We have audited the
accompanying consolidated balance sheets of Optex Systems Holdings, Inc. (the Company) as of October 2, 2016 and September 27,
2015, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended.
The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of Optex
Systems Holdings, Inc. as of October 2, 2016, and the results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of America.
Optex Systems Holdings,
Inc.
Condensed Consolidated
Balance Sheets
|
|
(Thousands, except share data)
|
|
|
|
October 2, 2016
|
|
|
September 27, 2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
2,568
|
|
|
$
|
683
|
|
Accounts Receivable, Net
|
|
|
2,095
|
|
|
|
2,866
|
|
Net Inventory
|
|
|
6,214
|
|
|
|
5,713
|
|
Prepaid Expenses
|
|
|
120
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
10,997
|
|
|
|
9,432
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
1,651
|
|
|
|
1,971
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid Royalties - Long Term
|
|
|
90
|
|
|
|
120
|
|
Security Deposits
|
|
|
23
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
113
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
12,761
|
|
|
$
|
11,546
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
706
|
|
|
$
|
575
|
|
Accrued Expenses
|
|
|
810
|
|
|
|
812
|
|
Accrued Warranties
|
|
|
28
|
|
|
|
28
|
|
Customer Advance Deposits - Short Term
|
|
|
559
|
|
|
|
1,091
|
|
Credit Facility
|
|
|
300
|
|
|
|
817
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
2,403
|
|
|
|
3,323
|
|
|
|
|
|
|
|
|
|
|
Customer Advance Deposits - Long Term
|
|
|
-
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,403
|
|
|
|
3,388
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred Stock Series A ($0.001 par 5,000 authorized, 0 and 1,001 issued and outstanding, respectively)
|
|
|
-
|
|
|
|
-
|
|
Preferred Stock Series B ($0.001 par 1,010 authorized, 0 and 994 issued and outstanding, respectively)
|
|
|
-
|
|
|
|
-
|
|
Preferred Stock Series C ($0.001 par 400 authorized, 360 and 0 issued and outstanding, respectively)
|
|
|
-
|
|
|
|
-
|
|
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,266,601 and 314,867 shares issued and outstanding, respectively)
|
|
|
8
|
|
|
|
-
|
|
Additional Paid-in-capital
|
|
|
29,583
|
|
|
|
26,394
|
|
Accumulated Deficit
|
|
|
(19,233
|
)
|
|
|
(18,236
|
)
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
10,358
|
|
|
|
8,158
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
12,761
|
|
|
$
|
11,546
|
|
The accompanying
notes are an integral part of these financial statements
Optex Systems Holdings,
Inc.
Consolidated Statements
of Operations
|
|
(Thousands, except share data)
|
|
|
|
Twelve months ended
|
|
|
|
October 2, 2016
|
|
|
September 27, 2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
17,279
|
|
|
$
|
13,003
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
14,228
|
|
|
|
11,617
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
3,051
|
|
|
|
1,386
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expense
|
|
|
3,251
|
|
|
|
2,826
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(200
|
)
|
|
|
(1,440
|
)
|
|
|
|
|
|
|
|
|
|
Gain on Purchased Asset
|
|
|
-
|
|
|
|
2,110
|
|
Interest Income (Expense)
|
|
|
(36
|
)
|
|
|
(179
|
)
|
Other (Expense) and Income
|
|
|
(36
|
)
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
(236
|
)
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
Current Income Taxes (Benefit)
|
|
|
-
|
|
|
|
-
|
|
Deferred Income Taxes (Benefit)
|
|
|
-
|
|
|
|
-
|
|
Net Income (Loss) After Taxes
|
|
|
(236
|
)
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend/premium
|
|
|
(761
|
)
|
|
|
(6,441
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
(997
|
)
|
|
$
|
(5,950
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share
|
|
$
|
(0.64
|
)
|
|
$
|
(19.06
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - basic and fully diluted
|
|
|
1,546,774
|
|
|
|
312,219
|
|
The accompanying
notes are an integral part of these financial statements
Optex Systems Holdings,
Inc.
Consolidated Statements
of Cash Flows
|
|
(Thousands)
|
|
|
|
Twelve months ended
|
|
|
|
October 2, 2016
|
|
|
September 27, 2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(236
|
)
|
|
$
|
491
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
345
|
|
|
|
334
|
|
Noncash interest expense
|
|
|
(17
|
)
|
|
|
154
|
|
Stock compensation expense
|
|
|
192
|
|
|
|
140
|
|
Provision for inventory valuation
|
|
|
60
|
|
|
|
247
|
|
Loss on sale of fixed assets
|
|
|
5
|
|
|
|
-
|
|
(Increase) decrease in accounts receivable
|
|
|
771
|
|
|
|
(2,135
|
)
|
(Increase) decrease in inventory (net of progress billed)
|
|
|
(562
|
)
|
|
|
(49
|
)
|
(Increase) decrease in prepaid expenses
|
|
|
51
|
|
|
|
(130
|
)
|
(Increase) decrease in security deposits
|
|
|
-
|
|
|
|
3
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
129
|
|
|
|
622
|
|
Increase (decrease) in accrued warranty costs
|
|
|
-
|
|
|
|
3
|
|
Decrease in prepaid royalties - long term
|
|
|
30
|
|
|
|
30
|
|
Increase (decrease) in customer advance deposits
|
|
|
(597
|
)
|
|
|
(898
|
)
|
Total adjustments
|
|
|
407
|
|
|
|
(1,679
|
)
|
Net cash provided by (used in) operating activities
|
|
|
171
|
|
|
|
(1,188
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(34
|
)
|
|
|
(2,100
|
)
|
Proceeds from sale of fixed assets
|
|
|
4
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(30
|
)
|
|
|
(2,100
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net proceeds from sale of common stock
|
|
|
4,247
|
|
|
|
-
|
|
Redemption of preferred stock
|
|
|
(1,751
|
)
|
|
|
-
|
|
Deferred public offering costs
|
|
|
(252
|
)
|
|
|
-
|
|
Proceeds from convertible notes issued
|
|
|
-
|
|
|
|
1,560
|
|
Debt issuance fees
|
|
|
-
|
|
|
|
(74
|
)
|
Proceeds (to) from credit facility (net)
|
|
|
(500
|
)
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,744
|
|
|
|
2,286
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,885
|
|
|
|
(1,002
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
683
|
|
|
|
1,685
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,568
|
|
|
$
|
683
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
53
|
|
|
$
|
25
|
|
Exchange of convertible note and accrued interest to series B preferred stock
|
|
|
-
|
|
|
|
1,629
|
|
Beneficial conversion feature on Series A and Series B preferred stock
|
|
|
761
|
|
|
|
6,441
|
|
Exchange of preferred stock for common stock
|
|
|
6,939
|
|
|
|
10
|
|
The accompanying
notes are an integral part of these financial statements
Optex Systems Holdings,
Inc.
Consolidated Statement
of Stockholders’ Equity
(Thousands, except
share data)
|
|
Common
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Paid in
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Outstanding
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Stock
|
|
|
Series
A Stock
|
|
|
Series
B Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2014 (post split(1))
|
|
|
310,867
|
|
|
|
1,001
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,184
|
|
|
$
|
(12,286
|
)
|
|
$
|
5,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Compensation Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140
|
|
|
|
-
|
|
|
|
140
|
|
Preferred Series B Issued in Exchange of Convertible
Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,629
|
|
|
|
-
|
|
|
|
1,629
|
|
Conversion of Preferred Series B
|
|
|
4,000
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Beneficial Conversion Feature on Series A and Series
B Preferred Stock - Dividend/Premium
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,441
|
|
|
|
(6,441
|
)
|
|
|
-
|
|
Net Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
491
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 27, 2015
|
|
|
314,867
|
|
|
|
1,001
|
|
|
|
994
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,394
|
|
|
$
|
(18,236
|
)
|
|
$
|
8,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation Expense
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
192
|
|
|
|
-
|
|
|
|
192
|
|
Issue of Shares - DTC/CEDE fractional roundup correction
for reverse split 12/8/15
|
|
|
247
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of Preferred Series B (10/23/15)
|
|
|
16,031
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of Preferred Series A (3/27/16)
|
|
|
1,250,000
|
|
|
|
(456
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion of Preferred Series B (7/6/16)
|
|
|
109,291
|
|
|
|
-
|
|
|
|
(167
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of Preferred Series A (8/10/16)
|
|
|
25,000
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issue of Common Shares for Investor Relations (IRTH)
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of Common Stock 8/26/2016
|
|
|
2,291,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,245
|
|
|
|
-
|
|
|
|
4,247
|
|
Fees on Share Offering paid by Optex
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(252
|
)
|
|
|
-
|
|
|
|
(252
|
)
|
Redemption of Series A & Series B Preferred
Shares 8/26/2016
|
|
|
-
|
|
|
|
(66
|
)
|
|
|
(796
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,751
|
)
|
|
|
-
|
|
|
|
(1,751
|
)
|
Conversion of Series A & Series B Preferred
Shares 8/26/2016
|
|
|
2,698,431
|
|
|
|
(470
|
)
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversions of Series C Preferred Shares
|
|
|
166,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ratchet on Preferred Series A 3/27/16 Conversion
(10/18/16)
|
|
|
1,354,167
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
Beneficial Conversion Feature on Series A and Series
B Preferred Stock - Dividend/Premium
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
761
|
|
|
|
(761
|
)
|
|
|
-
|
|
Net (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(236
|
)
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 2, 2016
|
|
|
8,266,601
|
|
|
|
-
|
|
|
|
-
|
|
|
|
360
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
29,583
|
|
|
$
|
(19,233
|
)
|
|
$
|
10,358
|
|
(1) Reverse split effective on October 7, 2015
of 1000:1 shares, inclusive of round up lot quantity of 139,953 shares for holders of less than 100,000 shares, pre-split. Holders
of less than 100,000 shares were rounded up to whole lots of 100 post split.
