Optex Systems Holdings, Inc.
Condensed Consolidated Balance Sheets
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(Thousands, except share data)
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June 26, 2016
(Unaudited)
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September 27, 2015
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ASSETS
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Current Assets
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Cash and Cash Equivalents
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$
|
601
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$
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683
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Accounts Receivable, Net
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1,837
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2,866
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Net Inventory
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6,510
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5,713
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Prepaid Expenses
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108
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170
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Current Assets
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9,056
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9,432
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Property and Equipment, Net
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1,745
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1,971
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Other Assets
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Prepaid Royalties - Long Term
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98
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120
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Security Deposits
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23
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23
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Other Assets
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121
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143
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Total Assets
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$
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10,922
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$
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11,546
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities
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Accounts Payable
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$
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732
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$
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575
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Accrued Expenses
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889
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812
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Accrued Warranties
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28
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28
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Customer Advance Deposits - Short Term
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630
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1,091
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Credit Facility
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730
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817
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Current Liabilities
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3,009
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3,323
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Customer Advance Deposits - Long Term
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-
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65
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Total Liabilities
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3,009
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3,388
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Stockholders' Equity
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Preferred Stock Series A ($0.001 par 5,000 authorized, 546 and 1,001 issued and outstanding, respectively)
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-
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-
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Preferred Stock Series B ($0.001 par 1,010 authorized, 969 and 994 issued and outstanding, respectively)
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-
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-
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Common Stock – ($0.001 par, 2,000,000,000 authorized, 1,621,145 and 314,867 shares issued and outstanding, respectively)
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2
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-
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Additional Paid-in-capital
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26,504
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26,394
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Accumulated Deficit
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(18,593
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)
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(18,236
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)
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Stockholders' Equity
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7,913
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8,158
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Total Liabilities and Stockholders' Equity
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$
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10,922
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$
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11,546
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The
accompanying notes are an integral part of these consolidated financial statements.
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of
Operations
(Unaudited)
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(Thousands, except share data)
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Three months ended
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Nine months ended
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June 26, 2016
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June 28, 2015
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June 26, 2016
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June 28, 2015
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Revenue
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$
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5,344
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$
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2,312
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$
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11,773
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$
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7,814
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Cost of Sales
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4,261
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2,572
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9,708
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7,723
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Gross Margin
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1,083
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(260
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)
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2,065
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91
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General and Administrative Expense
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872
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741
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2,394
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2,237
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Operating Income (Loss)
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211
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(1,001
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)
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(329
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)
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(2,146
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)
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Gain on Purchased Asset
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-
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-
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-
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2,110
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Interest Income (Expense)
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(12
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)
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(13
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)
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(28
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)
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(166
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)
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Other (Expense) and Income
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(12
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)
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(13
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(28
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1,944
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Net Income (Loss) After Taxes
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199
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(1,014
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)
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(357
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)
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(202
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)
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Preferred stock dividend/premium
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-
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-
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-
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(6,441
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)
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Net income (loss) applicable to common shareholders
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$
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199
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$
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(1,014
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)
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$
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(357
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)
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$
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(6,643
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)
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Basic and diluted income (loss) per share
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$
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0.12
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$
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(3.25
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)
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$
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(0.47
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)
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$
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(21.33
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)
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Weighted Average Common Shares Outstanding - basic and fully diluted
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1,607,079
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312,274
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756,321
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311,336
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The accompanying
notes are an integral part of these consolidated financial statements.
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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(Thousands)
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Nine months ended
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June 26, 2016
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June 28, 2015
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Cash flows from operating activities:
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Net loss
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$
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(357
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)
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$
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(202
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)
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
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Depreciation and amortization
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260
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247
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Noncash interest expense
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(17
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)
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142
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Stock compensation expense
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112
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116
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(Increase) decrease in accounts receivable
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1,029
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(337
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)
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(Increase) decrease in inventory (net of progress billed)
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(797
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)
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(867
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)
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(Increase) decrease in prepaid expenses
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62
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(23
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)
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(Increase) decrease in security deposits
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-
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3
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|
Increase (decrease) in accounts payable and accrued expenses
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|
234
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|
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|
837
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Increase (decrease) in accrued warranty costs
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|
-
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|
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|
3
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|
Increase (decrease) in customer advance deposits
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(526
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)
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(677
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)
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Total adjustments
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|
357
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|
|
|
(556
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)
|
Net cash (used in) operating activities
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|
-
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|
|
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(758
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)
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|
|
|
|
|
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|
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Cash flows from investing activities
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|
|
|
|
|
|
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Purchases of property and equipment
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(34
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)
|
|
|
(2,100
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)
|
Decrease in prepaid royalties - long term
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|
22
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|
|
|
22
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|
Net cash (used in) investing activities
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|
|
(12
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)
|
|
|
(2,078
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)
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities
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|
|
|
|
|
|
|
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Proceeds from convertible notes issued
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|
|
-
|
|
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|
1,560
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|
Debt issuance fees
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|
|
-
|
|
|
|
(74
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)
|
Proceeds (to) from credit facility (net)
|
|
|
(70
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)
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
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|
|
(70
|
)
|
|
|
2,036
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|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(82
|
)
|
|
|
(800
|
)
|
Cash at beginning of period
|
|
|
683
|
|
|
|
1,685
|
|
Cash at end of period
|
|
$
|
601
|
|
|
$
|
885
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
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|
|
|
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|
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Cash paid for interest
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|
$
|
45
|
|
|
$
|
23
|
|
Exchange of convertible note and accrued interest to series B preferred stock
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|
|
-
|
|
|
|
1,629
|
|
Beneficial Conversion Feature on series B preferred stock
|
|
|
-
|
|
|
|
4,887
|
|
Beneficial Conversion Feature on series A preferred stock
|
|
|
-
|
|
|
|
1,554
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|
Exchange of preferred stock for common stock
|
|
|
3,165
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|
|
|
10
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|
The accompanying
notes are an integral part of these consolidated financial statements.
Note 1 - Organization and Operations
Optex Systems
Holdings’ operations are based in Dallas and Richardson, Texas in two leased facilities comprising approximately 93,733 square
feet. As of June 26, 2016, Optex Systems Holdings operated with 89 full-time equivalent employees.
Optex Systems
Holdings manufactures optical sighting systems and assemblies, primarily for Department of Defense and foreign military applications.
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. Optex Systems Holdings is an ISO 9001:2008 certified company.
On November 3, 2014, Optex Systems, Inc. purchased the assets comprising the Applied Optics Products Line of L-3 Communications,
Inc., a thin film coating manufacturer for lenses used primarily in the defense industry.
U.S. military
spending has been significantly reduced as a result of the Congressional sequestration cuts to defense spending, which began in
fiscal year 2013. As a result of lower U.S. government spending, we have 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. 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.
On October 7,
2015, we effected a 1:1000 reverse split of our issued and outstanding shares of common stock and all share numbers in these consolidated
financial statements have been adjusted to give effect to this reverse split.
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 September 27, 2015 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. Management estimates include bad debt allowances, depreciable asset lives, accrued warranties, valuations
of derivatives, stock compensation expenses, inventory valuation reserves, as well as estimated contract costs at completion used
to derive cost of sales. Actual results could differ from the estimates.
Inventory:
Inventory
is recorded at the lower of cost or market value, and adjusted, as necessary, for decreases in valuation and obsolescence. Adjustments
to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected sales activity, inventory
costs and inventory balances to determine appropriate reserve levels. Cost is determined using the first-in first-out method. Under
arrangements by which progress payments are received against certain contracts, the customer retains a security interest in the
undelivered inventory identified with these contracts. Payments received for such undelivered inventory are classified as unliquidated
progress payments and deducted from the gross inventory balance. There were no unliquidated progress payments as of June 26, 2016
and September 27, 2015. As of June 26, 2016 and September 27, 2015, inventory included:
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(Thousands)
|
|
|
|
June 26, 2016
|
|
|
September 27, 2015
|
|
Raw Material
|
|
$
|
3,849
|
|
|
$
|
4,545
|
|
Work in Process
|
|
|
3,600
|
|
|
|
2,456
|
|
Finished Goods
|
|
|
653
|
|
|
|
304
|
|
Gross Inventory
|
|
$
|
8,102
|
|
|
$
|
7,305
|
|
Less: Inventory Reserves
|
|
|
(1,592
|
)
|
|
|
(1,592
|
)
|
Net Inventory
|
|
$
|
6,510
|
|
|
$
|
5,713
|
|
Net
inventory increased by $797 thousand during the nine months ending June 26, 2016 in support of revenues anticipated during
the fourth quarter of the current fiscal year.
