Optex Systems Holdings, Inc.
Consolidated Balance Sheets
|
|
(Thousands, except share and per share data)
|
|
|
|
|
|
October 1, 2017
|
|
|
October 2, 2016
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,682
|
|
|
$
|
2,568
|
|
Accounts Receivable, Net
|
|
|
3,125
|
|
|
|
2,095
|
|
Net Inventory
|
|
|
7,614
|
|
|
|
6,214
|
|
Prepaid Expenses
|
|
|
63
|
|
|
|
120
|
|
Current Assets
|
|
|
12,484
|
|
|
|
10,997
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
1,460
|
|
|
|
1,651
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid Royalties - Long Term
|
|
|
60
|
|
|
|
90
|
|
Security Deposits
|
|
|
23
|
|
|
|
23
|
|
Other Assets
|
|
|
83
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
14,027
|
|
|
$
|
12,761
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
1,362
|
|
|
$
|
706
|
|
Dividends Payable
|
|
|
261
|
|
|
|
—
|
|
Accrued Expenses
|
|
|
1,450
|
|
|
|
810
|
|
Accrued Warranties
|
|
|
174
|
|
|
|
28
|
|
Customer Advance Deposits
|
|
|
927
|
|
|
|
559
|
|
Credit Facility
|
|
|
300
|
|
|
|
300
|
|
Current Liabilities
|
|
|
4,474
|
|
|
|
2,403
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
3,607
|
|
|
|
3,118
|
|
Total Liabilities
|
|
|
8,081
|
|
|
|
5,521
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred Stock Series C ($0.001 par 400 authorized, 174 and 360 issued and outstanding, respectively)
|
|
|
—
|
|
|
|
—
|
|
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,190,101 and 8,266,601 shares issued and outstanding, respectively)
|
|
|
8
|
|
|
|
8
|
|
Additional Paid-in-capital
|
|
|
26,411
|
|
|
|
26,879
|
|
Accumulated Deficit
|
|
|
(20,473
|
)
|
|
|
(19,647
|
)
|
Stockholders’ Equity
|
|
|
5,946
|
|
|
|
7,240
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
14,027
|
|
|
$
|
12,761
|
|
The accompanying notes are an integral
part of these financial statements
Optex Systems Holdings, Inc.
Consolidated Statements of Operations
|
|
(Thousands, except share and per share data)
|
|
|
Twelve months ended
|
|
|
|
|
|
October 1, 2017
|
|
|
October 2, 2016
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,547
|
|
|
$
|
17,279
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
15,133
|
|
|
|
14,228
|
|
Gross Margin
|
|
|
3,414
|
|
|
|
3,051
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expense
|
|
|
3,210
|
|
|
|
3,962
|
|
Operating Income (Loss)
|
|
|
204
|
|
|
|
(911
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) Gain on Change in Fair Value of Warrants
|
|
|
(489
|
)
|
|
|
739
|
|
Interest Expense
|
|
|
(19
|
)
|
|
|
(36
|
)
|
Other Expense
|
|
|
(508
|
)
|
|
|
703
|
|
|
|
|
|
|
|
|
|
|
Loss Before Taxes
|
|
|
(304
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
Current Income Taxes (Benefit)
|
|
|
—
|
|
|
|
—
|
|
Deferred Income Taxes (Benefit)
|
|
|
—
|
|
|
|
—
|
|
Net Loss After Taxes
|
|
|
(304
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend/premium
|
|
|
—
|
|
|
|
(1,203
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) applicable to common shareholders
|
|
$
|
(304
|
)
|
|
$
|
(1,411
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.91
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - basic and
fully diluted
|
|
|
7,995,092
|
|
|
|
1,546,774
|
|
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 1, 2017
|
|
|
October 2, 2016
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(304
|
)
|
|
$
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
337
|
|
|
|
345
|
|
Loss (gain) on change in fair value of warrants
|
|
|
489
|
|
|
|
(739
|
)
|
Noncash interest expense
|
|
|
—
|
|
|
|
(17
|
)
|
Stock compensation expense
|
|
|
220
|
|
|
|
192
|
|
(Use of) provision for inventory valuation
|
|
|
(34
|
)
|
|
|
60
|
|
(Gain) loss on sale of fixed assets
|
|
|
(38
|
)
|
|
|
5
|
|
(Increase) decrease in accounts receivable
|
|
|
(1,185
|
)
|
|
|
771
|
|
Increase in inventory (net of progress billed)
|
|
|
(1,366
|
)
|
|
|
(562
|
)
|
Decrease in prepaid expenses
|
|
|
57
|
|
|
|
51
|
|
Increase in accounts payable and accrued expenses
|
|
|
1,296
|
|
|
|
130
|
|
Increase in accrued warranty costs
|
|
|
146
|
|
|
|
—
|
|
Decrease in prepaid royalties - long term
|
|
|
30
|
|
|
|
30
|
|
Increase (decrease) in customer advance deposits
|
|
|
368
|
|
|
|
(597
|
)
|
Total adjustments
|
|
|
320
|
|
|
|
(331
|
)
|
Net cash provided by (used in) operating activities
|
|
|
16
|
|
|
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows (to) from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(149