The accompanying
notes are an integral part of these financial statements
Note 1 — Organization and Operations
On March 30, 2009,
Optex Systems Holdings, Inc. (formerly known as Sustut Exploration, Inc.), a Delaware corporation (“Optex Systems Holdings”),
along with Optex Systems, Inc., a privately held Delaware corporation (“Optex Systems, Inc.“), which is a wholly-owned
subsidiary of Optex Systems Holdings, entered into a reorganization agreement, pursuant to which Optex Systems, Inc. was acquired
by Optex Systems Holdings in a share exchange transaction. Optex Systems Holdings became the surviving corporation. At the closing,
there was a name change from Sustut Exploration, Inc. to Optex Systems Holdings, Inc., and its year end changed from December 31
to a fiscal year ending on the Sunday nearest September 30.
On October 14, 2008,
certain senior secured creditors of Irvine Sensors Corporation, Longview Fund, L.P. (Longview) and Alpha Capital Anstalt formed
Optex Systems, Inc., which acquired all of the assets and assumed certain liabilities of Optex Systems, Inc., a Texas corporation
(“Optex Systems, Inc. (Texas)”), and a wholly-owned subsidiary of Irvine Sensors Corporation, in a transaction that
was consummated via purchase at a public auction. Following this asset purchase, Optex Systems, Inc. (Texas) remained a wholly-owned
subsidiary of Irvine Sensors Corporation.
On February 20, 2009,
Sileas Corporation (Sileas), a newly-formed Delaware corporation, owned by present members of Optex Systems Holdings’ management,
purchased 100% of Longview’s equity and debt interest in Optex Systems, Inc. (Longview’s interest in Optex Systems,
Inc. then representing 90% of the issued and outstanding common equity interests in Optex Systems, Inc.), in a private transaction.
Optex Systems, Inc.
operated as a privately-held Delaware corporation until March 30, 2009, when, as a result of a reverse merger transaction consummated
pursuant to a reorganization agreement dated March 30, 2009, it became a wholly-owned subsidiary of Optex Systems Holdings. Sileas
is the majority owner (parent) of Optex Systems Holdings, owning approximately 46.9% of the issued and outstanding equity interests
in Optex Systems Holdings. The financial statements of Optex Systems Holdings represent subsidiary statements and do not include
the accounts of its majority owner.
Optex Systems Holdings’
operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of October 2, 2016,
Optex Systems Holdings operated with 91 full-time equivalent employees.
Optex Systems Holdings
manufactures optical sighting systems and assemblies, for the U.S. Department of Defense, foreign military applications and commercial
markets. Its products are installed on a variety of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles,
light armored and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. Optex
Systems Holdings also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision
optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that are delivered
both directly to the military and to other defense prime contractors or commercial customers.
In February 2009,
Optex Systems Holdings’ ISO certification status was upgraded from 9001:2000 to 9001:2008, bringing Optex Systems Holdings
into compliance with the new ISO standards rewritten to align with ISO 14001.
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 Center (AOC) Products Line (“Purchased Assets”), which is engaged in the production
and marketing and sales of precision optical assemblies utilizing thin film coating capabilities for optical systems and components
primarily used for military purposes. See Note 4 Acquisition of L-3’s Applied Optics Center.
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, the Company has continued to explore other opportunities for manufacturing outside of our traditional
product lines for products which could be manufactured using our existing lines in order to fully utilize our existing capacity.
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.
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.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
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.
Fiscal Year:
Optex
System Holdings’ fiscal year ends on the Sunday nearest September 30. Fiscal year 2016 ended on October 2, 2016 and
included 53 weeks. Fiscal year 2015 ended on September 27, 2015 and included 52 weeks.
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 fiscal years ended October
2, 2016 and September 27, 2015. The carrying value of the balance sheet financial instruments included in Optex Systems Holdings’
consolidated financial statements approximated their fair values.
Cash and Cash
Equivalents:
For financial statement presentation purposes, Optex Systems Holdings considers those short-term, highly
liquid investments with original maturities of three months or less to be cash or cash equivalents. Optex Systems Holdings’
has $2,568 thousand in cash on deposit with our bank. Only a portion of the cash, currently $250 thousand, would be covered by
federal deposit insurance and the uninsured balances are substantially greater than the insured amounts. We are exploring options
to invest a portion of the excess cash into short term treasuries covered by federal deposit insurance in the near term.
Concentration
of Credit Risk:
Optex Systems Holdings’ revenues and accounts receivables for fiscal year ended October 2, 2016
are derived from sales to U.S. government agencies (45%), General Dynamics (18%), Nightforce Optics, Inc. (15%) and all other contractors
(22%). Optex Systems Holdings does not believe that this concentration results in undue credit risk because of the financial
strength of the obligees.
Accounts Receivable:
Optex
Systems Holdings records its accounts receivable at the original sales invoice amount less liquidations for previously collected
advance/progress bills and an allowance for doubtful accounts. An account receivable is considered to be past due if any portion
of the receivable balance is outstanding beyond its scheduled due date. On a quarterly basis, Optex Systems Holdings evaluates
its accounts receivable and establishes an allowance for doubtful accounts, based on its history of past write-offs and collections,
and current credit conditions. No interest is accrued on past due accounts receivable. As of October 2, 2016 and September 27,
2015, Optex Systems Holdings had an allowance for doubtful accounts of $42 thousand and $8 thousand, for non U.S. government account
balances greater than 120 days. As the customer base is primarily U.S. government and government prime contractors, Optex Systems
Holdings allowance for doubtful accounts is minimal. Optex Systems Holdings charges uncollectible accounts to bad debt expense
in the period as they are first deemed uncollectible. In the fiscal year 2016 there was $36 thousand, and in 2015, there
was $5 thousand in bad debt expenses associated with uncollectable accounts.
Inventory:
Inventory is
recorded at the lower of cost or market, and adjusted as appropriate 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. As of October 2, 2016 and September 27, 2015
inventory included:
|
|
(Thousands)
|
|
|
|
As of
October 2, 2016
|
|
|
As of
September 27, 2015
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
4,655
|
|
|
$
|
4,545
|
|
Work in Process
|
|
|
2,830
|
|
|
|
2,456
|
|
Finished Goods
|
|
|
380
|
|
|
|
304
|
|
Gross Inventory
|
|
|
7,865
|
|
|
|
7,305
|
|
Less:
|
|
|
|
|
|
|
|
|
Inventory Reserves
|
|
|
(1,651
|
)
|
|
|
(1,592
|
)
|
Net Inventory
|
|
$
|
6,214
|
|
|
$
|
5,713
|
|
Net inventory increased
$501 thousand during the year ended October 2, 2016. The increase in net inventory is primarily in support of higher backlog and
revenue in the current year over the prior year.
Warranty Costs:
Some
of Optex Systems Holdings’ customers require that the company warrant the quality of its products to meet customer requirements
and be free of defects for up to fifteen months subsequent to delivery. Future warranty costs are based on the estimated
cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of warranty covered
sales. Throughout the year, warranty costs are expensed as incurred, and as of each year end, Optex Systems Holdings reviews
the prior 15 month warranty experience rate and may adjust the warranty accrual as required to cover any additional anticipated
warranty costs related to prior shipments. As of October 2, 2016 and September 27, 2015, the existing warranty reserve balances
of $28 thousand and $28 thousand, respectively, were reviewed and determined to be adequate to satisfy any future warranty claims
that may have existed as of the end of each fiscal year for shipments occurring in the prior 15 months.
Property and
Equipment:
Property and equipment are recorded at cost. Depreciation is computed using the straight line method over
the estimated useful lives of the assets, ranging from three to seven years. Expenditures for renewals and betterments are capitalized.
Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Gain or loss upon sale or retirement
due to obsolescence is reflected in the operating results in the period the event takes place.
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.