Revenue
Recognition:
Optex Systems Holdings recognizes revenue based on the modified percentage of completion method utilizing
the units-of-delivery method, in accordance with FASB ASC 605-35:
The units-of-delivery
method recognizes as revenue the contract price of units of a basic production product delivered during a period and as the cost
of earned revenue the costs allocable to the delivered units. Costs allocable to undelivered units are reported in the balance
sheet as inventory or work in progress. The method is used in circumstances in which an entity produces units of a basic product
under production-type contracts in a continuous or sequential production process to buyers’ specifications.
Optex Systems
Holdings contracts are fixed price production type contracts whereby a defined order quantity is delivered to the customer during
a continuous or sequential production process tailored to the buyer’s specifications (build to print). Optex Systems
Holdings’ deliveries against these contracts generally occur in monthly increments across fixed delivery periods spanning
from 3 to 36 months.
Optex Systems Holdings may at times have
contracts that allow for invoicing based on achievement of milestone events. In such cases, Optex Systems Inc. recognizes revenue
based on the milestone method in accordance with FASB ASC 605-28, as applicable. On October 24, 2011, Optex Systems, Inc. was awarded
an $8.0 million contract with General Dynamics Land Systems - Canada that provided for milestone invoices up to a total of $3.9
million. The terms of the contract extend through 2017 during which time we are required to purchase the necessary materials to
fulfill the delivery of products required by the contract. Currently, there are no additional contracts providing for milestone
payments. In accordance with FASB 605-28, Optex Systems, Inc. recognizes milestone payments as revenue upon completion of a substantive
milestone as commensurate with the following guidelines: our performance to achieve the milestone, the milestone relates solely
to past performance and is reasonable relative to all of the deliverables and payment terms within the arrangement. Milestones
are not considered as substantive if any portion of the associated milestone consideration relates to the remaining deliverables
in the unit of accounting. Non-substantive milestone payments are reported as a liability on the balance sheet as Short Term and
Long Term Customer Advance Deposits.
Pursuant to the contract, all substantive
milestones events were completed as of September 30, 2012 and as such, there was zero revenue recognized for milestones in the
three and nine months ending June 26, 2016 and June 28, 2015 and no unpaid/invoiced customer deposits related to the completed
milestone events, respectively.
Customer Advance Deposits:
Customer
advance deposits represent amounts collected from customers in advance of shipment or revenue recognition which relate to undelivered
product due to non-substantive milestone payments or other cash in advance payment terms. As of June 26, 2016, Optex Systems, Inc.
had a balance of $0.6 million in short term customer advance deposits for deliveries to occur within the next twelve months on
non-substantive milestone billings.
Stock-Based
Compensation:
FASB ASC 718 establishes standards for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services, but primarily focuses on transactions whereby an entity obtains employee services
for share-based payments. FASB ASC 718 requires that the compensation cost relating to share-based payment transactions be recognized
in the consolidated financial statements. That cost will be measured based on the fair value of the equity or liability instruments
issued. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Company’s accounting policy for
equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC 505-50
.
The
measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment
for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is
complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the
term of the consulting agreement. Stock-based compensation related to non-employees is accounted for based on the fair value of
the related stock or options or the fair value of the services, whichever is more readily determinable in accordance with FASB
ASC 718.
Segment
Reporting:
FASB ASC 280 requires that a public business enterprise report financial and descriptive information about
its reportable operating segments. Operating segments are components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to segments. Segments are determined based on differences in products,
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 FASB ASC 280 requires that a public business enterprise report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliations of total segment revenues,
total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise’s
general-purpose financial statements. See Note 4 below regarding segment reporting for the company.
Fair Value of Financial Instruments:
FASB ASC 825-10 requires disclosure of fair value information about certain financial instruments, including, but not limited to,
cash and cash equivalents, accounts receivable, refundable tax credits, prepaid expenses, accounts payable, accrued expenses, notes
payable to related parties and convertible debt-related securities. 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 financial instruments included in Optex Systems Holdings’ consolidated financial statements approximated
their fair values.
Beneficial
Conversion Features of Convertible Securities:
Conversion options that are not bifurcated as a derivative pursuant
to ASC 815 and not accounted for as a separate equity component under the cash conversion guidance are evaluated to determine
whether they are beneficial to the investor at inception (a beneficial conversion feature) or may become beneficial in the
future due to potential adjustments. The beneficial conversion feature guidance in ASC 470-20 applies to convertible stock as
well as convertible debt which are outside the scope of ASC 815. A beneficial conversion feature is defined as a
nondetachable conversion feature that is in the money at the commitment date. In addition, our preferred stock issues contain
conversion terms that may change upon the occurrence of a future event, such as antidilution adjustment provisions. The
beneficial conversion feature guidance requires recognition of the conversion option’s in-the-money portion, the
intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The
resulting discount is amortized as a dividend over either the life of the instrument, if a stated maturity date exists, or to
the earliest conversion date, if there is no stated maturity date. If the earliest conversion date is immediately upon
issuance, the dividend must be recognized at inception. When there is a subsequent change to the conversion ratio based on a
future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on
occurrence.
Optex Systems Holdings has preferred stock,
convertible into common shares, containing beneficial conversion features at inception as well as potential beneficial conversion
features that could be triggered by future adjustments to the conversion price. Because our preferred stock is perpetual, with
no stated maturity date, and the conversions may occur any time from inception, the dividend is recognized immediately when a beneficial
conversion exists at issuance. During the three and nine months ending June 28, 2015 Optex Systems Holdings recognized dividends
of zero and $6.4 million, respectively, on series A and series B preferred stock related to the beneficial conversion feature of
arising from a common stock conversion rate of $2.50 versus a current market price of $10.00 per common share. There was zero dividends
recognized during the three and nine months ending June 26, 2016, as the conversion price was above the market.
Intangible
Assets:
Optex Systems Holdings has acquisition-related intangible assets which include the fair market value of customer
order backlog as of the acquisition date. We determine the fair value of intangible assets using the income approach methodology
of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies, which requires
some judgment by management. Amortization of acquisition-related intangible assets is expensed to total operating expenses
as cost of sales and general and administrative expenses on a straight-line basis over their estimated useful lives, unless such
lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired,
written down to fair value based on either discounted cash flows or appraised values. The residual values and useful lives are
reviewed at each balance sheet date and adjusted, if appropriate. Optex Systems Holdings identified intangible assets of $342 thousand
from the acquisition of the Applied Optics Center from L3 on November 3, 2014 which consisted primarily of customer backlog, with
an initial useful life of less than one year. As of June 26, 2016 and September 27, 2015 the unamortized balance of the intangible
assets was zero. See Note 5 “Intangible Assets”.
Intangible assets
with indefinite lives are tested annually for impairment, during the fiscal fourth quarter and between annual periods, if impairment
indicators exist, and are written down to fair value as required.
Income Tax/Deferred Tax:
FASB
ASC 740 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have
been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are
determined based on differing treatment of items for financial reporting and income tax reporting purposes. The deferred tax balances
are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in effect in the years
in which the temporary differences are expected to reverse. Under FASB ASC 740, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided
for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
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, convertible debt, stock options
and warrants. In computing the dilutive effect of convertible preferred stock or debt, the numerator is adjusted to add back any
convertible preferred dividends and interest on convertible debt, 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
stock options and warrants. Convertible preferred stock, convertible debt, stock options and warrants that are anti-dilutive are
excluded from the calculation of diluted earnings per common share.
