorize declarations
beyond the April 2018 date for the foreseeable future as Optex Systems Holdings pursues other business opportunities. The
board of directors will revisit the issue at the end of calendar year 2018.
Results
of Operations
Non
GAAP Adjusted EBITDA
We
use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the
performance of our business as “net income” includes the significant impact of noncash valuation gains and losses
on warrant liabilities, noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest
expenses and federal income taxes. We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because
it permits period-over-period comparisons of our ongoing core operations before the excluded items. Adjusted EBITDA is a financial
measure not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).
Adjusted
EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP.
This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry
may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA
as a comparative measure.
The
table below summarizes our three month operating results for periods ending December 31, 2017 and January 1, 2017, in terms of
both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both measures allows the
reader to have a “complete picture” of our overall performance.
|
|
(Thousands)
|
|
|
|
Three months ending
|
|
|
|
December 31, 2017
|
|
|
January 1, 2017
|
|
|
|
|
|
|
|
|
Net (Loss) Income Applicable to Common Shareholders (GAAP) :
|
|
$
|
(94
|
)
|
|
$
|
354
|
|
Add:
|
|
|
|
|
|
|
|
|
Loss (Gain) on Change in Fair Value of Warrants
|
|
|
344
|
|
|
|
(430
|
)
|
Federal Income Taxes - Current
|
|
|
90
|
|
|
|
—
|
|
Depreciation
|
|
|
81
|
|
|
|
83
|
|
Stock Compensation
|
|
|
44
|
|
|
|
64
|
|
Royalty License Amortization
|
|
|
7
|
|
|
|
7
|
|
Interest Expense
|
|
|
3
|
|
|
|
4
|
|
Adjusted EBITDA - Non GAAP
|
|
$
|
475
|
|
|
$
|
82
|
|
Our
adjusted EBITDA increased by $0.4 million to $0.5 million during the three months ending December 31, 2017 as compared $0.1 million
during the three months ending January 1, 2017. We attribute the increase in adjusted EBITDA primarily to increased revenue of
$1.3 million over the prior year quarter, from $3.5 million in the three months ending January 1, 2017 to $4.8 million during
the three months ending December 31, 2017. In addition, we experienced a 1.4% improvement on our gross margins percentage, from
22.0% in the prior year quarter to 23.4% in the current year quarter ending December 31, 2017 and a $0.07 million reduction in
general and administrative spending from the prior year level for the first quarter.
Segment
Information
We
have presented the operating results by segment to provide investors with an additional tool to evaluate our operating results
and to have a better understanding of the overall performance of each business segment and its ability to perform in subsequent
periods. Management of Optex Systems Holdings uses the selected financial measures by segment internally to evaluate its ongoing
segment operations and to allocate resources within the organization accordingly. Segments are determined based on differences
in products, location, internal reporting and how operational decisions are made. Management has determined that the Optex Systems,
Richardson plant, and the Applied Optics Center, Dallas plant, which was acquired on November 3, 2014, are separately managed,
organized, and internally reported as separate business segments. The table below provides a summary of selective statement of
operations data by operating segment for the three months ended December 31, 2017 and January 1, 2017 reconciled to the Audited
Consolidated Results of Operations as presented in Item 8, “Financial Statements and Supplementary Data”.