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 October 2, 2016, Optex Systems,
Inc. had a balance of $559 thousand in customer advance deposits related to a 2011 customer contract. The terms of the contract
extend through 2018 during which time we are required to purchase the necessary materials to fulfill the delivery of products required
by the contract. Of the total collected customer advance deposits, $559 thousand related to short term customer advance deposits
for deliveries to occur within the next twelve months.
Estimated Costs
at Completion and Accrued Loss on Contracts:
Optex Systems Holdings reviews and reports on the performance of
its contracts and production orders against the respective resource plans for such contracts/orders. These reviews are summarized
in the form of estimates at completion. Estimates at completion include Optex Systems Holdings’ incurred costs to date against
the contract/order plus management’s current estimates of remaining amounts for direct labor, material, other direct costs
and subcontract support and indirect overhead costs based on the completion status and future contractual requirements for each
order.
If an estimate at
completion indicates a potential overrun against budgeted resources for a fixed price contract/order, management first attempts
to implement lower cost solutions that will profitably meet the requirements of the fixed price contract. If such solutions do
not appear practicable, management makes a determination whether to seek renegotiation of contract or order requirements from the
customer. If neither cost reduction nor renegotiation appears probable, an accrual for the contract loss/overrun is recorded against
earnings and the loss is recognized in the first period the loss is identified based on the most recent estimates at completion
of the particular contract or product order. As of October 2, 2016 there was $0 in contract loss reserves. As of September 27,
2015 the contract loss reserves were $54 thousand.
During 2010,
Optex Systems Holdings realized increased losses against the Howitzer programs of $1.1 million of which $0.8 million related
specifically to production issues encountered on our Howitzer product line. Increased losses were primarily
attributable to manufacturing issues on our U.S. government Howitzer Aiming Circles culminating in higher material scrap and
labor hours, combined with a reduction in total production volume in 2010 which further impacted production efficiencies
across all product lines. Optex Systems Holdings requested an equitable adjustment on this program due to significant
design issues impacting the manufacturability of the product. As there was no guarantee that the request would be
granted in part or in full, we realized the entire loss in fiscal year 2010. The initial equitable adjustment claim was
formally rejected by the contracting agency on May 31, 2012; however, Optex Systems Holdings appealed the decision with the
Armed Services Board of Contract Appeals (ASBCA). In September 2015, the U.S. Government agreed to an $850,000 settlement
against the claim for the Aiming Circle contract number W52H09-06-D-0229. The settlement is the result of a negotiation and
fact gathering process managed through the Armed Services Board of Contract Appeals (ASBCA). A contract modification was
issued on September 23, 2015 increasing the total contract price by the agreed amount. As the respective units were shipped
complete in 2011, the contract was essentially complete on execution of the modification and the entire amount was recorded
as revenue for the twelve months ended September 27, 2015.
Government Contracts:
Many
of Optex Systems Holdings’ contracts are prime or subcontracted directly with the Federal government and as such, are subject
to Federal Acquisition Regulation (Federal Acquisition Regulation) Subpart 49.5, “Contract Termination Clauses”
and more specifically Federal Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the Government
(Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for default”. These clauses are standard
clauses on prime military contracts and are generally, “flowed down” to Optex Systems Holdings as subcontractors on
other military business. It has been Optex Systems Holdings’ experience that the termination for convenience is rarely
invoked, except where it has been mutually beneficial for both parties. Optex Systems Holdings is not currently aware of
any pending terminations for convenience or default on its existing contracts.
In the event a termination for
convenience were to occur, these Federal Acquisition Regulation clause 52.249-2 provides for full recovery of all contractual
costs and profits reasonably incurred up to and as a result of the terminated contract. In the event a termination for default
were to occur, Optex Systems Holdings could be liable for any excess cost incurred by the government to acquire supplies from another
supplier similar to those terminated from Optex Systems Holdings. Optex Systems Holdings would not be liable for any excess
costs if the failure to perform the contract arises from causes beyond its control and without its fault or negligence as defined
by Federal Acquisition Regulation clause 52.249-8. In addition, the government may require Optex Systems Holdings to
transfer title and deliver to the government any completed supplies, partially completed supplies and materials, parts, tools,
dies, jigs, fixtures, plans, drawings, information, and contract rights that Optex Systems Holdings has specifically produced or
acquired for the terminated portion of this contract. The government shall pay contract price for completed supplies delivered
and accepted, and Optex Systems Holdings and the government would negotiate an agreed upon amount of payment for manufacturing
materials delivered and accepted and for the protection and preservation of the property. Failure to agree on an amount for manufacturing
materials is subject to the Federal Acquisition Regulation Disputes clause 52.233-1.
In some cases, Optex
Systems Holdings may receive orders subject to subsequent price negotiation on contracts exceeding the federal government simplified
acquisition threshold of $750,000. These “undefinitized” contracts are considered firm contracts but as Cost
Accounting Standards Board covered contracts, they are subject to the Truth in Negotiations Act disclosure requirements and downward
only price negotiation. As of October 2, 2016 and September 27, 2015, Optex Systems had no booked orders that fell under
this criterion.
Impairment or Disposal of Long-Lived
Assets:
Optex Systems Holdings follows the provisions of FASB ASC 360-10, “
Accounting for the Impairment
or Disposal of Long-lived Assets
”. This standard requires, among other things, that long-lived assets be reviewed
for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The assessment
of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pre-tax cash
flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value
of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement
of impairment requires management to estimate future cash flows and the fair value of long-lived assets. No impairment of long-lived
assets was recorded for the periods presented.
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 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.
Optex Systems Holdings’
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.
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 twelve months ending September 27, 2015, Optex
Systems Holdings recognized preferred stock dividends of $6.4 million on Series A and Series B preferred stock related to the
beneficial conversion feature arising from a common stock conversion rate of $2.50 versus a current market price of $10.00
per common share (post-split). During the twelve months ending October 2, 2016, Optex Systems Holdings recognized an
additional preferred stock dividend of $0.8 million as a result of the August 26, 2016 public offering which reset the
preferred stock conversion rate from $2.50 per common share to $1.20 per common share and resulted in an additional
beneficial conversion for the series A and Series B preferred shares.
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 October 2, 2016 the unamortized balance of the intangible assets was zero.
See Note 6.
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 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 Optex Systems Holdings will not realize tax assets
through future operations. When assessing the recoverability of deferred tax assets, management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies. Based on those estimates, management
has determined that the deferred tax assets may not be realized and has established a valuation allowance against the deferred
tax asset balance. As of October 2, 2016 Optex Systems Inc. has a deferred tax asset valuation allowance of ($4.7) million against
deferred tax assets of $4.7 million.
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, stock options and warrants. In computing
the dilutive effect of convertible preferred stock, the numerator is adjusted to add back any convertible preferred dividends,
and the denominator is increased to assume the conversion of the number of additional common shares. Optex Systems Holdings uses
the Treasury Stock Method to compute the dilutive effect of stock options and warrants. Convertible preferred stock, stock options
and warrants that are anti-dilutive are excluded from the calculation of diluted earnings per common share.
For the twelve months
ended October 2, 2016, 4,125,200 warrants, 360 Series C preferred stock and 52,840 stock options were excluded as anti-dilutive
due to the net loss attributable to common shareholders during the years. For the twelve months ended September 27, 2015, 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
as anti-dilutive due to the net loss attributable to common shareholders during the years.
Note 3 —
Recent Accounting Pronouncements
In August 2016, the
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU
2016-15"). ASU 2016-15 reduces diversity in practice in how certain transactions are classified in the statement of cash flows.
The amendments in ASU 2016-15 provide guidance on specific cash flow issues including debt prepayment or debt extinguishment costs,
settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation
to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds
from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions
received from equity method investees. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017.
We are currently assessing the potential impact of ASU 2016-15 on our consolidated financial statements and results of operations.
In June 2016, the
FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment
model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities
and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of
allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within
those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods
within that fiscal year. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as
of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact
of ASU 2016-13 on our consolidated financial statements and results of operations.
In March 2016, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 amending
several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies to be recorded
in the income statement when the awards vest or are settled, with prospective application required. The guidance also changes the
classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity to an operating
activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification of employee
taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement of cash flows,
with retrospective application required. This ASU is effective for annual periods, and interim periods within those annual periods,
beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our
consolidated financial statements and related disclosures.
In March 2016, the
FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of Topic 606 but clarifies the implementation
guidance on principal versus agent considerations. ASU 2016-08 is effective for the annual and interim periods beginning after
December 15, 2017. We are currently assessing the potential impact of ASU 2016-08 on our consolidated financial statements and
results of operations.
In February 2016,
FASB issued ASU 2016-02—
Leases (Topic 842).
The update is intended to increase transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application of the amendments in this update is permitted. Optex Systems Holdings is currently
evaluating the impact of FASB ASU 2016-02 and expects the adoption thereof will have a material effect on Optex Systems Holdings’
presentation of balance sheet assets and liabilities based on the present value of future lease payments, but does not expect a
material effect on the presentation of expenses and cash flows
In July 2015, FASB
issued ASU 2015-11—
Inventory (Topic 330): “Simplifying the Measurement of Inventory”.