For the three and nine months ended June
26, 2016, respectively, 546 shares of Series A preferred stock, 969 shares of Series B preferred stock, 52,850 stock options
and zero warrants were excluded from the earnings per share calculation as anti-dilutive. For the three and nine
months ended June 28, 2015, respectively, 1,001 shares of Series A preferred stock, 994 shares of Series B preferred stock, 62,858
stock options and 1,000 warrants were excluded from the earnings per share calculation as anti-dilutive.
Note 3 Purchase of Applied Optics Products
Line
On November 3, 2014, Optex Systems, Inc.
entered into a Purchase Agreement with L-3 Communications, Inc. (“L-3”) pursuant to which Optex purchased from L-3
the assets comprising L-3’s Applied Optics Products Line (“Purchased Assets”). Applied Optics (“AOC”)
is primarily engaged in the production, marketing and sales of precision optical assemblies utilizing thin film coating capabilities
for optical systems and components primarily used for military purposes. The Purchased Assets consist of personal property, inventory,
books and records, contracts, prepaid expenses and deposits, intellectual property, and governmental contracts and licenses utilized
in the business comprised of the Purchased Assets.
The purchase price for the acquisition
was $1,013.1 thousand, which was paid in full at closing, plus the assumption of certain liabilities associated with the Purchased
Assets in the approximate amount of $270.7 thousand. The source of funds for the acquisition consisted of Optex working capital
of $213.1 thousand and an advance of $800 thousand from accredited investors which was subsequently consummated on November 17,
2014 through the private placement of convertible notes issued by Optex Systems Holdings in a transaction exempt from registration
under Section 4(2) of the Securities Act. See Note 8 “Issuance of Convertible Notes”.
The asset acquisition met the definition
of a business for business combinations under ASC 805-10-20. The following table reconciles the fair value of the acquired assets
and assumed liabilities to the total purchase price of the Applied Optics Product Line Acquisition (in thousands):
|
|
Fair Values as of
November 3, 2014
|
|
Fixed Assets
|
|
$
|
2,064.7
|
|
Inventory
|
|
|
940.1
|
|
Prepaid Assets/Other
|
|
|
47.1
|
|
Liabilities
|
|
|
(270.7
|
)
|
|
|
|
|
|
Net Assets Acquired
|
|
|
2,781.2
|
|
|
|
|
|
|
Intangible Asset:
|
|
|
|
|
Customer Contracts/Backlog
|
|
|
342.2
|
|
Total Assets Acquired
|
|
|
3,123.4
|
|
|
|
|
|
|
Less: Cash Consideration
|
|
|
(1,013.1
|
)
|
|
|
|
|
|
Gain on Bargain Purchase
|
|
$
|
2,110.3
|
|
The aggregate purchase consideration has
been allocated to the assets and liabilities acquired, including identifiable intangible assets, based on their respective estimated
fair values. The total assets acquired exceeded the total consideration paid, thus there is no goodwill associated with the asset
purchase and the acquisition has been determined as a bargain purchase which requires immediate recognition of a gain on the purchased
assets. The gain is reflected in earnings in Other Income on the Consolidated Statement of Operations as “Gain on Purchased
Asset”.
The intangible assets include finite-life
intangibles associated with undelivered customer backlog as of the acquisition date and was valued using the income approach methodology
that includes the discounted cash flow method as well as other generally accepted valuation methodologies, which requires significant
judgment by management. The cash flow projections took into effect the expected net sales from the customer backlog
as of November 3, 2014 and the corresponding expenses against those sales in the respective periods. The shipments against the
customer backlog were delivered between January and June of 2015, and as such, the intangible amortization against those shipments
was complete by June 28, 2015. As of September 27, 2015 the balance in unamortized intangible assets was zero.
The respective estimated fair values for
property plant & equipment, and fixed assets were determined by an independent third-party appraisal firm. The appraisal methods
employed by the firm in arriving at the final values on all of the equipment included a combination of the “Cost Approach”
the “Market Data Approach” as well as “Income Approach” on specific high historical cost assets as presented
by the seller. Certain assets which had very specific military manufacturing applications were operating at less than optimal capacity
due to significantly reduced government spending from historical levels related to those processes. The excess or “idle”
capacity on these unique assets was considered in the appraiser’s valuation, and the appraised values adjusted downward accordingly,
in consideration of the reduced revenue and corresponding limited cash flow that could reasonably be generated from these assets
under the current market conditions.
Separate from the appraisal analysis, Optex
completed a physical inventory of all raw material, work in process and finished goods inventories in their various stages of production
as of the acquisition date, and conducted a thorough revaluation and review of the counted inventory carrying values giving downward
consideration to any excess, obsolete, or other product inventories which were valued in excess of the expected net realizable
values given the depressed market conditions. Based on the supplemental inventory review, combined with the income approach used
on the excess and idle capacity assets applied by the appraiser, the company was satisfied that the third party appraisal fairly
valued those assets. The total fair value appraisal for the purchased assets, before intangible assets and assumed liabilities
approximated 73% of the net carrying values of those same assets on the sellers closing balance sheet as of November 3, 2014.
Optex Systems
Holdings believes that it was able to acquire the Applied Optics Product Line for less than the fair value of its assets because
of (i) its unique position as a market leader in the industry segment that directly utilizes the manufactured components specific
to the Applied Optics Product Line, (ii) a previous customer/supplier relationship with the acquisition target, (iii) L-3’s
intent to exit the optical coating operations, and (iv) L-3’s desire to provide for continued employment of the Applied Optics
workforce. The Applied Optics Product Line had a recent history of losses, and the seller approached Optex Systems in an effort
to sell the product line and exit the optical coating manufacturing business that no longer fit its strategy. With the seller's
intent to exit the business segment and Optex’s position as a market leader within the same industry segment utilizing the
product line capability, Optex was able to agree on a favorable purchase price with L-3 Communications.
As a result of the asset purchase, the
Company incurred additional acquisition-related costs of approximately $40.2 thousand during the nine months ending June 28, 2015
for legal, accounting and valuation consulting fees which were expensed to general administrative costs.
Note 4 Segment Reporting
Optex Systems
Holdings, Inc. has two reportable segments which include Optex Systems (OPX)-Richardson, and Applied Optics Center (AOC) –
Dallas. The accounting policies for each segment are the same as those described in the summary of significant accounting policies.
Optex Systems Holdings, Inc. evaluates performance based on profit and loss from operations before income taxes excluding nonrecurring
gains and losses.
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 in place just prior to 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 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
– Dallas, serves as the home office for both segments, and shared general and administrative costs attributable to both segments
are allocated directly to the segments based on the government costs accounting standard, CAS 403 – “Allocation of
Home Office Expenses to Segments”. The purpose of CAS 403 is to provide criteria for allocating home office expenses to the
segments of an organization based on the beneficial or causal relationships between the expenses and the receiving segments. Based
on CAS 403, Optex Systems Holdings allocates home office expenses based on a three factor formula which is the average of the following
three percentages for each of the segment’s fiscal year:
(1)
The percentage of segment payroll dollars to total payroll dollars of all segments;
(2)
The percentage of the segment’s operating revenue to the total operating revenue of all segments; and
(3)
The percentage of the average net book value of the sum of the segment’s tangible capital assets plus inventories to the
total average net book value of such assets of all segments.
Optex Systems (OPX) – Richardson,
Texas
Optex Systems, Inc. manufactures optical
sighting systems and assemblies, primarily for Department of Defense and foreign military 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. 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, Inc. 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, NorcaTec 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.
Optex Systems – Richardson revenues
predominately support prime and subcontracted military customers both domestically and abroad. The Optex Systems segment serves
domestic military customers, 69% and foreign military customers, 31%. The Optex Systems segment revenue for nine months ending
June 26, 2016 was derived from external customers consisting of General Dynamics, 26%, the U.S. government, 57%, International
Parts Supply Co (IPS), 8%, and other external customers, 9%.