Results of Operations Selected Financial Info by Segment
(Thousands)
|
|
Three
months ending
|
|
|
|
December
31, 2017
|
|
|
January
1, 2017
|
|
|
|
Optex
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non allocated costs and eliminations)
|
|
|
Consolidated
|
|
|
Optex
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non allocated costs and eliminations)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from External Customers
|
|
$
|
2,665
|
|
|
$
|
2,112
|
|
|
$
|
—
|
|
|
$
|
4,777
|
|
|
$
|
2,039
|
|
|
$
|
1,473
|
|
|
$
|
—
|
|
|
$
|
3,512
|
|
Intersegment
Revenues
|
|
|
—
|
|
|
|
371
|
|
|
|
(371
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
462
|
|
|
|
(462
|
)
|
|
|
—
|
|
Total
Segment Revenue
|
|
|
2,665
|
|
|
|
2,483
|
|
|
|
(371
|
)
|
|
|
4,777
|
|
|
|
2,039
|
|
|
|
1,935
|
|
|
|
(462
|
)
|
|
|
3,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Sales
|
|
|
2,072
|
|
|
|
1,960
|
|
|
|
(371
|
)
|
|
|
3,661
|
|
|
|
1,527
|
|
|
|
1,675
|
|
|
|
(462
|
)
|
|
|
2,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
593
|
|
|
|
523
|
|
|
|
—
|
|
|
|
1,116
|
|
|
|
512
|
|
|
|
260
|
|
|
|
—
|
|
|
|
772
|
|
Gross
Margin %
|
|
|
22.3
|
%
|
|
|
21.1
|
%
|
|
|
0.0
|
%
|
|
|
23.4
|
%
|
|
|
25.1
|
%
|
|
|
13.4
|
%
|
|
|
0.0
|
%
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
Expense
(1)
|
|
|
611
|
|
|
|
118
|
|
|
|
44
|
|
|
|
773
|
|
|
|
655
|
|
|
|
125
|
|
|
|
64
|
|
|
|
844
|
|
Segment
Allocated G&A Expense
|
|
|
(156
|
)
|
|
|
156
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(166
|
)
|
|
|
166
|
|
|
|
—
|
|
|
|
—
|
|
Net General & Administrative
Expense
|
|
|
455
|
|
|
|
274
|
|
|
|
44
|
|
|
|
773
|
|
|
|
489
|
|
|
|
291
|
|
|
|
64
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
138
|
|
|
|
249
|
|
|
|
(44
|
)
|
|
|
343
|
|
|
|
23
|
|
|
|
(31
|
)
|
|
|
(64
|
)
|
|
|
(72
|
)
|
Operating
(Loss) %
|
|
|
5.2
|
%
|
|
|
10.0
|
%
|
|
|
11.9
|
%
|
|
|
7.2
|
%
|
|
|
1.1
|
%
|
|
|
(1.6
|
%)
|
|
|
0.0
|
%
|
|
|
(2.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain on Change
in Fair Value of Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
(344
|
)
|
|
|
(344
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
430
|
|
|
|
430
|
|
Interest Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) before taxes
|
|
$
|
138
|
|
|
$
|
249
|
|
|
$
|
(391
|
)
|
|
$
|
(4
|
)
|
|
$
|
23
|
|
|
$
|
(31
|
)
|
|
$
|
362
|
|
|
$
|
354
|
|
Net
Income (Loss) %
|
|
|
5.2
|
%
|
|
|
10.0
|
%
|
|
|
—
|
|
|
|
(0.1
|
%)
|
|
|
1.1
|
%
|
|
|
(1.6
|
%)
|
|
|
—
|
|
|
|
10.1
|
%
|
(1)
General and administrative expenses for the three months ending January 1, 2017 of $64 thousand associated with amortized
stock compensation attributeable to executive/director restricted stock units has been restated from Optex Richardson to
Other (non allocated costs). Operating income (loss) for Optex Richardson and Other (non allocated costs) has been restated to reflect the change.
Our
total revenues increased by $1.3 million or 37.1% during the three months ending December 31, 2017 as compared to the three months
ending January 1, 2017. Increased revenues during the quarter were primarily driven by increased revenue of $0.63 at the Optex
Richardson plant and increased revenues of $0.64 million at the Applied Optics Center plant. Intersegment revenues decreased by
($0.1) million during the period, from $0.5 million to $0.4 million. Intersegment revenues relate primarily to coated filters
provided by the Applied Optics Center to Optex Systems in support of the Optex Systems periscope line.
Both
the gross margin and the gross margin percentages increased on a consolidated basis during the three months ending December 31,
2017 as compared to the prior year period. Total gross margin increased by $0.3 million, and 1.4% to 23.4% from 22.0%. The gross
margin percentage for the Applied Optics Center increased from 13.4% to 21.1% and by $0.26 million from the prior year period.