The update
is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments
in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting
period. The update is part of FASB’s Simplification Initiative, the objective of which is to identify, evaluate, and improve
areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced. Pursuant to the update,
an entity should measure inventory at the lower of cost and net realizable value.
The
amendments in the update more closely align the measurement of inventory in GAAP with the measurement of inventory in International
Financial Reporting Standards (IFRS). Optex Systems Holdings is currently evaluating the impact of FASB ASU 2015-11 but does
not expect the adoption thereof to have a material effect on Optex Systems Holdings’ financial statements.
In August 2015, FASB Issued ASU 2015-14—“Revenue
from Contracts with Customers (Topic 606):
Deferral of the Effective Date”
The amendments in this update
defer the effective date of ASU 2014-09 for all entities by one year. Public business entities should apply the guidance in ASU
2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting
period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. See also ASU 2014-09 issued in May 2014.
In August 2014, FASB issued ASU 2014-15—Presentation
of Financial Statements—Going Concern (ASC Subtopic 205-40):
“Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern”.
The update requires management to assess a company’s ability to continue
as a going concern and to provide related footnote disclosures in certain circumstances. All entities are required to apply the
new requirements in annual periods ending after December 15, 2016, and interim periods thereafter. Early application is permitted.
As such, Optex Systems Holdings is required to adopt these provisions for the annual period ending October 1, 2017. Optex Systems
Holdings is currently evaluating the impact of FASB ASU 2014-15 but does not expect the adoption thereof to have a material effect
on Optex Systems Holdings’ financial statements.
In May 2014, FASB issued ASU 2014-09—Revenue
from Contracts with Customers (Topic 606):
“Section A—Summary and Amendments That Create Revenue from Contracts
with Customers, (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40), Section B—Conforming
Amendments to Other Topics and Subtopics in the Codification and Status Tables, Section C—Background Information and Basis
for Conclusions”.
The guidance in this update affects any entity that enters into contracts with customers to transfer
goods or services and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The update is effective
for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application
is not permitted. As such, Optex Systems Holdings is required to adopt these provisions as of October 2, 2017, the beginning of
the annual period ending September 30, 2018 and at the beginning of all interim periods ending after October 1, 2017. Optex Systems
Holdings is currently evaluating the impact of FASB ASU 2014-09 but does not expect the adoption thereof to have a material effect
on Optex Systems Holdings’ financial statements. See also ASU 2015-14 issued in August, 2015.
Note 4 - Purchase of L-3’s Applied
Optics Products Center
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 Products Line (“Purchased Assets”). The Applied Optics Center 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 Purchased Assets
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 amount of $270.7. The source of funds for the acquisition consisted of Optex Systems, Inc.’s 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 11 “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 Center 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 completed between January and June of 2015, and as such, the intangible amortization against those
shipments was complete by June 28, 2015. As of October 2, 2016 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
Systems, Inc. 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 Center for less than the fair value of its assets because of (i) its unique
position as a market leader in the industry sector that directly utilizes the manufactured components specific to the Applied Optics
Center, (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 Center workforce. The
Applied Optics Center had a recent history of losses, and the seller approached Optex Systems, Inc. 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 sector utilizing the product line capability,
Optex Systems, Inc. was able to agree on a favorable purchase price with L-3 Communications.
As a result of the asset purchase, the company
has incurred additional acquisition-related costs of approximately $40.2 thousand for legal, accounting and valuation consulting
fees which have been expensed to general administrative costs in 2015.
Note 5 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.
The 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. The Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was retained.
The Applied Optics
Center segment also serves as the key supplier of the laser coated filters used in the production of periscope assemblies at 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 the each segments 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
(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 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.
During the year ended October 2, 2016, 99%
of Optex Systems – Richardson revenues were in support of prime and subcontracted military customers. The Optex Systems segment
serves domestic military customers, 71%, foreign military customers, 28%, and domestic commercial customers of 1%. The Optex Systems
segment revenue for the year ending October 2, 2016 was derived from external customers consisting of General Dynamics, 27%, the
U.S. government, 57%, International Parts Supply Corp. 5%, and other external customers, 11%.
Optex Systems is located in Richardson Texas,
with leased premises consisting of approximately 49,100 square feet. As of October 2, 2016, the Richardson facility operated
with 53 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 4). 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,
Excelis Inc. 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. Approximately 77% of the Applied Optics Center revenue for the year ending October 2, 2016 was derived
from external customers consisting of Nightforce Optics, Inc., 43%, the U.S. government, 24%, L3 Communications, 10%, Excelis Inc.,
15%, and other external customers, 8%. Sales to commercial customers represent 48% and military sales to prime and subcontracted
customers represent 52% of the total segment revenue. Intersegment sales to Optex Systems – Richardson during the year ended
October 2, 2016, comprised 23% of the total segments revenue and was primarily in support of military contracts.
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 was
subleased to L3 Mobile Vision through September 30, 2016. As of October 2, 2016, AOC operated with 38 full time equivalent employees
in a single shift operation.
The financial table below presents the information
for each of the reportable segments profit or loss as well as segment assets for each year. Optex Systems Holdings, Inc. does not
allocate interest expense, income taxes or unusual items to segments.
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ending October 2, 2016
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
11,052
|
|
|
$
|
6,227
|
|
|
$
|
-
|
|
|
$
|
17,279
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
1,892
|
|
|
|
(1,892
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
11,052
|
|
|
$
|
8,119
|
|
|
$
|
(1,892
|
)
|
|
$
|
17,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
36
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
73
|
|
|
$
|
272
|
|
|
$
|
-
|
|
|
$
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
$
|
145
|
|
|
$
|
(345
|
)
|
|
$
|
(36
|
)
|
|
$
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(728
|
)
|
|
$
|
728
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Stock compensation expense
|
|
$
|
192
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
192
|
|
Royalty expense amortization
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30
|
|
Provision for (use of) contract loss reserves
|
|
$
|
-
|
|
|
$
|
(54
|
)
|
|
$
|
-
|
|
|
$
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,861
|
|
|
$
|
3,900
|
|
|
$
|
-
|
|
|
$
|
12,761
|
|
Expenditures for segment assets
|
|
$
|
(16
|
)
|
|
$
|
(18
|
)
|
|
$
|
-
|
|
|
$
|
(34
|
)
|
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ending September 27, 2015
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics Center
Dallas (1)
|
|
|
Other
(non allocated costs
and intersegment
eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
8,172
|
|
|
$
|
4,831
|
|
|
$
|
-
|
|
|
$
|
13,003
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
526
|
|
|
|
(526
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
8,172
|
|
|
$
|
5,357
|
|
|
$
|
(526
|
)
|
|
$
|
13,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
179
|
|
|
$
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
88
|
|
|
$
|
246
|
|
|
$
|
-
|
|
|
$
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
$
|
(431
|
)
|
|
$
|
1,101
|
|
|
$
|
(179
|
)
|
|
$
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(387
|
)
|
|
$
|
387
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(Gain) on purchased asset - AOC
|
|
$
|
-
|
|
|
$
|
(2,110
|
)
|
|
$
|
-
|
|
|
$
|
(2,110
|
)
|
Amortization of intangible assets
|
|
$
|
-
|
|
|
$
|
342
|
|
|
$
|
-
|
|
|
$
|
342
|
|
Stock option compensation expense
|
|
$
|
140
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
140
|
|
Provision for excess & obsolete inventories
|
|
$
|
132
|
|
|
$
|
115
|
|
|
$
|
-
|
|
|
$
|
247
|
|
Royalty expense amortization
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30
|
|
Provision for (use of) contract loss reserves
|
|
$
|
(11
|
)
|
|
$
|
54
|
|
|
$
|
-
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
7,537
|
|
|
$
|
4,009
|
|
|
$
|
-
|
|
|
$
|
11,546
|
|
Expenditures for segment assets
|
|
$
|
30
|
|
|
$
|
2,070
|
|
|
$
|
-
|
|
|
$
|
2,100
|
|
(1) The Applied Optics Center was acquired on November 3, 2014.
|
Note 6 – Intangible Assets
On November 3, 2014, Optex Systems, Inc. purchased
the Applied Optics Center Products line in exchange for $1,013.1 thousand and the assumption of approximately $270.7 thousand of
liabilities (see Note 4). 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 were essentially fulfilled as of June 28, 2015. The amortization of identifiable intangible
assets associated with the acquisition has been amortized on a straight line basis over the six month period beginning on December
29, 2014 and ending June 28, 2015 at a rate of $57.0 thousand per month pursuant to the order deliveries. The intangible amortization
was allocable to operating expenses as manufacturing cost of sales and general and administrative expenses at a rate of $48.5 thousand
and $8.5 thousand per month, respectively, through June 28, 2015. The identifiable intangible assets are amortized over 15 years
for income tax purposes.