Optex Systems is located in Richardson,
Texas, with leased premises consisting of approximately 49,100 square feet. As of June 26, 2016, the Richardson facility
operated with 52 full time equivalent employees in a single shift operation. Optex Systems in Richardson serves as the home office
for both the Optex Systems (OPX) and Applied Optics Center (AOC) segments.
Applied Optics Center (AOC) – Dallas
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 (see Note 3). Applied Optics Center 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 Corporation 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 Richardson segment.
The Applied Optics Center serves primarily
domestic U.S. customers, externally, and as an internal supplier for Optex Systems – Dallas. Applied Optics Center sales
to commercial customers represent 32% and military sales to prime and subcontracted customers represent 46% of the total segment
revenue. Intersegment sales to Optex Systems – Richardson, comprised 22% of the total segments revenue and was primarily
in support of military contracts. The Applied Optics Center external customer revenue for the nine months ending June 26, 2016
was derived from Nightforce Optics, Inc., 38%, L3 Communications, 15%, Exelis, Inc., 22%, the U.S. government, 20%, and other external
customers, 5%.
The Applied Optics Center (AOC), is located
in Dallas, Texas with leased premises consisting of approximately 56,633 square feet of space, of which 12,000 square feet is currently
subleased to L3 Mobile Vision. As of June 26, 2016, AOC operated with 37 full time equivalent employees in a single shift operation.
The financial tables below present the
information for each of the reportable segments profit or loss as well as segment assets for the three months ending June 26, 2016
and the three months ending June 28, 2015. Optex Systems Holdings does not allocate interest expense, income taxes or unusual items
to segments.
|
|
Reportable Segment Financial
Information
(thousands)
|
|
|
|
Three
months ending June 26, 2016
|
|
|
|
Optex
Systems
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
3,377
|
|
|
$
|
1,967
|
|
|
$
|
-
|
|
|
$
|
5,344
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
515
|
|
|
|
(515
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
3,377
|
|
|
$
|
2,482
|
|
|
$
|
(515
|
)
|
|
$
|
5,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
20
|
|
|
$
|
68
|
|
|
$
|
-
|
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
$
|
135
|
|
|
$
|
76
|
|
|
$
|
(12
|
)
|
|
$
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(188
|
)
|
|
$
|
188
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Stock compensation expense
|
|
$
|
63
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
63
|
|
Royalty expense amortization
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8
|
|
Provision for (use of) contract loss reserves
|
|
$
|
-
|
|
|
$
|
(17
|
)
|
|
$
|
-
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
6,146
|
|
|
$
|
4,776
|
|
|
$
|
-
|
|
|
$
|
10,922
|
|
Expenditures for segment assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Reportable Segment Financial
Information
(thousands)
|
|
|
|
Three
months ending June 28, 2015
|
|
|
|
Optex
Systems
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
1,108
|
|
|
$
|
1,204
|
|
|
$
|
-
|
|
|
$
|
2,312
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
190
|
|
|
|
(190
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
1,108
|
|
|
$
|
1,394
|
|
|
$
|
(190
|
)
|
|
$
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
22
|
|
|
$
|
67
|
|
|
$
|
-
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
$
|
(612
|
)
|
|
$
|
(390
|
)
|
|
$
|
(13
|
)
|
|
$
|
(1,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(111
|
)
|
|
$
|
111
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(Gain) on purchased asset - AOC
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Amortization of intangible assets
|
|
$
|
-
|
|
|
$
|
171
|
|
|
$
|
-
|
|
|
$
|
171
|
|
Stock option compensation expense
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24
|
|
Royalty expense amortization
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8
|
|
Provision for (use of) contract loss reserves
|
|
$
|
-
|
|
|
$
|
(41
|
)
|
|
$
|
-
|
|
|
$
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
7,099
|
|
|
$
|
3,903
|
|
|
$
|
-
|
|
|
$
|
11,002
|
|
Expenditures for segment assets
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(6
|
)
|
The financial tables below present the
information for each of the reportable segments profit or loss as well as segment assets for the nine months ending June 26, 2016
and the nine months ending June 28, 2015. Optex Systems Holdings does not allocate interest expense, income taxes or unusual items
to segments.
|
|
Reportable Segment Financial
Information
(thousands)
|
|
|
|
Nine
months ending June 26, 2016
|
|
|
|
Optex
Systems
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
7,511
|
|
|
$
|
4,262
|
|
|
$
|
-
|
|
|
$
|
11,773
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
1,173
|
|
|
|
(1,173
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
7,511
|
|
|
$
|
5,435
|
|
|
$
|
(1,173
|
)
|
|
$
|
11,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
57
|
|
|
$
|
203
|
|
|
$
|
-
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
$
|
(16
|
)
|
|
$
|
(313
|
)
|
|
$
|
(28
|
)
|
|
$
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(565
|
)
|
|
$
|
565
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Stock compensation expense
|
|
$
|
112
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
112
|
|
Royalty expense amortization
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22
|
|
Provision for (use of) contract loss reserves
|
|
$
|
-
|
|
|
$
|
(47
|
)
|
|
$
|
-
|
|
|
$
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
6,146
|
|
|
$
|
4,776
|
|
|
$
|
-
|
|
|
$
|
10,922
|
|
Expenditures for segment assets
|
|
$
|
(15
|
)
|
|
$
|
(19
|
)
|
|
$
|
-
|
|
|
$
|
(34
|
)
|
|
|
Reportable Segment Financial
Information
(thousands)
|
|
|
|
Nine
months ending June 28, 2015
|
|
|
|
Optex
Systems
Richardson
|
|
|
Applied
Optics Center
Dallas (1)
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
4,786
|
|
|
$
|
3,028
|
|
|
$
|
-
|
|
|
$
|
7,814
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
190
|
|
|
|
(190
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
4,786
|
|
|
$
|
3,218
|
|
|
$
|
(190
|
)
|
|
$
|
7,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
166
|
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
68
|
|
|
$
|
179
|
|
|
$
|
-
|
|
|
$
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
$
|
(1,055
|
)
|
|
$
|
1,020
|
|
|
$
|
(166
|
)
|
|
$
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(277
|
)
|
|
$
|
277
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(Gain) on purchased asset - AOC
|
|
$
|
-
|
|
|
$
|
2,110
|
|
|
$
|
-
|
|
|
$
|
2,110
|
|
Amortization of intangible assets
|
|
$
|
-
|
|
|
$
|
342
|
|
|
$
|
-
|
|
|
$
|
342
|
|
Stock option compensation expense
|
|
$
|
116
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
116
|
|
Royalty expense amortization
|
|
$
|
23
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23
|
|
Provision for (use of) contract loss reserves
|
|
$
|
(11
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
7,099
|
|
|
$
|
3,903
|
|
|
$
|
-
|
|
|
$
|
11,002
|
|
Expenditures for segment assets
|
|
$
|
(30
|
)
|
|
$
|
(2,070
|
)
|
|
$
|
-
|
|
|
$
|
(2,100
|
)
|
(1) The Applied Optics Center was acquired on November 3,
2014.
Note 5 – Intangible Assets
On November 3, 2014, Optex Systems, Inc.
purchased the assets comprising L-3 Communications’ Applied Optics Products Line (“Purchased Assets”) in exchange
for $1,013.1 thousand and the assumption of approximately $270.7 thousand of liabilities (see Note 3 “Purchase of Applied
Optics Product Line”). Optex Systems, Inc. has allocated the consideration for the acquisition of the purchased assets among
tangible and intangible assets acquired and liabilities assumed based upon their fair values as of the acquisition date. Assets
that met the criteria for recognition as intangible assets apart from goodwill were also valued at their fair values.