The increased Applied Optics Center margins are primarily driven by increased revenue and the corresponding contribution margin
towards fixed costs, a more favorable pricing structure in addition to improvements in labor and product yield efficiencies for
our optical assembly and laser interface filters. The Optex Richardson gross margin increased by $0.08 million on higher revenue,
while the gross margin percentage decreased by (2.8%) from 25.1% to 22.3% on changes in product mix in the current period as compared
to the prior year period. We expect the gross margins for both segments to continue to improve throughout the fiscal year as revenues
grow and labor efficiencies continue to improve on the Applied Optics Center optical assembly line and the product line mix on
Optex Systems shifts toward newer orders with higher pricing.
During
the three months ending December 31, 2017 and January 1, 2017, the Applied Optics Center absorbed $0.2 million of fixed general
and administrative costs incurred by Optex Systems for support services. These expenses cover accounting, executive, human resources,
information technology, board fees and other corporate expenses paid by Optex Systems and shared across both operating segments.
Our
operating income increased by $0.4 million, in the three months ending December 31, 2017, to $0.3 million, as compared to the
prior year period operating loss of ($0.1) million as a result of increased gross margin in our Applied Optics Center and lower
general and administrative spending of $0.1 million on a consolidated based across both segments. We expect continued improvements
in the operating profits across both segments during the year as compared to 2017 levels as we increase revenues and gross margins
across our product groups.
During
the three months ending December 31, 2017 we recognized a ($0.3) million loss on change in valuation of warrant liabilities as
compared to a $0.4 million gain in the prior year quarter. The changes in valuation on warrants are not allocated by segment as
they relate to non-cash expenses which recognize fair value changes on warrants based on market changes beyond the control of
the segment operating activities.
Backlog
Backlog
as of December 31, 2017, was $14.6 million as compared to a backlog of $15.7 million as of October 1, 2017, representing an decrease
of ($1.1) million or (7.0%). During the three months ending December 31, 2017, Optex Systems booked $3.6 million in new orders,
representing a ($3.1) million, or (46.3%), decrease from the booked orders of $6.7 million in the prior year quarter. We attribute
the lower orders in the current year period as compared to the prior year period to timing of government contract awards on periscopes
and delays in new optical assembly orders from one of our major Applied Optics Customers.
The
following table depicts the current expected delivery by period of all contracts awarded as of December 31, 2017 in millions of
dollars:
|
(Millions)
|
Product
Line
|
Q2
2018
|
Q3
2018
|
Q4
2018
|
2018
Delivery
|
2019+
Delivery
|
Total
Backlog
12/31/2017
|
|
Total
Backlog
10/1/2017
|
Variance
|
%
Chg
|
Periscopes
|
2.3
|
1.2
|
0.2
|
3.7
|
1.5
|
5.2
|
|
4.9
|
0.3
|
6.1%
|
Sighting
Systems
|
0.6
|
0.7
|
0.3
|
1.6
|
2.1
|
3.7
|
|
4.1
|
(0.4)
|
(9.8%)
|
Other
|
0.4
|
0.2
|
—
|
0.6
|
1.0
|
1.6
|
|
0.6
|
1.0
|
166.7%
|
Optex
Systems - Richardson
|
3.3
|
2.2
|
0.5
|
5.9
|
4.6
|
10.5
|
|
9.6
|
0.9
|
9.4%
|
Applied
Optics Center - Dallas
|
2.4
|
0.9
|
0.6
|
3.9
|
0.2
|
4.1
|
|
6.1
|
(2.0)
|
(32.8%)
|
Total
Backlog
|
5.7
|
3.1
|
1.1
|
9.8
|
4.8
|
14.6
|
|
15.7
|
(1.1)
|
(7.0%)
|
Optex
Systems - Richardson:
During
the three months ending December 31, 2017, backlog for our Optex Systems Richardson segment has increased by $0.9 million, or
9.4%, to $10.5 million from our fiscal year-end backlog of $9.6 million. The increased backlog was primarily driven by increased
backlog of $1.0 million, or 166.7% in our other product group. The increase was primarily driven by new orders in our from the
U.S. government for MRS collimator assemblies in support of the M1A2 Abrams tank. Sighting Systems backlog declined by ($0.4)
million, or (9.8%) from our fiscal year-end backlog as we continue to ship sighting systems against our existing contracts. Backlog
for our periscope product line has increased by 6.1% or $0.3 million to $5.1 million, from our ending 2017 fiscal year level of
$4.9 million.