|
)
|
|
|
(34
|
)
|
Proceeds from sale of fixed assets
|
|
|
41
|
|
|
|
4
|
|
Net cash used in investing activities
|
|
|
(108
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from (to) financing activities
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(261
|
)
|
|
|
—
|
|
Net proceeds from sale of common stock
|
|
|
—
|
|
|
|
4,750
|
|
Redemption of preferred stock
|
|
|
—
|
|
|
|
(1,751
|
)
|
Deferred public offering costs
|
|
|
—
|
|
|
|
(45
|
)
|
Cash paid for taxes withheld on net settled restricted stock unit share issue
|
|
|
(15
|
)
|
|
|
—
|
|
Proceeds (to) credit facility (net)
|
|
|
—
|
|
|
|
(500
|
)
|
Proceeds (to) stock repurchase
|
|
|
(518
|
)
|
|
|
—
|
|
Net cash (used in) provided by financing activities
|
|
|
(794
|
)
|
|
|
2,454
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(886
|
)
|
|
|
1,885
|
|
Cash and cash equivalents at beginning of period
|
|
|
2,568
|
|
|
|
683
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,682
|
|
|
$
|
2,568
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Exchange of common stock for non-trade accounts receivable
|
|
$
|
155
|
|
|
$
|
—
|
|
Exchange of preferred stock for common stock
|
|
|
930
|
|
|
|
6,939
|
|
Beneficial conversion features on preferred stock
|
|
|
—
|
|
|
|
1,203
|
|
Fair value of warrants issued for underwriter expenses in public offering
|
|
|
—
|
|
|
|
156
|
|
Dividends declared and unpaid
|
|
|
261
|
|
|
|
—
|
|
Cash paid for interest
|
|
|
19
|
|
|
|
53
|
|
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
Shares
Outstanding
|
|
|
Series
A
Preferred
Shares
|
|
|
Series
B
Preferred
Shares
|
|
|
Series
C
Preferred
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid in
Capital
|
|
|
Retained
Earnings
|
|
|
Total
Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
4,748
|
|
|
|
—
|
|
|
|
4,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees on Share Offering paid by Optex
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Warrants Issued in Offering 8/26/2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,856
|
)
|
|
|
—
|
|
|
|
(3,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Preferred Stock -Dividend/Premium
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,203
|
|
|
|
(1,203
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(208
|
)
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 2, 2016
|
|
|
8,266,601
|
|
|
|
—
|
|
|
|
—
|
|
|
|
360
|
|
|
$
|
8
|
|
|
$
|
26,879
|
|
|
$
|
(19,647
|
)
|
|
$
|
7,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
220
|
|
|
|
—
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in settlement of 68,000 vested restricted stock units on 1/4/17, net of tax withheld shares of 22,201
|
|
|
45,799
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return and cancellation of Sileas held Common Shares in exchange
for Accounts Recievables due from Sileas
|
|
|
(197,299
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(155
|
)
|
|
|
—
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversions of Series C Preferred Shares
|
|
|
775,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(186
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Buyback and Cancellation
|
|
|
(700,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(517
|
)
|
|
|
—
|
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared Dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(522
|
)
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2017
|
|
|
8,190,101
|
|
|
|
—
|
|
|
|
—
|
|
|
|
174
|
|
|
$
|
8
|
|
|
$
|
26,411
|
|
|
$
|
(20,473
|
)
|
|
$
|
5,946
|
|
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 was the majority owner (parent) of Optex Systems Holdings, until June 9, 2017. On June 9, 2017, Sileas entered into a transaction
with Longview to settle its original February 20, 2009 Note with Longview in exchange for 2,798,782 common shares of Optex Systems
Holdings common stock owned by Sileas, a $250,000 cash payment and a Note to Longview of $64,000 which shall be paid in cash by
Sileas to Longview on a quarterly basis. See Note 9. As a result of the transaction, Longview owns 34.2% of the issued and outstanding
equity interests in Optex Systems 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 1, 2017, Optex Systems Holdings operated with 100 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.
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.