The purchase price was assigned to the
acquired interest in the assets and liabilities of Optex Systems Holdings as of November 3, 2014 as follows:
|
|
(Thousands)
|
|
Assets:
|
|
|
|
|
Current assets, consisting primarily of inventory of $940.1 thousand and prepaid assets of $47.1 thousand
|
|
$
|
987.2
|
|
Identifiable intangible assets
|
|
|
342.2
|
|
Other non-current assets, principally property and equipment
|
|
|
2,064.7
|
|
Total assets
|
|
$
|
3,394.1
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current liabilities, consisting of accounts payable of $119.4 thousand and accrued liabilities of $151.3 thousand
|
|
$
|
(270.7
|
)
|
Acquired net assets
|
|
$
|
3,123.4
|
|
The fair values
of the intangible assets as of the asset transfer date consisted primarily of $342.2 thousand of undelivered customer order backlog
with contracted delivery dates that is essentially fulfilled as of quarter ended June 28, 2015. The amortization of identifiable
intangible assets associated with the acquisition was amortized on a straight line basis over the six month period beginning on
December 29, 2014 at a rate of $57.0 thousand per month pursuant to the expected order deliveries. The intangible amortization
is allocable to operating expenses as manufacturing cost of sales and general and administrative expenses at a rate of $145.5 thousand
and $25.5 thousand per quarter, respectively, through quarter ending June 28, 2015. The identifiable intangible assets are amortized
over 15 years for income tax purposes. There were no unamortized intangible assets or amortization expenses incurred in the
three and nine months ending June 26, 2016. During the three and nine months ending June 28, 2015, $145.5 thousand and $291.1 thousand
had been amortized to cost of sales, respectively, and $25.5 thousand and $51.1 thousand had been amortized to general and administrative
expenses, respectively. As of the periods ending June 26, 2016 and September 27, 2015, the total unamortized balance of intangible
assets was zero.
Note 6 - Commitments
and Contingencies
Investor
Relations - IRTH Communications
On April 6, 2016 Optex Systems Holdings
Inc. executed an investor relations services agreement with IRTH Communications. The material terms of the agreement are as follows:
|
·
|
An initial retainer of $7,500, followed by 11 consecutive monthly payments of $7,500.
|
|
·
|
A single one-time retainer payment of 40,000 shares of the Company’s common stock; which shares shall be “Restricted Securities” pursuant to the provisions of rule 144.
|
|
·
|
Reimbursement of any reasonable out-of-pocket cost and expenses, approved by the Company in advance.
|
|
·
|
The term of the agreement is 12 months, expiring on April 5, 2017, and shall automatically renew for an additional 12 month term on each yearly anniversary date unless the Company gives notice to IRTH of an intention to terminate at the expiration of the original term.
|
|
·
|
Continued payments of $7,500 per month plus a one-time payment of $100,000 worth of retainer shares of the Company’s common stock on renewal; which shares shall be “Restricted Securities” pursuant to the provisions of rule 144.
|
On April 29, 2016, Optex Systems Holdings,
Inc. issued 40,000 common “restricted” shares at a market price of $2.35 per share ($94,000) in support of the IRTH
Communications agreement.
Rental Payments
under Non-cancellable Operating Leases
Optex Systems
Holdings leases its office and manufacturing facilities for the Optex Systems, Inc., Richardson address and the Applied Optics
Center Dallas address, under non-cancellable operating leases.
The leased facility
under Optex Systems Inc. at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space and expires March
31, 2021. Pursuant to the terms of the most recent amendment to the Richardson site facilities lease, there was no base rent payment
due from January 1, 2014 through March 31, 2014, with payments beginning April 2014, and annual rental payment inflationary increases
between 3.4% and 4.8% occurring each year beginning in 2016. As of June 26, 2016 the unamortized deferred rent was $108 thousand
as compared to $106 thousand as of September 27, 2015. Deferred rent expense is amortized monthly over the life of the lease.
The leased facility under the Applied Optics
Center at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 56,633 square feet of space at the premises. The term of the
lease expires September 30, 2016. We are currently in negotiations with the property manager to renew the lease with a reduced
floor space for an additional five years by September 30, 2016.
Approximately 12,000 square feet covered
under the current Applied Optics Center lease, is subleased under a separate Memorandum of Understanding dated October 27, 2014,
to L-3 Communications Mobile Vision Inc. The sublease term is for November 2014 through September 2016. The sublease is treated
as a reduction in the company facilities rental and CAM expenses in the statement of operations. L-3 has notified Optex that it
will not be renewing the sublease at the end of the current term. We are negotiating with the property manager to exclude a substantial
portion of the floor space currently associated with the L-3 Mobile Vision Inc. address from the Optex lease renewal.
As of June 26,
2016, 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
|
|
|
Applied Optics
Center
Dallas Sublease
|
|
|
|
|
Fiscal Year
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Total
Payments
|
|
2016
|
|
$
|
67
|
|
|
$
|
22
|
|
|
$
|
72
|
|
|
$
|
20
|
|
|
$
|
(15
|
)
|
|
$
|
(8
|
)
|
|
$
|
158
|
|
2017
|
|
|
266
|
|
|
|
88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
354
|
|
2018
|
|
|
271
|
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
361
|
|
2019
|
|
|
281
|
|
|
|
92
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
373
|
|
2020
|
|
|
291
|
|
|
|
94
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
385
|
|
2021
|
|
|
147
|
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
195
|
|
Total minimum lease payments
|
|
$
|
1,323
|
|
|
$
|
434
|
|
|
$
|
72
|
|
|
$
|
20
|
|
|
$
|
(15
|
)
|
|
$
|
(8
|
)
|
|
$
|
1,826
|
|
Total
facilities rental and CAM expense for both facility lease agreements as of the three and nine months ended June 26, 2016 was $169
and $473 thousand. Total expense under facility lease agreements as of the three and nine months ended June 28, 2015 was $181 and
$435 thousand.
Note 7 –
Prepaid Royalties
Prepaid royalties represent
payments made for the purchase of non-transferable, non-exclusive patent rights associated with a patent license. The patent license
allows for development of current and future products in our digital line of periscopes. We completed our first international shipment
utilizing this technology in 2014 and are currently in production to support a U.S. Government Foreign Military Sale contract awarded
in January 2016. We estimate the commercial life of the patent at seven years. As of June 26, 2016, the balance of the patent license
is $98 thousand net of accumulated amortization. The royalty expenses for the associated patent license are amortized on a straight
line basis starting in fiscal year 2013. The amortized royalty expense for the three and nine months ending June 26, 2016 and June
28, 2015 was $8 thousand and $22 thousand each year, respectively.
Note 8 - Debt
Financing
Related Parties
Acquisition
by Sileas Corporation on February 20, 2009
On February 20,
2009, Sileas purchased 100% of the equity and debt interest held by Longview, which represented 90% of the Optex Systems, Inc.
(Delaware) outstanding equity on that date. Currently, Sileas is the majority owner of Optex Systems Holdings.
Sileas Secured Promissory Note Due
on May 29, 2021 to Longview Fund, LP
As a result of the transaction described
above between Sileas and Longview on February 20, 2009, Sileas, the new majority owner of Optex Systems, Inc. (Delaware), executed
and delivered to Longview, a Secured Promissory Note in an original principal amount of $13,524,405 and bearing simple interest
at the rate of 4% per annum.
On June 5, 2015, Sileas Corp. amended its
Secured Note, with Longview Fund, L.P., as lender, as follows:
|
•
|
The
principal amount was increased to $18,022,329 to reflect the original principal amount plus all accrued and unpaid interest to
date, and the Secured Note ceased to bear interest as of that date;
|
|
•
|
The
maturity date of the note was extended to May 29, 2021; and
|
|
•
|
A
conversion feature was added to the Secured Note by which the principal amount of the Secured Note can be converted into our Series
A preferred stock, which is owned by Sileas, at the stated value of our Series A preferred stock.
|
Simultaneously therewith, Sileas entered
into a Blocker Agreement with us pursuant to which the Series A preferred stock shall not be convertible by Sileas into our common
stock, and we shall not effect any conversion of the Series A Stock or otherwise issue any shares of our common stock pursuant
hereto, to the extent (but only to the extent) that after giving effect to such conversion or other share issuance hereunder Sileas
(together with its affiliates) would beneficially own in excess of 9.99% our common stock. Sileas also agreed to not vote any of
its shares of Series A preferred stock in excess of 9.99% of our common stock. This Blocker Agreement has been waived by us until
further notice.