During
the three months ending December 31, 2017 we booked new periscope orders of $1.8 million, a reduction of ($1.9) million from the
prior year period. In the prior year first quarter, the periscope orders of $3.7 million were exceptional high as a result of
delays in government procurements during the fourth quarter of fiscal year 2016 which pushed awards into the first quarter of
2017. We have booked an additional $1.2 million in new periscope orders subsequent to the current quarter ended December 31, 2017
and are currently in price negotiations on two additional substantial contracts which we hope to finalize in the near term.
We
experienced increases in orders for Sighting Systems of $0.2 million and other product line orders of $0.9 million for a total
increase of $1.1 million during the three months ending December 31, 2017 to $1.6 million in new orders from the prior year levels
of $0.5 million in new orders, offsetting a portion of the lower orders in periscopes and Applied Optics optical assemblies. We
anticipate additional new orders throughout the year across all product lines to maintain for deliveries within the current fiscal
year and beyond.
Applied
Optics Center – Dallas
During
the three months ending December 31, 2017, the Applied Optics Center backlog decreased by (32.8%), or ($2.0) million, to $4.1
million from the fiscal year end level of $6.1 million. New orders for our Applied Optics Center were $0.2 million in the three
months ending December 31, 2017 as compared to $2.5 million in the prior year quarter, a reduction of ($2.3) million. We have
experienced a delay in expected purchase orders from one of our major customers during the first quarter of fiscal year 2018.
We anticipate increased orders during the next two quarters to satisfy the customers total estimated 2018 production requirements.
The
Applied Optics Center also serves as a primary filter supplier to the Optex Systems – Richardson plant. During the three
months ending December 31, 2017, the Applied Optex Center received intracompany orders for laser coated filters in support of
the Optex periscope product line of $0.4 million, as compared to $0.5 million in the prior year quarter. The decrease in intercompany
orders is primarily related to changes in periscope mix and production schedules as compared to the prior year quarter.
Optex
Systems Holdings continues to aggressively pursue international and commercial opportunities in addition to maintaining its current
footprint with U.S. vehicle manufactures, with existing as well as new product lines. We continue exploring new market opportunities
for our M17 day/thermal periscopes and digital optics for commercial applications. We are also reviewing potential products, outside
our traditional product lines, which could be manufactured using our current production facilities in order to capitalize on our
existing capacity. Further, we continue to look for strategic businesses to acquire that will strengthen our existing product
line, expand our operations, and enter new markets.
Three
Months Ended December 31, 2017 Compared to the Three Months Ended January 1, 2017
Revenues
.
In the three months ended December 31, 2017, revenues increased by $1.3 million or 37.1% from the respective prior period in fiscal
year 2017 as set forth in the table below:
|
|
Three months ended
|
|
|
|
|
|
|
(Millions)
|
|
|
|
|
Product Line
|
|
December 31, 2017
|
|
|
January 1, 2017
|
|
|
Variance
|
|
|
% Chg
|
|
Periscopes
|
|
$
|
1.6
|
|
|
$
|
1.6
|
|
|
$
|
—
|
|
|
|
—
|
|
Sighting Systems
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
0.8
|
|
|
|
800.0
|
|
Other
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
|
(33.3
|
)
|
Optical Systems – Richardson
|
|
|
2.7
|
|
|
|
2.0
|
|
|
|
0.7
|
|
|
|
35.0
|
|
Applied Optics Center – Dallas
|
|
|
2.1
|
|
|
|
1.5
|
|
|
|
0.6
|
|
|
|
40.0
|
|
Total Revenue
|
|
$
|
4.8
|
|
|
$
|
3.5
|
|
|
$
|
1.3
|
|
|
|
37.1
|
|
Revenues
on our periscope line remained flat during the three months ended December 31, 2017 as compared to the three months ended January
1, 2017. Based on our current backlog and customer delivery schedule, we anticipate an increase in periscope revenues during the
next quarter and our fiscal year 2018 revenues to be consistent with or slightly above the fiscal year 2017 level.