During the twelve months ending September 27,
2015, $291.1 thousand has been amortized to cost of sales, and $51.1 thousand had been amortized to general and administrative
expenses. There were no unamortized intangible assets or amortization expenses incurred in the twelve months ending October 2,
2016. As of September 27, 2015 and October 2, 2016, the total unamortized balance of intangible assets was zero.
Note 7 — Property and Equipment
A summary of property and equipment at
October 2, 2016 and September 27, 2015 is as follows:
|
|
|
|
(Thousands)
|
|
|
|
Estimated Useful Life
|
|
Year Ended
October 2, 2016
|
|
|
Year Ended
September 27, 2015
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
Furniture and Fixtures
|
|
3-5yrs
|
|
$
|
356
|
|
|
$
|
322
|
|
Machinery and Equipment
|
|
5 yrs
|
|
|
3.233
|
|
|
|
3,247
|
|
Leasehold Improvements
|
|
7 yrs
|
|
|
276
|
|
|
|
276
|
|
Less: Accumulated Depreciation
|
|
|
|
|
(2,214
|
)
|
|
|
(1,874
|
)
|
Net Property & Equipment
|
|
|
|
$
|
1,651
|
|
|
$
|
1,971
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
|
|
$
|
345
|
|
|
$
|
334
|
|
During the twelve
months ending October 2, 2016, Optex Systems Holdings’ purchased $34 thousand in new furniture and fixtures, and sold machinery
and equipment with a net book value of $9 thousand for $4 thousand in proceeds resulting in a loss on asset sales of $5 thousand.
Note 8 —
Accrued Expenses
The components of
accrued liabilities for the years ended October 2, 2016 and September 27, 2015 are summarized below:
|
|
(Thousands)
|
|
|
|
Year Ended
October 2,
2016
|
|
|
Year Ended
September 27,
2015
|
|
|
|
|
|
|
|
|
Deferred Rent Expense
|
|
$
|
108
|
|
|
$
|
106
|
|
Accrued Vacation
|
|
|
330
|
|
|
|
315
|
|
Property Taxes
|
|
|
101
|
|
|
|
81
|
|
Operating Expenses
|
|
|
144
|
|
|
|
81
|
|
Reserve for Contract Losses
|
|
|
-
|
|
|
|
54
|
|
Payroll & Payroll Related
|
|
|
127
|
|
|
|
175
|
|
Total Accrued Expenses
|
|
$
|
810
|
|
|
$
|
812
|
|
Note 9 — Commitments and Contingencies
Rental Payments under Non-cancelable
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 increases occurring
each year beginning in 2016. As of October 2, 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. Approximately
12,000 square feet of the facility is subleased through September 30, 2016 to L-3 Communications Mobile Vision Inc. under a separate
Memorandum of Understanding dated October 27, 2014, which was not renewed. The term of the Applied Optics Center facility lease
expired September 30, 2016, and was renewed for 44,867 square feet, excluding the portion formerly subleased by L-3 Communications
Mobile Vision Inc. The new lease term will expire on September 30, 2021, with three remaining renewal options available to the
tenant, each with a renewal term duration of five years.
As of October 2, 2016, the remaining minimum
base lease and estimated 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
(1)
|
|
|
|
|
Fiscal Year
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Total
Payments
|
|
2017
|
|
$
|
266
|
|
|
$
|
88
|
|
|
$
|
214
|
|
|
$
|
60
|
|
|
$
|
628
|
|
2018
|
|
|
271
|
|
|
|
90
|
|
|
|
240
|
|
|
|
61
|
|
|
|
662
|
|
2019
|
|
|
281
|
|
|
|
92
|
|
|
|
248
|
|
|
|
62
|
|
|
|
683
|
|
2020
|
|
|
291
|
|
|
|
94
|
|
|
|
255
|
|
|
|
63
|
|
|
|
703
|
|
2021
|
|
|
147
|
|
|
|
48
|
|
|
|
262
|
|
|
|
64
|
|
|
|
521
|
|
2022
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
65
|
|
|
|
87
|
|
Total minimum lease payments
|
|
$
|
1,256
|
|
|
$
|
412
|
|
|
$
|
1,241
|
|
|
$
|
375
|
|
|
$
|
3,284
|
|
(1) Includes new countersigned facility lease dated October 21,
2016 and countersigned by the landlord on November 17, 2016 for 44,867 square feet for the Applied Optics Center. The lease expires
on October 31, 2021 (with a lease term which commenced retroactive to October 1, 2016). See Note 16- Subsequent Events.
Total
facilities rental and CAM expenses for both facility lease agreements as of the twelve months ended October 2, 2016 was $627 thousand.
Total expense under facility lease agreements as of the twelve months ended September 27, 2015 was $589 thousand.
Note 10 —
Transactions with a Related Party
As of October 2, 2016,
accounts receivable includes $132 thousand of non trade receivables due from Sileas Corporation, a related party, for operating
expenses paid by Optex Systems on their behalf. The amount is to be settled in stock within the next quarter. See Note 16-Subsequent
Events.
In the
twelve months ending October 2, 2016, Sileas Corporation converted 926 shares of Optex Systems Series A preferred stock at a
total stated value of $6.4 million for 5,293,896 common shares. The common shares include 1,354,167 of additional common
shares issued on October 18, 2016 as a result of a downward adjustment on the preferred Series A conversion price triggered
by the public offering price in August 2016 on Sileas Corporation’s previously converted preferred Series A shares.
These additional shares have been retroactively reflected in the ending common shares outstanding as of October 2, 2016. As
a result, Optex has recorded an additional beneficial conversion amount of $0.8 million to reflect the common stock
conversion rate change from $2.50 to $1.20 in 2016.
There were no other
transactions with Related Parties during fiscal years 2016 or 2015 except as described below in Note 11 Debt Financing.
Note 11 — 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 due February 20, 2012 in the principal amount of $13,524,405. The Note bears simple
interest at the rate of 4% per annum, and the interest rate upon an event of default increases to 10% per annum. In the event that
a Major Transaction occurs prior to the maturity date resulting in the Borrower receiving Net Consideration with a fair market
value in excess of the principal and interest due under the terms of this Secured Note, then in addition to paying the principal
and interest due, Sileas shall also pay an amount equal to 90% of the consideration. “Major Transaction” refers to
a transaction whereby Optex Systems, Inc. (Delaware) would consolidate or merge into or sell or convey all or substantially all
of its assets to a third party entity for more than nominal consideration, and “Net Consideration” refers to the fair
market value of the consideration received in connection with a Major Transaction less all outstanding liabilities of Optex Systems,
Inc. (Delaware).
On November 22, 2011 Sileas Corp and Longview
Fund, LP entered into an amendment to the Secured Promissory Note that extended the maturity date for an additional two year period
ending on February 20, 2014. In exchange for the extension, Sileas Corp agreed to pay Longview Fund an extension fee equal to 2%
of the principal amount of this Secured Note. As a result of the agreement, the principal amount of the Note was increased $270
thousand to $13.8 million as of November 22, 2011.
On November 27, 2013 Sileas Corp. and the Longview
Fund, LP entered into an amendment to the Secured Promissory Note that extended the maturity date for an additional two year period
ending on February 20, 2016. In exchange for the extension, Sileas Corp. agreed to pay the Longview Fund an extension fee equal
to 2% of the principal amount of this Secured Note. As a result of the amendment, the principal amount of the Note was increased
by $275 thousand to $14.1 million as of November 27, 2013.
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.
On August 4, 2016, Longview Fund, L.P. converted
$250 thousand of the note principal for 100,000 shares of Optex Systems Holdings common stock pursuant to the note conversion terms.
The Sileas note balance to the Longview Fund, LP as of October 2, 2016 is $17.8 million.
In the twelve months
ending October 2, 2016, Sileas Corporation converted all their Optex Systems Holdings, Inc. Series A preferred stock, 926 shares,
at a total stated value of $6.4 million for 5,293,896 common shares. The total common shares held by Sileas as of October 2, 2016
is 5,296,081. The common shares outstanding include 1,354,167 of additional common shares issued on October 18, 2016 as a result
of a downward adjustment on the preferred Series A conversion price triggered by the public offering price in August 2016 for Sileas
Corporation’s previously converted preferred Series A shares. These additional shares have been retroactively reflected in
the ending common shares outstanding as of October 2, 2016.
Credit Facility
— Avidbank
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 October 2, 2016, the outstanding principal on the line of credit was $300 thousand. For the years ended October 2, 2016
and September 27, 2015, the total interest expense against the outstanding line of credit balance was $36 thousand and $33 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 balance sheet and cash flow statement
as debt issuance costs and are amortized to interest expense across the term of the notes based on the effective interest method.
On March 29, 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.