Conversion of Sileas Owned Series
A Preferred Shares to Common Stock
On March 27, 2016, Sileas exercised a conversion
of 455.52 shares of Optex Systems, Inc. Preferred Series A shares at a total stated value of $3.1 million into 1,250,000 shares
of common stock. The conversion rate to common stock was $2.50 per share. There was no impact to the balance sheet net equity as
a result of this transaction.
Credit Facility
— Avidbank (formerly known as Peninsula Bank Business Funding)
On April 20, 2016,
the Company amended its revolving credit facility with Avidbank. The new renewable revolving maturity date is January 22, 2018.
The facility provides up to $2 million in financing against eligible receivables and is subject to meeting certain covenants including
an asset coverage ratio test for up to twenty months. The material terms of the amended revolving credit facility are as follows:
|
•
|
The
interest rate for all advances shall be the then in effect prime rate plus 2.5% and is subject to a minimum interest payment requirement
per six month period of $10,000.
|
|
•
|
Interest
shall be paid monthly in arrears.
|
|
•
|
A
facility fee of (0.5%) of the revolving line ($10,000) is due on May 22, 2016 and each anniversary thereof for so long as the
revolving credit facility is in effect.
|
|
•
|
The
loan period is from April 20 through January 22, 2018 at which time any outstanding advances, and accrued and unpaid interest
thereon, will be due and payable.
|
|
•
|
The
obligations of Optex Systems, Inc. to Avidbank are secured by a first lien on all of its assets (including intellectual property
assets should it have any in the future) in favor of Avidbank.
|
|
•
|
The
facility contains customary events of default. Upon the occurrence of an event of default that remains uncured after any applicable
cure period, Avidbank’s commitment to make further advances may terminate, and Avidbank would also be entitled to pursue
other remedies against Optex Systems, Inc. and the pledged collateral.
|
|
•
|
Pursuant
to a guaranty executed by Optex Systems Holdings in favor of Avidbank, Optex Systems Holdings has guaranteed all obligations of
Optex Systems, Inc. to Avidbank.
|
As of June 26,
2016 and September 27, 2015, the outstanding principal and accrued interest balance on the line of credit was $730 thousand and
$817 thousand, respectively. For the three and nine months ended June 26, 2016 and June 28, 2015, the total interest expense
against the outstanding line of credit balance was $12 and $28 thousand and $10 and $20 thousand, respectively.
Issuance of Convertible Notes
On November 17,
2014, Optex Systems Holdings entered into a Subscription Agreement (the “Agreement”) to sell up to $2.1 million principal
amount of convertible promissory notes (“Notes”) to several accredited investors (the “Investors”) in a
private placement pursuant to which the Investors purchased a series of Notes with an aggregate principal amount of $1,550 thousand. An
additional convertible promissory note for $10 thousand was issued to the placement agency in consideration for placement services
on the transaction.
Optex Systems,
Inc. incurred $74 thousand in debt issuance costs, for investment banking, legal and placements fee services, inclusive of the
$10 thousand supplemental convertible note issued for placement fees. These costs are reflected in the June 28, 2015 cash flow
statement as debt issuance costs and were amortized to interest expense across the term of the notes based on the effective interest
method. For the three and nine months ending June 26, 2016 the total interest expense related to the debt was zero. For the three
and nine months ending June 28, 2015 the total interest expense related to the debt was $3 and $146 thousand, respectively. As
of June 26, 2016 and September 27, 2015 the unamortized debt issuance costs were zero.
On June 28, 2015, the holders of the Company’s
$1,560,000 principal amount of convertible promissory notes, issued on or about November 17, 2014, converted the entire principal
amount thereof and all accrued and unpaid interest thereon, into 1,000 shares of the Company’s Series B Preferred Stock.
Note 9-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 nonstatutory stock options determined at the
time of grant. As of June 26, 2016, Optex Systems Holdings has granted stock options to officers and employees as follows:
Date of
|
|
Shares
|
|
|
Exercise
|
|
|
Shares Outstanding
|
|
|
Expiration
|
|
Vesting
|
Grant
|
|
Granted
|
|
|
Price
|
|
|
As of 6/26/16
|
|
|
Date
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/09/11
|
|
|
46,070
|
|
|
$
|
10.00
|
|
|
|
35,350
|
|
|
12/08/2018
|
|
4 years
|
12/19/13
|
|
|
25,000
|
|
|
$
|
10.00
|
|
|
|
25,000
|
|
|
12/18/2020
|
|
4 years
|
Total
|
|
|
73,752
|
|
|
|
|
|
|
|
60,350
|
|
|
|
|
|
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 September 28, 2014
|
|
|
62,912
|
|
|
$
|
—
|
|
|
|
3.41
|
|
|
$
|
—
|
|
Granted – 2015
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited – 2015
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Exercised – 2015
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Outstanding as of September 27, 2015
|
|
|
62,858
|
|
|
$
|
—
|
|
|
|
2.32
|
|
|
$
|
—
|
|
Granted – 2016
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited – 2016
|
|
|
(2,508
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Exercised – 2016
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Outstanding as of June 26, 2016
|
|
|
60,350
|
|
|
$
|
—
|
|
|
|
1.67
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 27, 2015
|
|
|
40,266
|
|
|
$
|
—
|
|
|
|
1.45
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 26, 2016
|
|
|
52,850
|
|
|
$
|
—
|
|
|
|
1.34
|
|
|
$
|
—
|
|
As of June 26, 2016, the intrinsic value
of the outstanding options was zero. There were zero options granted in the three and nine months ended June 26, 2016 and June
28, 2015, respectively.
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 September 28, 2014
|
|
|
42,710
|
|
|
$
|
7.58
|
|
Non-vested granted — year ended September 27, 2015
|
|
|
—
|
|
|
$
|
—
|
|
Vested — year ended September 27, 2015
|
|
|
(20,064
|
)
|
|
$
|
7.50
|
|
Forfeited — year ended September 27, 2015
|
|
|
(54
|
)
|
|
$
|
—
|
|
Non-vested as of September 27, 2015
|
|
|
22,592
|
|
|
$
|
7.66
|
|
Non-vested granted — nine months ended June 26, 2016
|
|
|
—
|
|
|
|
—
|
|
Vested — nine months ended June 26, 2016
|
|
|
(12,585
|
)
|
|
|
7.33
|
|
Forfeited — nine months ended June 26, 2016
|
|
|
(2,508
|
)
|
|
|
—
|
|
Non-vested as of June 26, 2016
|
|
|
7,500
|
|
|
$
|
8.00
|
|
Restricted Stock Units issued to Officers
and Employees
On June 14, 2016,
the Compensation Committee (“Committee”) of the Board of Directors of Optex Systems Holdings, Inc. approved the Company’s
2016 Restricted Stock Unit Plan (the “Plan”). The Plan provides for the issuance of stock units (“RSU”)
for up to 1,000,000 shares of the Company’s common stock to Optex Systems Holdings officers and employees. Each RSU constitutes
a right to receive one share of the Company’s common stock, subject to vesting, which unless otherwise stated in an RSU agreement,
shall vest in equal amounts on the first, second and third anniversary of the grant date. Shares of the Company’s common
stock underlying the number of vested RSUs will be delivered as soon as practicable after vesting. During the period between grant
and vesting, the RSUs may not be transferred, and the grantee has no rights as a shareholder until vesting has occurred. If the
grantee’s employment is terminated for any reason (other than following a change in control of the Company or a termination
of an officer other than for cause), then any unvested RSUs under the award will automatically terminate and be forfeited. If an
officer grantee’s employment is terminated by the Company without cause or by the grantee for good reason, then, provided
that the RSUs have not been previously forfeited, the remaining unvested portion of the RSUs will immediately vest as of the officer
grantee’s termination date. In the event of a change in control, the Company’s obligations regarding outstanding RSUs
shall, on such terms as may be approved by the Committee prior to such event, immediately vest, be assumed by the surviving or
continuing company or cancelled in exchange for property (including cash).