Sighting
systems revenues for the three months ending December 31, 2017 increased by $0.8 million or 800.0% from revenues in the prior
year period. Deliveries on our current backlog for DDAN sighting systems were delayed during the first quarter of 2017 pending
product configuration changes and export licenses. We have resumed full production on the current orders and expect to continue
shipments at a higher pace through the third quarter of fiscal 2018.
Applied
Optics Center revenue increased $0.6 million or 40.0% during the three months ended December 31, 2017 as compared to the three
months ended January 1, 2017 primarily due to increased deliveries on commercial optical assemblies and government laser interface
filters (LIFs). We are currently expecting several new orders for additional optical assemblies and LIFs from several customers
to be delivered in the second half of fiscal year 2018. We expect the optical assembly revenues to increase steadily throughout
the year over 2017 levels, as we continue to ship against existing backlog and anticipate new orders in the near term.
Other
product revenues declined by ($0.1) million to $0.2 million during the three months ending December 31, 2017 as compared to $0.3
million in the prior year period primarily due to reductions in component spare orders from the prior year level. Based on our
current backlog as compared to our backlog level at the end of the first quarter in 2017, we expect lower revenues in the other
product group during the fiscal year 2018 as compared to the prior year. Many of these orders have a long material lead time and
often require first article testing prior to production. Reductions in other revenues are expected to be fully offset by increased
revenues in each of the other product groups.
Gross
Margin
. The gross margin during the period ending December 31, 2017 was 23.4% of revenue as compared to a gross margin of
22.0% of revenue for the period ending January 1, 2017. Cost of sales increased to $3.7 million for the current period as compared
to the prior year period of $2.7 million on increased revenues of $1.3 million. The gross margin increased by $0.3 million in
the current year period to $1.1 million as compared to the prior year period of $0.8 million. We attribute the improvement in
gross margin to higher revenue combined with cost efficiency improvements and changes in product mix between the respective periods.
G&A
Expenses
. During the three months ended December 31, 2017, we recorded operating expenses of $0.77 million as opposed to $0.84
million, during the three months ended January 1, 2017, a net decrease of $0.07 million. Decreased general and administrative
costs during the current year period were primarily driven by decreases in accrued executive bonus pay, stock compensation expenses
and investor relations costs in the current year quarter as compared to the prior year quarter. We expect our total fiscal year
2018 general and administrative spending to approximate the spending in fiscal year 2017.
Operating
Income (Loss)
. During the three months ended December 31, 2017, we recorded an operating income of $0.3 million, as compared
to an operating loss of ($0.1) million during the three months ended January 1, 2017. The $0.4 million increased operating income
in the current year period over the prior year period is primarily due to increased gross margin on higher revenue and lower general
and administrative costs in the current year quarter as compared to the prior year quarter.
Net
(Loss) Income applicable to common shareholders
. During the three months ended December 31, 2017, we recorded a net loss applicable
to common shareholders of ($0.1) million as compared to net income applicable to common shareholders of $0.4 million during the
three months ended January 1, 2017. The increase in net loss of ($0.5) million is primarily attributable to increased operating
income of $0.3 million, offset by recognition of a loss on changes in the fair value of warrant liabilities of ($0.3) million
in the current year period as compared to a gain of $0.4 million in the prior year period, and a current federal income tax expense
of ($0.1) million in the current year period as compared to zero in the prior year period.