We are cautiously optimistic that the new
government administrations proposed boost in military spending will have a favorable impact in the direction of funding or product
need for the U.S. military. We anticipate that absent any significant changes from the current defense spending levels, maintenance
will still be required, and the opportunities for us to upgrade existing systems with higher performing systems will continue to
present themselves. Spending levels may change, but given the mix between foreign spending, domestic/prime demand, and the more
recent commercial opportunities, we do not expect any negative trends arising from political domestic changes over the next twelve
months.
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 assess 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 1, 2017 and
included 53 weeks. Fiscal year 2016 ended on October 2, 2016 and included 53 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, prepaid expenses, accounts payable, accrued expenses
credit facilitied and warrant liabilities. Fair value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of fiscal years ended October 1, 2017 and October 2, 2016. The carrying value
of the balance sheet financial instruments included in Optex Systems Holdings’ consolidated financial statements approximated
their fair values.
The carrying value of the balance sheet
cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and credit facilities are carried at, or
approximate, fair value as of the reporting date because of their short-term nature. Fair values for the Company’s warrant
liabilities and derivatives are estimated by utilizing valuation models that consider current and expected stock prices, volatility,
dividends, market interest rates, forward yield curves and discount rates. Such amounts and the recognition of such amounts
are subject to significant estimates that may change in the future.
The accounting guidance FASB ASC 820-10, “
Fair
Value Measurements and Disclosures”
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value and requires that assets and liabilities carried at fair value be classified and disclosed in one of
the following three categories:
Level 1: Quoted market prices in active
markets for identical assets or liabilities.
Level 2: Observable market-based inputs
or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting
the reporting entity’s own assumptions.
The accounting guidance establishes a hierarchy
which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability’s
level is based on the lowest level of input that is significant to the fair value measurement. Fair value estimates are reviewed
at the origination date and again at the each applicable measurement date and interim or annual financial reporting dates, as applicable
for the financial instrument, and are based upon certain market assumptions and pertinent information available to management at
those times.
The methods, significant
inputs and assumptions utilized in estimating the fair value of the warrant liabilities are discussed further in Note 13 “Warrant
Liabilities”. Each of the measurements is considered a Level 3 measurement as a result of at least one unobservable input.
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 $1,682 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 1, 2017
are derived from sales to U.S. government agencies (38%), General Dynamics (19%), Nightforce Optics, Inc. (22%) and all other contractors
(21%). 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
1, 2017 and October 2, 2016, Optex Systems Holdings had an allowance for doubtful accounts of $2 thousand and $42 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 2017 we recognized
income of ($12) thousand related to bad debt expense deemed as uncollectible in 2016 which was subsequently paid in 2017. In the
fiscal year 2016 there was $36 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 1, 2017 and October 2, 2016 inventory
included:
|
|
(Thousands)
|
|
|
As of
October 1, 2017
|
|
As of
October 2, 2016
|
|
Raw Materials
|
|
$
|
5,931
|
|
|
$
|
4,655
|
|
Work in Process
|
|
|
2,859
|
|
|
|
2,830
|
|
Finished Goods
|
|
|
441
|
|
|
|
380
|
|
Gross Inventory
|
|
|
9,231
|
|
|
|
7,865
|
|
Less: Inventory Reserves
|
|
|
(1,617
|
)
|
|
|
(1,651
|
)
|
Net Inventory
|
|
$
|
7,614
|
|
|
$
|
6,214
|
|
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 twelve 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 12 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 1, 2017 and October 2, 2016,
the existing warranty reserve balances of $174 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
12 months. The increase in warranty reserves of $146 thousand during the twelve months ending October 1, 2017 from the prior year
balance represents additional expenses recognized during 2017 related to quality issues encountered on our Applied Optics Center
optical assemblies during the year for returned products requiring repairs or replacements. We believe we have made sufficient
improvements to the production process to reduce the return rate on any future shipments but we will continue to review and monitor
the reserve balances related to this product line against any existing warranty backlog and current trend data until the current
warranty backlog is depleted.
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 1, 2017, Optex Systems,
Inc. had a balance of $927 thousand in customer advance deposits related to multiple contracts for our sighting system product
line. The products associated with the sighting systems customer deposits generally have a high material content with long lead
items which require purchase well in advance of final product delivery. We expect the deliveries against these contracts extend
into the fourth quarter of fiscal year 2018. Of the total collected customer advance deposits, $927 thousand relate 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 1, 2017 and October 2, 2016 the contract loss reserves were $0 thousand.
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 1, 2017 and October 2, 2016, 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.