For the twelve months
ending September 27, 2015 the amortized interest expense related to the debt was $146 thousand. As of September 27, 2015 the unamortized
debt issuance costs was zero.
Note 12 —
Stock Based Compensation
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 October 2, 2016, Optex Systems Holdings has granted stock options to officers and employees as follows (as
adjusted for the 1000:1 reverse stock split on common shares effective October 7, 2015):
Date of
|
|
Shares
|
|
|
Exercise
|
|
|
Shares Outstanding
|
|
|
Expiration
|
|
Vesting
|
Grant
|
|
Granted
|
|
|
Price
|
|
|
As of 10/02/16
|
|
|
Date
|
|
Period
|
12/09/11
|
|
|
46,070
|
|
|
$
|
10.00
|
|
|
|
35,370
|
|
|
12/08/2018
|
|
4 years
|
12/19/13
|
|
|
25,000
|
|
|
$
|
10.00
|
|
|
|
25,000
|
|
|
12/18/2020
|
|
4 years
|
Total
|
|
|
71,070
|
|
|
|
|
|
|
|
60,340
|
|
|
|
|
|
The following table
summarizes the status of Optex Systems Holdings’ aggregate stock options granted under the incentive stock option plan (as
adjusted for the 1000:1 reverse stock split on common shares effective October 7, 2015):
|
|
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
|
|
|
(2,518
|
)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Exercised – 2016
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Outstanding as of October 2, 2016
|
|
|
60,340
|
|
|
$
|
—
|
|
|
|
1.40
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 27, 2015
|
|
|
40,266
|
|
|
$
|
—
|
|
|
|
1.45
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of October 2, 2016
|
|
|
52,840
|
|
|
$
|
—
|
|
|
|
1.07
|
|
|
$
|
—
|
|
There were no options granted in the twelve
months ended October 2, 2016 and September 27, 2015.
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 — year ended October 2, 2016
|
|
|
—
|
|
|
|
—
|
|
Vested — year ended October 2, 2016
|
|
|
(12,575
|
)
|
|
|
7.33
|
|
Forfeited — year ended October 2, 2016
|
|
|
(2,518
|
)
|
|
|
—
|
|
Non-vested as of October 2, 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.
As of October 2, 2016,
none of the restricted stock units had vested.
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 twelve months ended October 2,
2016.
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
|
|
|
|
Twelve
months ended
|
|
|
As
of period ending
|
|
|
|
October
2, 2016
|
|
|
September
27, 2015
|
|
|
October
2, 2016
|
|
|
September
27, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
52
|
|
|
$
|
140
|
|
|
$
|
48
|
|
|
$
|
100
|
|
Restricted Stock Units
|
|
|
93
|
|
|
|
-
|
|
|
|
279
|
|
|
|
-
|
|
Consultant Shares (IRTH)
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
Total Stock Compensation
|
|
$
|
192
|
|
|
$
|
140
|
|
|
$
|
374
|
|
|
$
|
100
|
|
Note 13 —
Stockholders Equity
The table below depicts
the Optex Systems Holdings stock equity transactions and ending share balances by equity class for the twelve months ending September
27, 2015 and October 2, 2016, respectively.
|
|
Optex Systems Holdings Inc.
Stockholder Equity Shares Outstanding
|
|
|
|
|
|
|
|
Common
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Warrants
|
|
Shares outstandingSeptember 28, 2014 (post split)
|
|
|
310,867
|
|
|
|
1,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of Notes to Series B Preferred shares June 28, 2015
(1)
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Conversion of Series B Preferred shares May 27, 2015
(2)
|
|
|
4,000
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
Common shares outstanding as of September 27, 2015
|
|
|
314,867
|
|
|
|
1,001
|
|
|
|
994
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of Series B Preferred shares October 23, 2015
(3)
|
|
|
16,031
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
Issuance of shares on December 8, 2015 for DTC roundup correction
(4)
|
|
|
247
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of Series A Preferred shares March 27, 2016
(5)(14)
|
|
|
1,250,000
|
|
|
|
(456
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance IRTH consulting common shares on April 29, 2016
(6)
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Conversion of Series B Preferred shares on July 6, 2016
(7)
|
|
|
109,291
|
|
|
|
-
|
|
|
|
(167
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion of Series A Preferred shares on August 10, 2016
(8)
|
|
|
25,000
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Public offering issuance of common stock on August 26, 2016
(9)
|
|
|
2,291,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400
|
|
|
|
3,958,700
|
|
Underwriter warrants issued with offering on August 26, 2016
(10)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
166,500
|
|
Redemption of Series A and Series B Preferred shares on August 26,2016
(11)
|
|
|
-
|
|
|
|
(66
|
)
|
|
|
(796
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion of Series A and Series B Preferred shares on August 26,2016
(12)
|
|
|
2,698,431
|
|
|
|
(470
|
)
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
Conversion of Series C Preferred shares on August 10, 2016
(13)
|
|
|
166,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
-
|
|
Additional shares issued on October 18, 2016 for downward price adjustment for previous converted 456 share Series A Preferred dated March 27, 2016
(14)(5)
|
|
|
1,354,167
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common shares outstanding as of October 2, 2016
|
|
|
8,266,601
|
|
|
|
-
|
|
|
|
-
|
|
|
|
360
|
|
|
|
4,125,200
|
|
Notes:
|
1.
|
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.
|
|
2.
|
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
|
|
3.
|
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.
|
|
4.
|
On December 7, 2015, 247 common shares issued to certain beneficial holders to correct Depository
Trust and Clearing Corporation (DTC) rounding errors occurring from the October 7, 2015 reverse split
|
|
5.
|
On March 27, 2016, Sileas Corporation converted $3,125 thousand or 456 shares of the Series
A preferred stock at a stated value of $6,860 per share, for 1,250,000 shares of common stock.
|
|
6.
|
On April 29, 2016, Optex Systems Holdings, Inc. issued 40,000 common “restricted”
shares at a market price of $2.35 per share ($94 thousand) in support of the IRTH Communications agreement (See note 12).
|
|
7.
|
On July 6, 2016 a private investor converted $273 thousand, or 167 shares of the Series B preferred
stock at a stated value of $1,629 per share, for 109,291 shares of common stock.
|
|
8.
|
On August 10, 2016, a private investor converted $62.5 thousand, or 9 shares, of the Series
A preferred stock at a stated value of $6860 per share for 25,000 shares of common stock.
|
|
9.
|
On August 26, 2016, we consummated a public offering of 2,291,000 Class A units consisting of
common stock and warrants and 400 Class B units consisting of shares of Series C convertible stock and warrants for a total gross
purchase price of $4,750,280. The offering is comprised of Class A Units, priced at a public offering price of $1.20 per unit,
with each unit consisting of one share of common stock and one five-year warrant to purchase one share of common stock with an
exercise price of $1.50 per share (each, a "warrant"), and Class B Units, priced at a public offering price of $5,000
per unit, with each unit comprised of one share of preferred stock with a conversion price of $1.20 which is convertible into 4,167
shares of common stock and warrants to purchase 4,167 shares of common stock. The securities comprising the units are immediately
separable and will be issued separately.
|
|
10.
|
On August 26, 2016, 166,500 five-year warrants to purchase one share of common stock with an
exercise price of $1.50 per share were issued to the underwriter in connection with the offering.
|
|
11.
|
On August 26, 2016, 66 Series A and 796 preferred shares were redeemed for $1.75 million, as
a condition of the offering.
|
|
12.
|
On August 26, 2016, 470 shares of Series A preferred stock at a stated value of $6,860 were
converted for 2,689,729 shares of common stock and 6 shares of Series B preferred stock at a stated value of $1,629 were converted
for 8,702 shares of common stock, for a total of 2,698,431 shares of common stock based on a conversion price of $1.20 per share,
as a condition of the offering.
|
|
13.
|
On August 26, 2016, 28 shares of Series C preferred stock, and on August 29, 2016 12 shares
of Series C preferred stock were converted at a stated value of $5000 per share, for a total value of $200 thousand, into 166,667
common shares at a per share conversion price of $1.20.
|
|
14.
|
Pursuant to a board of directors meeting held on August 4, 2016, 1,354,167 additional shares
of common stock were issued to Sileas Corporation as a result of a downward price adjustment on the conversion rate of Series A
preferred shares which was triggered by the August 26, 2016 public offering. The conversion price adjustment applied to 456 Series
A preferred shares which had been previously converted on March 27, 2016. The conversion price was reset to the public offering
price $1.20 per common share from the prior conversion price of $2.50 per common share. As a result of the adjustment the additional
common shares were issued on October 18, 2016 and retroactively included in the ending outstanding shares as of October 2, 2016.
|
Common stock
On August 31, 2015, the Optex Systems Holdings
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 Holdings 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. The outstanding common shares as of September 28, 2014, have been
retrospectively stated as 310,867 shares, reflective of the additional roundup quantity, post split.