Liquidity
and Capital Resources
As
of December 31, 2017, Optex Systems Holdings had working capital of $8.1 million, as compared to $8.0 million as of October 1,
2017. During the three months ended December 31, 2017, the Company experienced a net loss of ($0.1) million and an increase of
37.1%, or $1.3 million in revenues to $4.8 million in the current year period as compared to $3.5 million in the prior year period
ending January 1, 2017. The Company’s adjusted EBITDA increased by $0.4 million during the three months ending December
31, 2017 to $0.5 million from $0.1 million during the three months ending January 1, 2017. Backlog as of December 31, 2017 has
decreased by ($1.1) million or (7.0%) to $14.6 million as compared to backlog of $15.7 million as of October 1, 2017. Approximately
39.1% of annual revenue is derived from new orders booked during the fiscal year.
U.S.
military spending has been significantly reduced from the 2011 peak spending levels as a result of a decrease in military operations
in Iraq and Afghanistan and due to Congressional sequestration cuts to defense spending created by the Budget Control Act of 2011,
which began in fiscal year 2013. As a result of lower U.S. government defense spending, the Company has continued to explore other
opportunities for manufacturing outside of our traditional product lines for products which could be manufactured using our existing
lines in order to fully utilize our existing capacity. On November 16, 2017, the National Defense Authorization Act (NDAA) for
fiscal year 2018 was sent to President Trump to sign into law after passing both the House of Representatives and the Senate.
The 2018 NDAA authorizes total spending of $700 billion which includes a base spending authorization of $634 billion plus the
authorization of $65.8 billion in additional funding for the Overseas Contingency Operation (OCO) account. The bill authorizes
a major hike in military spending over the 2017 NDAA authorization amount of $619 billion and sets defense spending well above
the $549 billion base authorization cap under the 2011 Budget Control Act. On February 9, 2018, Congress passed a budget stop
gap resolution which was signed by the president. The resolution lifts the sequestration limits on military spending by $165 billion
over the next two years in line with the 2018 NDAA authorization of $700 billion. We are cautiously optimistic that the defense
industry effects of the sequestration from 2011 have reached a plateau and we will begin to see small but steady increases in
defense military procurement orders in fiscal year 2018 and upcoming fiscal years. Further, we continue to look for additional
strategic businesses to acquire that will strengthen our existing product line, expand our operations, and enter new markets.
The
Company has historically funded its operations through working capital, convertible notes, preferred stock offerings and bank
debt. The Company’s ability to generate positive cash flows depends on a variety of factors, including the continued development
and successful marketing of the Company’s products. At December 31, 2017, the Company had approximately $1.5 million in
cash and an outstanding payable balance of $0.8 million against our working line of credit. The line of credit allows for borrowing
up to a maximum of $2.2 million, which fluctuates based on our open accounts receivable balance. As of December 31, 2017 our outstanding
accounts receivable was $2.4 million. The Company expects to incur net income, increased adjusted EBITDA and positive cash flow
from operating activities throughout 2018 on higher projected revenue growth combined with increased gross margin related to existing
and planned productivity and cost efficiency improvements. Successful transition to attaining and maintaining profitable operations
is dependent upon maintaining a level of revenue adequate to support the Company’s cost structure. Management intends to
manage operations commensurate with its level of working capital and facilities line of credit during the next nine months; however,
uneven revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program delays
combined with increasing inventory and production costs required to support the increases in backlog could create a working capital
shortfall. In the event the Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.
On
August 26, 2016, we consummated a public offering of 2,291,000 Class A units consisting of common stock and warrants and 400 Class
B units consisting of shares of Series C convertible stock and warrants for a total gross purchase price of $4.8 million. The
net cash proceeds of the offering were $4.2 million after underwriter expenses of $0.5 million. We used $0.3 million of the proceeds
for offering expenses paid by Optex Systems Holdings and $1.7 million of the proceeds for the redemption of Series A and Series
B preferred shares which were a condition of the offering. The remaining $2.2 million of funds is being used to fund working capital
needs to support revenue growth and acquisitions.