On June 15, 2016,
the Company issued 150,000 RSUs to its Chief Executive Officer, Danny Schoening, and 50,000 RSUs to its Chief Financial Officer,
Karen Hawkins. The RSUs issued to Mr. Schoening and Ms. Hawkins vest as follows: 34% on January 1, 2017, 33% on January 1, 2018
and 33% on January 1, 2019. The total market value of the restricted stock units based on the shares price of $1.85 as of June
15, 2016 is $372 thousand. The cost of the shares is amortized on a straight line basis across the vesting periods.
Consulting and Vendor Equity Issues
On April 29, 2016,
Optex Systems Holdings, Inc. issued 40,000 common “restricted” shares at a market price of $2.35 per share ($94,000)
in support of the IRTH Communications agreement (See note 6). The cost of the shares is amortized on a straight line basis through
April 2017. There were no other equity instruments issued to consultants and vendors during the three or nine months ended June
26, 2016 and June 28, 2015.
Warrant Agreements
Optex Systems
Holdings calculates the fair value of warrants issued with debt or preferred stock using the Black-Scholes-Merton valuation method.
The total proceeds received in the sale of debt or preferred stock and related warrants are allocated among these financial instruments
based on their relative fair values. The discount arising from assigning a portion of the total proceeds to the warrants issued
is recognized as interest expense for debt from the date of issuance to the earlier of the maturity date of the debt or the conversion
dates using the effective yield method.
As of June 26,
2016, Optex Systems Holdings had the zero outstanding warrants outstanding. As of March 3, 2016 1,000 warrants issued to Avidbank
on March 4, 2010 expired unexercised.
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
|
|
|
Nine months ended
|
|
|
As of period ending
|
|
|
|
June 26, 2016
|
|
|
June 28, 2015
|
|
|
June 26, 2016
|
|
|
June 28, 2015
|
|
|
June 26, 2016
|
|
|
September 27, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options (1)
|
|
$
|
(8
|
)
|
|
$
|
25
|
|
|
$
|
41
|
|
|
$
|
116
|
|
|
$
|
59
|
|
|
$
|
100
|
|
Restricted Stock Units
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
325
|
|
|
|
-
|
|
Consultant Shares (IRTH)
|
|
|
24
|
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
Total Stock Compensation
|
|
$
|
63
|
|
|
$
|
25
|
|
|
$
|
112
|
|
|
$
|
116
|
|
|
$
|
454
|
|
|
$
|
100
|
|
(1) The three months ending June 26, 2016 includes a cumulative
correction for over amortization stock options during the six months ending March 27, 2016.
Note 10 Stockholders’
Equity
Common stock
On August 31, 2015, the Optex Systems board
of directors approved a reverse stock split of our common stock, in a ratio to be determined by the board of directors, of not
less than 1-for-400 nor more than 1-for-1000. On October 6, 2015, 20 calendar days had passed since the mailing to our shareholders
of the Definitive Schedule 14C filed on September 11, 2015 regarding the approval by the board of the reverse stock split. On October
7, 2015, we effected a 1-for-1000 reverse split of our common stock. Pursuant to the reverse split, all shareholders of less than
100,000 pre-split common shares, were issued a round lot quantity of 100 common shares post-split. The total share round up quantity
related to the reverse split resulted in an additional issue of 139,953 common shares post-split. All share and related option
information has been retroactively adjusted to reflect the decrease in shares resulting from this action. Additional funds were
reclassified from the common stock to additional paid in capital to reflect the change in total par value represented by the lower
common shares after the reverse split. The par value of the common stock outstanding shall remain at $0.001 per share subsequent
to the reverse split action.
As of September
28, 2014, Optex Systems had 170,914 common shares outstanding. Pursuant to an October 7, 2015 reverse split, there was an additional
139,953 shares issued to preserve round lots of 100 shares for all lot holders holding less than 100,000 pre-split, or 100 post-split
shares common shares. An adjustment to common stock par value and additional paid in capital was recorded to reflect the change
in values as a result of the reverse split.
On May 27, 2015
a private investor converted $10 thousand, or 6 shares of the Series B preferred stock at a stated value of $1,629 per share, for
4,000 shares of common stock. The outstanding common shares as of September 27, 2015 were 314,867.
On October 23,
2015 a private investor converted $40 thousand, or 25 shares of the Series B preferred stock at a stated value of $1,629 per share,
for 16,031 shares of common stock. On December 8, 2015 Optex Systems issued an additional 247 common shares to certain beneficial
holders to correct Depository Trust and Clearing Corporation (DTC) rounding errors occurring from the October 7, 2015 reverse split.
On March 27, 2016, Sileas Corporation converted $3,125 thousand or 455.52 shares of the Series A preferred stock at a stated value
of $6,860 per share, for 1,250,000 shares of common stock. On April 29, 2016, Optex Systems Holdings, Inc. issued 40,000 common
“restricted” shares at a market price of $2.35 per share ($94,000) in support of the IRTH Communications agreement
(See note 6). The outstanding common shares as of June 26, 2016 is 1,621,145.
The table below
reflects the retroactive changes to common shares and equity accounts as a result of the 1000:1 reverse split and subsequent share
issues as of June 26, 2016.
|
|
Common Shares
|
|
|
|
Outstanding
|
|
|
|
|
|
Common shares outstanding as of September 28, 2014 pre-split
|
|
|
170,913,943
|
|
|
|
|
|
|
Common shares after 1000:1 reverse split effective October 7, 2015
|
|
|
170,914
|
|
Roundup quantity for holders less than 100 shares
|
|
|
139,953
|
|
Common shares outstanding post reverse split as of September 28, 2014
|
|
|
310,867
|
|
Conversion of Series B Preferred Shares May 27, 2015
|
|
|
4,000
|
|
Common shares outstanding as of September 27, 2015
|
|
|
314,867
|
|
Conversion of Series B Preferred Shares October 23, 2015
|
|
|
16,031
|
|
Issuance of shares on December 8, 2015 for DTC roundup correction
|
|
|
247
|
|
Conversion of Series A Preferred Shares March 27, 2016
|
|
|
1,250,000
|
|
Issuance IRTH consulting shares on April 29, 2016
|
|
|
40,000
|
|
Common shares outstanding as of June 26, 2016
|
|
|
1,621,145
|
|
There were no
other issuances of common or preferred stock during the three or nine months ended June 26, 2016 or June 28, 2015.
On December 15,
2015, our board of directors and the shareholders holding a majority of our issued and outstanding Common Stock approved an amendment
to our Certificate of Incorporation, as amended, to effect a reverse stock split which combines the outstanding shares of our common
stock into a lesser number of outstanding shares. Our board of directors will have the sole discretion to effect the amendment
and reverse stock split at any time prior to June 30, 2016, and to fix the specific ratio for the combination, provided that the
ratio would be not less than 1-for-2 and not more than 1-for-3. We did not effect this reverse split within the time period allotted.
Series A
preferred stock
Optex Systems
Holdings has filed a Certificate of Designation with the Secretary of State of the State of Delaware authorizing a series of preferred
stock, under its articles of incorporation, known as “Series A preferred stock”. The Certificate of Designation currently
sets forth the following terms for the Series A preferred stock: (i) number of authorized shares: 1,027; (ii) per share stated
value: $6,860; (iii) liquidation preference per share: stated value; (iv) conversion price: $0.15 per share as adjusted from time
to time; and (v) voting rights: votes along with the common stock on an as converted basis with one vote per share (vi) par value
$0.001 per share. The conversion price was subsequently reset to $2.50 per share as discussed below.