During the twelve
months ending September 27, 2015, Optex Systems Holdings issued 4,000 common shares due to conversions of Series B preferred stock.
As of September 27, 2015, Optex Systems had 314,867 common shares outstanding.
On August 26, 2016,
2,291,900 Class A units consisting of common stock and warrants and 400 Class B units consisting of shares of Series C convertible
stock and warrants were issued pursuant to a public offering. The offering is comprised of Class A Units, priced at a public offering
price of $1.20 per unit, with each unit consisting of one share of common stock and one five-year warrant to purchase one share
of common stock with an exercise price of $1.50 per share (each, a "warrant"), and Class B Units, priced at a public
offering price of $5,000 per unit, with each unit comprised of one share of preferred stock with a conversion price of $1.20 which
is convertible into 4,167 shares of common stock and warrants to purchase 4,167 shares of common stock. The net proceeds from the
offering were $4,247 thousand (Gross proceeds of $4,752 thousand less underwriter expenses of $505 thousand). Deferred public offering
costs incurred by Optex in connection with the offering was $252 thousand.
During the
twelve months ending October 2, 2016, Optex Systems Holdings issued 5,619,587 common shares due to conversions of Series A,
Series B and Series C preferred stock, 2,291,900 shares were issued in connection with the public offering, 247 common shares
were issued to correct Depository Trust and Clearing Corporation (DTC) rounding errors occurring from the October 7, 2015
reverse split and 40,000 common shares were issued to a vendor (See note 12). As of October 2, 2016, the outstanding common
shares are 8,266,601. The issued and outstanding shares above have been retroactively adjusted to include 1,354,167 common
shares issued on October 18, 2016 pursuant to a ratchet triggered on previously converted Series A preferred shares.
There were no other
issuances of common or preferred stock during the twelve months ended October 2, 2016.
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: $150.00 per share, ($0.15 per share,
pre split) 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 $10.00 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 $150.00 per share. The dividends were subsequently waived and the price per share was reset to
$10.00 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 a pre split value of $0.0025, or $2.50 post
split 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 and effective on August 22, 2016, the conversion price has been reset to $1.20 pursuant
to a public offering of common shares at $1.20 per share.
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 $10.00 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 of October 2, 2016
and September 27, 2015 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 October 7, 2015, we effected a 1-for-1000 reverse split of
our common stock. Based on the price reset to $2.50 per common share, there were 1,001.5 shares of preferred stock with a beneficial
conversion feature, “in the money”, which were subject to conversion at the discretion of the holder. In the twelve
months ending September 27, 2105, Optex Systems Holdings recognized a $5.2 million adjustment to retained earnings for dividends
for the intrinsic value of the beneficial conversion feature on the convertible preferred shares. During the twelve months ending
October 2, 2016, Optex System Holdings recognized an additional $0.8 million adjustment to retained earnings for dividends due
to a beneficial conversion feature on 926 Series A preferred shares, whereas the conversion price reset from $2.50 per common share
to $1.20 per common share as a result of the public offering price on August 26, 2016.
During the twelve months ending September 27,
2015 there were no conversions and no new issues of Series A preferred shares. Optex Systems Holdings had 1,001 of preferred shares
outstanding as of September 27, 2015.
During the twelve
months ending October 2, 2016 there were conversions of 935 preferred Series A shares, or $6,415 thousand, into 5,318,896 common
shares, and cash redemptions for $455 thousand of 66 Series A preferred shares. The 5,318,896 converted common shares above have
been retroactively adjusted to include 1,354,167 common shares subsequently issued on October 18, 2016 pursuant to a ratchet triggered
on conversions of 456 of Series A preferred shares which had occurred on March 27, 2016.
As of October 2, 2016 there were zero preferred
Series A shares outstanding.
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, pre split, 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 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.
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. Effective on
August 22, 2016, the conversion price has been reset to $1.20 pursuant to a public offering of common shares at $1.20 per share.
At the time of 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 at inception. For
the twelve months ending September 27, 2015 Optex Systems Holdings recognized a retained earnings dividends and additional paid
in capital adjustment of $1.2 million, which represented the intrinsic value of the options at the commitment date. During the
twelve months ending October 2, 2016 there were no dividends booked to retained earnings related to the beneficial conversion feature
on Series B preferred shares as the conversion price remained at or above the market price.
During the twelve
months ending September 27, 2015, 6 shares of the Series B preferred stock had been converted to common stock. As of September
27, 2015, there were 994 shares of Series B preferred shares outstanding.
During the twelve months ending October 2,
2016 there were conversions of 198 preferred Series B shares, or $324 thousand, into 134,024 common shares, and cash redemptions
of 796 Series B preferred shares for $1,296 thousand. As of October 2, 2016 there were zero preferred Series B shares outstanding.
Series C Preferred
Stock
Our board of directors designated 400 shares
of our preferred stock as Series C convertible preferred stock (“Series C preferred stock”). The preferences and rights
of the Series C preferred stock are set forth in a Certificate of Designation (the “Series C Certificate of Designation”).
Pursuant to a transfer agency agreement between
us and Equity Stock Transfer, as transfer agent, the Series C preferred stock will be issued in book-entry form and shall initially
be represented only by one or more global certificates deposited with The Depository Trust Company, or DTC, and registered in the
name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.
In the event of a liquidation, the holders
of Series C preferred stock are entitled to participate on an as-converted-to-Common Stock basis with holders of the Common Stock
in any distribution of assets of the Company to the holders of the Common Stock. The Series C Certificate of Designation provides,
among other things, that we shall not pay any dividends on shares of Common Stock (other than dividends in the form of Common Stock)
unless and until such time as we pay dividends on each Series C preferred share on an as-converted basis. Other than as set forth
in the previous sentence, the Series C Certificate of Designation provides that no other dividends shall be paid on Series C preferred
stock.
With certain exceptions, as described in the
Series C Certificate of Designation, the Series C preferred stock have no voting rights. However, as long as any shares of Series
C preferred stock remain outstanding, the Series C Certificate of Designation provides that we shall not, without the affirmative
vote of holders of a majority of the then-outstanding Series C preferred stock, (a) alter or change adversely the powers, preferences
or rights given to the Series C preferred stock or alter or amend the Series C Certificate of Designation, (b) increase the number
of authorized shares of Series C preferred stock or (c) amend our certificate of incorporation in any manner that adversely affects
the rights of holders of Series C preferred stock.
Each Series C preferred share is convertible
at any time at the holder’s option into a number of shares of common stock equal to $5,000 divided by the Series C Conversion
Price. The “Series C Conversion Price” is initially $1.20 and is subject to adjustment for stock splits, stock dividends,
distributions, subdivisions and combinations. Notwithstanding the foregoing, the Series C Certificate of Designation further provides
that we shall not effect any conversion of Series C preferred stock, with certain exceptions, to the extent that, after giving
effect to an attempted conversion, the holder of Series C preferred stock (together with such holder’s affiliates, and any
persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of
shares of Common Stock in excess of 4.99% of the shares of our Common Stock then outstanding after giving effect to such exercise
(the “preferred stock Beneficial Ownership Limitation”); provided, however, that upon notice to the Company, the holder
may increase or decrease the preferred stock Beneficial Ownership Limitation, provided that in no event shall the preferred stock
Beneficial Ownership Limitation exceed 9.99% and any increase in the preferred stock Beneficial Ownership Limitation will not be
effective until 61 days following notice of such increase from the holder to us.
We do not intend to apply for listing of the
Series C preferred stock on any securities exchange or other trading system.
During the twelve months ending October 2,
2016 there were 400 preferred Series C shares issued, at a total stated value of $2 million, pursuant to the public offering on
August 26, 2016, and conversions of 40 preferred Series C shares, or $200 thousand, into 166,667 common shares. As of October 2,
2016 there were 360 preferred Series C shares outstanding.
Warrants
On August 26, 2016, Optex Systems Holdings
Inc. issued 4,125,200 warrants to new shareholders and the underwriter, in connection with a public share offering. The warrants
entitle the holder to purchase one share of our common stock at an exercise price equal to $1.50 per share at any time on or after
August 26, 2016 (the “Initial Exercise Date”) and on or prior to the close of business on August 26, 2021 (the “Termination
Date”).
Pursuant to a warrant agreement between Optex
Systems Inc. and Equity Stock Transfer, LLC, as warrant agent, the warrants will be issued in book-entry form and shall initially
be represented only by one or more global warrants deposited with the warrant agent, as custodian on behalf of The Depository Trust
Company, or DTC, and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.
The exercise price and number of shares of
common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock
splits, stock dividend, extraordinary dividend on or recapitalization, reorganization, merger or consolidation. For one year following
the issuance date of the warrants, the exercise price of the warrants will also be adjusted for issuances of common stock at a
price below their exercise price, on the date of issuance of any option to purchase, or sell or grant any right to reprice, or
otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any common stock
or common stock equivalents, at an effective price per share less than the exercise price then in effect. Under such adjustment,
the exercise price of the warrants shall be reduced to that lower issuance price per share. Under the terms of the Warrants, there
can only be one such price reset during the term of the warrant.