On
April 27, 2017, the Board of Directors of Optex Systems Holdings approved a purchase of 700,000 shares of its common stock in
a private transaction from The Longview Fund, L.P. The transaction was priced at the closing sale price on April 28, 2017 of $0.74
per share for a total transaction amount of $518,000. Upon repurchase on May 1, 2017, the shares were cancelled thereby reducing
the total shares outstanding of its common stock.
On
June 26, 2017, our board of directors approved a resolution declaring a $0.02 per share dividend payment on July 12, 2017, for
common and Series C preferred shareholders and warrant holders of record as of July 5, 2017 and for the three subsequent quarters
with the last dividend payment to occur in April 2018. On October 19, 2017, we paid a second $0.02 per share dividend to holders
of record as of October 12, 2017, and on January 19, 2018, we paid a third $0.02 per share dividend to holders of record as of
January 12, 2018. Optex recorded $262 thousand in dividends payable as of December 31, 2017 which were in paid on January 19,
2018. The Company expects to pay the fourth dividend payment totaling $262 thousand in April 2018. Our board of directors has
determined that it will not authorize declarations beyond the April 2018 date for the foreseeable future as Optex Systems Holdings
pursues other business opportunities. The
board of directors will revisit the issue at the end of calendar year 2018.
Cash
Flows for the Period from October 1, 2017 through December 31, 2017
Cash
and Cash Equivalents:
As of December 31, 2017, we had cash and cash equivalents of $1.5 million which representing a decrease
of ($0.1) million during the three months ended December 31, 2017.
Net
Cash Provided by Operating Activities
. Net cash provided by operating activities during the three months from October 1, 2017
to December 31, 2017 totaled $0.1 million. The primary sources of cash during the period relate to an collections against accounts
receivable of $0.7 million, offset by increased in accounts payable and accrued expenses of ($0.8 million) and other working capital
changes of ($0.2) million.
Net
Cash Used in Investing Activities
. In the three months ended December 31, 2017, cash used in investing activities was zero.
Net
Cash Used in Financing Activities
. Net cash used in financing activities was ($0.3) million during the three months ended
December 31, 2017 and relate to dividends paid to shareholders on October 19, 2017.
Critical
Policies and Accounting Pronouncements
Our
significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting
policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results.
These policies are described in “Critical Policies and Accounting Pronouncements” and Note 2 (Accounting Policies)
to consolidated financial statements in our Annual Report on Form 10-K for the year ended October 1, 2017.
Cautionary
Factors That May Affect Future Results
This
Quarterly Report on Form 10-Q and other written reports and oral statements made from time to time by Optex Systems Holdings may
contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. You can identify
these forward-looking statements by their use of words such as “expects,” “plans,” “will,”
“estimates,” “forecasts,” “projects” and other words of similar meaning. You can identify
them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address Optex
Systems Holdings’ growth strategy, financial results and product and development programs. You must carefully consider any
such statement and should understand that many factors could cause actual results to differ from Optex Systems Holdings’
forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties,
including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results
may vary materially.
Optex
Systems Holdings does not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements
in light of factors described in this Form 10-Q. In various filings Optex Systems Holdings has identified important factors that
could cause actual results to differ from expected or historic results. You should understand that it is not possible to predict
or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks
or uncertainties.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by our Quarterly Report on Form 10-Q for the quarter ended December 31, 2017, management performed,
with the participation of our Principal Executive Officer and Principal Financial Officer, an evaluation of the effectiveness
of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls
and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange
Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such
information is accumulated and communicated to our management including our Principal Executive Officer and our Principal Financial
Officer, to allow timely decisions regarding required disclosures. Based upon the evaluation described above, our Principal Executive
Officer and our Principal Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures were
effective.
Changes
in Internal Control Over Financial Reporting
During
the quarter ended December 31, 2017, there were no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
We
are not aware of any material litigation pending or threatened against us.