The Series A preferred
stock entitles the holders to receive cumulative dividends at the rate of 6% per annum, payable in cash at the discretion of Board
of Directors. Each share of preferred stock is immediately convertible into common shares at the option of the holder which entitles
the holder to receive the equivalent number of common shares equal to the stated value of the preferred shares divided by the conversion
price, which was initially set at $0.15 per share. The dividends were subsequently waived and the price per share was reset to
$0.01 on February 21, 2012 as discussed below. On November 17, 2014 an exercise price per share ratchet was triggered by the issuance
of convertible notes with a lower conversion price and the exercise price was reset to $0.0025 per common share Effective as of
October 7, 2015, the conversion price has been reset to $2.50 per share pursuant to the 1000:1 reverse stock split on common shares.
Holders of preferred
shares receive preferential rights in the event of liquidation. Additionally, the preferred stock shareholders are entitled to
vote together with the common stock on an “as-converted” basis.
As of April 1, 2012, the preferred shareholders
agreed to waive the past dividends in arrears through June 29, 2014 of $884 thousand in exchange for an increase in the stated
value to $6,860. On February 21, 2012, in connection with the purchase of the 5,000 shares of common stock of Optex Systems Holdings
by Alpha Capital, the preferred shareholders executed an irrevocable waiver for any and all previously accrued and outstanding
dividends and the right to receive any future dividends on the Series A Preferred Stock. The per share conversion price of the
Optex Systems Holdings’ Series A Preferred Stock was automatically reset to $0.01 per share in accordance with the reset
provision as set forth in paragraph 4(d)(ii) of the Series Designation for the Optex Systems Holdings’ Series A Preferred
Stock. The total amount of dividends waived as a result of the February 21, 2012 waiver is $213 thousand. As a result of the executed
waiver dated February 21, 2012, there were no dividends in arrears on preferred shares and no future dividends will accrue on the
preferred shares.
On March 19, 2013, Alpha Capital Anstalt
converted 7.29 shares of Series A preferred stock at a stated value of $6,860 into 5,000 shares of its Common Stock for a total
converted value of $50,000. On February 11, 2014 and March 24, 2014, Alpha Capital Anstalt converted 7.29 shares of Series A preferred
stock at a stated value of $6,860 into 5,000 shares of its Common Stock for a converted value of $50,000 each transaction, respectively. On
March 27, 2016, Sileas Corp. converted $3,125 thousand or 455.52 shares of our Series A preferred stock into 1,250,000 shares of
our common stock. As a result of the conversions, Optex Systems Holdings had 546 of preferred shares outstanding as of June 26,
2016 and 1,001 of preferred shares outstanding as of September 27, 2015 respectively.
As of April 3, 2015, a majority in interest
of the holders of the Series A preferred stock have waived the right to convert its Series A preferred stock into Company common
shares until such a time as a reverse stock split of the Company’s stock is effected in sufficient ratio to accommodate full
conversion of both Series A and Series B preferred stock from authorized and unissued shares. On October 7, 2015, we effected a
1-for-1000 reverse split of our common stock.
On June 5, 2015, Sileas entered into a
Blocker Agreement with us pursuant to which the Series A preferred stock shall not be convertible by Sileas into our common stock,
and we shall not effect any conversion of the Series A Stock or otherwise issue any shares of our common stock pursuant hereto,
to the extent (but only to the extent) that after giving effect to such conversion or other share issuance hereunder Sileas (together
with its affiliates) would beneficially own in excess of 9.99% our common stock. Sileas also agreed to not vote any of its shares
of Series A preferred stock in excess of 9.99% of our common stock. This has been waived by us until further notice.
For the three months ending June 26, 2016
and June 28, 2015, there were no preferred dividends booked or preferred dividends payable in arrears. As of March 29, 2015, based
on the price reset to $2.50 per common share, there were 75.5 shares of preferred stock with a beneficial conversion feature, “in
the money”, which were subject to immediate conversion at the discretion of the holder. In the nine months ending June 28,
2015, Optex Systems Holdings recognized a $1.5 million adjustment to retained earnings for dividends for the intrinsic value of
the beneficial conversion feature for the 75.5 preferred shares issued and convertible as of March 29, 2015. During the nine months
ending June 26, 2016 there were no dividends booked to retained earnings related to the beneficial conversion feature on Series
A preferred shares. Based on the market price of the common stock of $1.90 as of June 26, 2016, these preferred shares are not
subject to the beneficial conversion feature as the conversion price of $2.50 per share is above the market. As these Series A
preferred shares are subject to the potential for further adjustments to the conversion ratio based on future occurrences, any
new conversion price reset may trigger recognition of an additional beneficial conversion feature on occurrence.
Series B Preferred Stock
On March 26, 2015,
Optex Systems Holdings filed a Certificate of Designation with the Secretary of State of the State of Delaware authorizing a series
of preferred stock, under its articles of incorporation, known as “Series B preferred stock”. The Certificate of Designation
currently sets forth the following terms for the Series B preferred stock: (i) number of authorized shares: 1,010; (ii) per share
stated value: $1,629 (iii) liquidation preference per share, other than Series A preferred stock: stated value; (iv) conversion
price: $0.0025 per share as adjusted from time to time; (v) voting rights: votes along with the common stock on an as converted
basis with one vote per share; and (vi) par value of $0.001 per share. Effective as of October 7, 2015, the conversion price has
been reset to $2.50 per share pursuant to the 1000:1 reverse stock split on common shares.
On March 28, 2015, the holders of the Company’s
$1,560,000 principal amount of convertible promissory notes, issued on or about November 17, 2014, converted the entire principal
amount thereof and all accrued and unpaid interest thereon, into 1,000 shares of the Company’s Series B Preferred Stock.
Each share of preferred stock is immediately convertible into common shares at the option of the holder which entitles the holder
to receive the equivalent number of common shares equal to the stated value of the preferred shares divided by the conversion price,
which is initially set at $0.0025 per share and was reset to $2.50 per share pursuant to the October 7, 2015 1000:1 reverse stock
split.
Upon the March 28, 2015 issuance, the market
value of the common stock was $10.00 ($0.01 pre-split). As the conversion rate of $2.50 ($0.0025 pre-split) was below the market
price, the issued preferred series B stock contained a beneficial conversion feature. As the series B preferred stock is immediately
convertible with no stated maturity date, Optex Systems Holdings recognized a retained earnings and additional paid in capital
adjustment for the intrinsic value, “in the money portion”, of the conversion options. During the three and nine months
ending June 28, 2015 Optex Systems Holdings recognized a retained earnings dividends and additional paid in capital adjustment
of zero and $4.9 million, respectively, which represented the intrinsic value of the options at the March 28, 2015 commitment date.
There were no retained earnings dividends booked during the three and nine months ending June 26, 2016 for the beneficial conversion
feature on the Series B preferred stock. As these shares are subject to the potential for further adjustments to the conversion
ratio based on future occurrences, any new conversion price reset may trigger recognition of an additional beneficial conversion
feature on occurrence.
On May 27, 2015 a private
investor converted $10,000, or 6 shares of the Series B preferred stock at a stated value of $1,629 per share, for 4,000 shares
of common stock. On October 23, 2015 a private investor converted $40,000, or 25 shares of the Series B preferred stock at a stated
value of $1,629 per share, for 16,031 shares of common stock. As of June 26, 2016 and September 27, 2015, there were 969 and 994
shares of Series B preferred shares outstanding, respectively.
Note 11 Subsequent Events
On June 30, 2016 a private investor
converted $273,226, or 167.7 shares of the Series B preferred stock at a stated value of $1,629 per share, for 109,291 shares of
common stock.
On July 20, 2016 Optex Systems Inc. was awarded a 5-year Indefinite
Delivery, Indefinite Quantity (IDIQ) contract with a total potential order value up to $6.0 million to supply its laser protected
periscopes to the Defense Logistics Agency over the next 5 years.
On August 2, 2016 Optex Systems Holdings filed an amended registration
statement on Form S-1/A for a primary offering in August 2016 and are seeking to consummate an underwritten offering of up to $5,000,000
in gross proceeds from the sale of common stock with a potential additional $750,000 if the entire overallotment is exercised in
the offering.