Under the terms of the warrant agreement, Optex
Systems Holdings Inc. has agreed to use their best efforts to maintain the effectiveness of the registration statement and current
prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. During any period
Optex fails to have maintained an effective registration statement covering the shares underlying the warrants, the warrant holder
may exercise the warrants on a cashless basis. The warrant holders do not have the rights or privileges of holders of common stock
and any voting rights until they exercise their warrants and receive shares of common stock, except as set forth in the warrants.
After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share
held of record on all matters to be voted on by stockholders.
Subject to limited exceptions, a holder of
warrants will not have the right to exercise any portion of its warrants if the holder (together with such holder’s affiliates,
and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a
number of shares of common stock in excess of 4.99% of the shares of our common stock then outstanding after giving effect to such
exercise (the “Beneficial Ownership Limitation”); provided, however, that, upon notice to the Company, the holder may
increase or decrease the Beneficial Ownership Limitation, provided that in no event shall the Beneficial Ownership Limitation exceed
9.99% and any increase in the Beneficial Ownership Limitation will not be effective until 61 days following notice of such increase
from the holder to us.
No fractional shares of common stock will be
issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest
in a share, Optex Systems Holdings Inc. will, upon exercise, round up to the nearest whole number of shares of common stock to
be issued to the warrant holder. If multiple warrants are exercised by the holder at the same time, Optex Systems Holdings Inc.
will aggregate the number of whole shares issuable upon exercise of all the warrants. There is no established trading market for
the warrants. The warrants have been approved for quotation on the OTCQB.
In the event of a fundamental transaction (as
defined in warrant), then the Company or any successor entity will pay at the holder’s option, exercisable at any time concurrently
with or within 30 days after the consummation of the fundamental transaction, an amount of cash equal to the value of the remaining
unexercised portion of the warrants on the date of consummation of the fundamental transaction as determined in accordance with
the Black Scholes option pricing model.
During the twelve
months ending October 2, 2016, zero warrants had been exercised. As of October 2, 2016 the outstanding warrants were 4,125,200.
Note 14 —
Income Taxes
The income tax provisions
as of October 2, 2016 and September 27, 2015 include the following:
|
|
(Thousands)
|
|
|
|
2016
|
|
|
2015
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(65
|
)
|
|
|
(539
|
)
|
State
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
65
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
Provision for (Benefit from) income taxes, net
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
The income tax provision
for Optex Systems as of October 2, 2016 differs from those computed using the statutory federal tax rate of 34%, due to the following
permanent differences:
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit) at statutory federal rate
|
|
$
|
(80
|
)
|
|
|
34
|
|
|
$
|
167
|
|
|
|
34
|
|
Nondeductible expenses
|
|
|
15
|
|
|
|
25
|
|
|
|
11
|
|
|
|
2
|
|
Gain on asset purchase (Applied Optics Center)
|
|
|
—
|
|
|
|
—
|
|
|
|
(717
|
)
|
|
|
(146
|
)
|
Change in valuation and other
|
|
|
65
|
|
|
|
(59
|
)
|
|
|
539
|
|
|
|
110
|
|
Provision for (Benefit from) income taxes, net
|
|
$
|
-0-
|
|
|
|
-0-
|
|
|
$
|
-0-
|
|
|
|
-0-
|
|
Deferred income taxes recorded in the balance
sheets results from differences between financial statement and tax reporting of income and deductions. A summary of the
composition of the deferred income tax assets (liabilities) follows:
|
|
(Thousands)
|
|
|
|
Deferred Tax Asset — Long Term
|
|
|
|
As of
October 2,
2016
|
|
|
As of
September 27,
2015
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
308
|
|
|
$
|
242
|
|
Inventory Reserve
|
|
|
332
|
|
|
|
312
|
|
Unicap
|
|
|
41
|
|
|
|
37
|
|
Contract Loss Reserve
|
|
|
(279
|
)
|
|
|
(260
|
)
|
Fixed assets
|
|
|
89
|
|
|
|
48
|
|
Goodwill Amortization
|
|
|
1,289
|
|
|
|
1,451
|
|
Intangible Asset Amortization
|
|
|
641
|
|
|
|
732
|
|
Net Operating Losses
|
|
|
2,244
|
|
|
|
2,058
|
|
Other
|
|
|
(14
|
)
|
|
|
(34
|
)
|
Subtotal
|
|
$
|
4,651
|
|
|
$
|
4,586
|
|
Valuation allowance
|
|
|
(4,651
|
)
|
|
|
(4,586
|
)
|
Net deferred asset (liability)-long term
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
As of October 2, 2016,
the Company has a net operating loss carryforward of $6,601 thousand as compared to net loss carryforwards of $6,049 thousand available
as of September 27, 2015.
As of September 27, 2015 management assessed
the recoverability of deferred tax assets and determined due to recent and projected loss conditions and the downturn in the defense
budget spending, that the balance of deferred tax assets may not be realized. The valuation allowance reserve was decreased by
$65 thousand during the twelve months ended October 2, 2016, consistent with the 2016 change in deferred tax assets. As of October
2, 2016 Optex Systems Inc. has a deferred tax asset valuation allowance of ($4.7) million against a deferred tax asset of $4.7
million.
As the result of the
application of the FASB ASC 740-10
,
Optex Systems Holdings has no unrecognized tax benefits. By statute, the tax years
ending in October 2, 2016, September 27, 2015 and September 28, 2014 are open to examination by the major taxing jurisdictions
to which the Optex Systems Holdings is subject.
There were no income
taxes paid during the fiscal years ended October 2, 2016 or September 27, 2015.
Note 15 —
Defined Contribution Plan
The Company sponsors
a defined contribution pension plan under Section 401(k) of the Internal Revenue Code for all employees. Company contributions
are voluntary and are determined annually at the discretion of the Board of Directors at the beginning of each fiscal year. For
the fiscal years ending October 2, 2016 and September 27, 2015, the company offered a qualified automatic contribution arrangement
(QACA) with a 100% match of the first 1% and 50% matching of the next 5% and a 2 year vesting requirement. The Company’s
contribution expense for the fiscal years ended October 2, 2016 and September 27, 2015 were $133 thousand and $110 thousand, respectively.
Note 16 —
Subsequent Events
Lease Renewal
The premises for the business unit which we
acquired from L-3 Communications, Inc., the Applied Optics Center, in November 2014 consists of approximately 56,633 square feet
of space, of which approximately 12,000 square feet was subleased through September 30, 2016 to L-3 Communications Mobile Vision
Inc. under a separate Memorandum of Understanding dated October 27, 2014, which was not renewed. On November 17, 2016, we received
a countersigned new lease for the Applied Optics Center from the landlord for 44,867 square feet, dated October 21, 2016, which
lease expires on October 31, 2021 (with a lease term which commenced retroactive to October 1, 2016).
|
·
|
The monthly base rent is $19.4 thousand through September 30, 2017 and escalates approximately
3% October 1, each year thereafter through 2021. The monthly rent includes approximately $4.9 thousand for additional Common Area
Maintenance fees and taxes (CAM), to be adjusted annually based on actual expenses incurred by the landlord. The initial rent including
CAM is $24.3 thousand beginning November 1, 2016.
|
|
·
|
The lease includes a one month base rent abatement for October 1 through October 31, 2016 for $19.4
thousand.
|
|
·
|
There are two renewal terms which are each five years in duration. Our obligations to make payments
under the lease are secured by a $250,000 standby letter of credit which we can reduce to $125,000 on October 31, 2019.
|
|
·
|
Our monthly base rent (including payment for operating expenses) under the new lease is $24,340.35.
|
Credit Facility — Avidbank
In order to meet the security requirement under
the lease, we entered into a letter of credit with Avidbank on October 17, 2016 in the amount of $250,000, which expires on October
17, 2017 and is renewable by us for successive one year periods unless the bank notifies us no later than 60 days prior to the
end of the initial or any extended term that it shall not renew the letter of credit.
In order to accommodate this letter of credit,
Avidbank, on the same date, increased our line of credit to $2.2 million from $2.0 million.
Equity Transactions – Related Party
On October 31, 2016, Longview Fund, L.P. converted
$2.7 million of the Sileas note principal in exchange for 800,000 shares of Optex Systems Holdings common stock. The Sileas note
balance to the Longview Fund, LP as of October 31, 2016 is $15.1 million.
On October 31, 2016, Longview Fund L.P. authorized
the return to Optex Systems Holdings’ treasury of 197,299 common shares, held by Sileas Corporation in settlement of $157
thousand of accounts receivable due for expenses paid by Optex Systems Inc. on behalf of the Sileas Corporation. The shares were
subsequently cancelled in satisfaction of the outstanding accounts receivable balance as of October 31, 2016.