During the twelve months ending October
2, 2016, Optex Systems Holdings had preferred stock outstanding, 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 was perpetual, with no stated maturity date, and the conversions could occur any
time from inception, the dividend is recognized immediately when a beneficial conversion exists at issuance. The August 26, 2016
public offering triggered a reset of the preferred stock conversion rate from $2.50 per common share to $1.20 per common share
on our Series A and Series B preferred shares and resulted in a $0.8 million beneficial conversion feature. The public offering
also included a beneficial conversion feature of $0.4 million at the August 26, 2016 commitment date of the 400 shares of Series
C preferred stock issued in the offering, based on the effective conversion price of the shares, net of the allocated warrant proceeds.
During the twelve months ending October 2, 2016, Optex Systems Holdings recognized a total preferred stock dividend of $1.2 million
as a result of the beneficial conversion features triggered on the existing and new issues of preferred shares. There were no preferred
shares outstanding during the twelve months ending October 1, 2017 subject to subsequent beneficial conversion features, thus there
was zero preferred stock dividends recognized during the period.
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 and results of recent operations. 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. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in
which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical
merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the
largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax
authority.
As of October 1, 2017 Optex Systems Inc.
has a deferred tax asset valuation allowance of ($4.6) million against deferred tax assets of $4.6 million due to historical losses
resulting in a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016. We intend to continue maintaining
a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some
portion of these allowances. However, given our improved earnings performance during the final quarter of fiscal year ending October
1, 2017, and anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient
positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance
will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and
a decrease to income tax expense for the period the release is recorded. We believe the change in the valuation allowance could
approximate $2.0 million, assuming a change in tax rate from 34% to 21%. However, the exact timing and amount of the valuation
allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve and the
corporate tax rate in effected at that time.
Earnings
per Share
: Basic earnings per share is computed by dividing income available for common shareholders (the numerator)
by the weighted average number of common shares outstanding (the denominator) for the period. Diluted earnings per share reflect
the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock.
The potentially
dilutive securities that Optex Systems Holdings has outstanding are convertible preferred stock, 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 1, 2017, 4,125,200 warrants, 174 Series C preferred stock (convertible into 725,000 common
shares) and 56,260 stock options and 182,000 unvested restricted stock units were excluded as anti-dilutive due to the net
loss attributable to common shareholders during the years. For the twelve months ended October 2, 2016, 4,125,200 warrants,
360 Series C preferred stock (convertible into 1,500,000 common shares) and 52,840 stock options and 200,000 unvested
restricted stock units were excluded as anti-dilutive due to the net loss attributable to common shareholders during
the years.
Note 3 —
Recent Accounting Pronouncements
In May 2017, the
FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09).
ASU 2017-09 provides clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in
Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments
in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity
to apply modification accounting in Topic 718. The amendments in this update are effective for all entities for annual periods,
and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. As such, Optex
Systems Holdings is required to adopt these provisions as of the fiscal year beginning on October 1, 2018. The amendments in this
update should be applied prospectively to an award modified on or after the adoption date. We are currently assessing the potential
impact of ASU 2017-09 on our consolidated financial statements and results of operations.
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.
As such, Optex Systems Holdings is required to adopt these provisions as of the fiscal year beginning on October 1, 2018. 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. As such, Optex Systems Holdings is required to
adopt these provisions as of the fiscal year beginning on September 30, 2019. 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. As such, Optex Systems Holdings adopted these provisions as
of the fiscal year beginning October 2, 2017. There was no material effect of the new provisions on our consolidated financial
statements and related disclosures.
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. As such, Optex Systems Holdings
is required to adopt these provisions as of the fiscal year beginning on September 30, 2019. 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. As
such, Optex Systems Holdings is required to adopt these provisions as of the fiscal year beginning on October 2, 2017. 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 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. As such, Optex Systems Holdings
adopted these provisions for the annual period ending October 1, 2017. There was no material effect on Optex Systems Holdings’
financial statements of as a result of adoption of FASB ASU 2014-15.
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. FASB deferred the effective
date of ASU 2014-09 in August 2015, with 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. 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. As such, Optex Systems Holdings is required to adopt these provisions as of the fiscal year
beginning on October 1, 2018. Optex Systems Holdings is currently evaluating the impact of FASB ASU 2014-09 and subsequent amendments
but does not expect the adoption thereof to have a material effect on Optex Systems Holdings’ financial statements.
Note 4 Segment Reporting
Optex Systems
Holdings, Inc. has two reportable segments which include Optex Systems (OPX)-Richardson, and Applied Optics Center (AOC) –
Dallas. The accounting policies for each segment are the same as those described in the summary of significant accounting policies.
Optex Systems Holdings, Inc. evaluates performance based on profit and loss from operations before income taxes excluding nonrecurring
gains and losses.
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 1, 2017,
approximately 100% of Optex Systems – Richardson revenues were in support of prime and subcontracted military customers.
The Optex Systems segment serves domestic military customers, 87%, and foreign military customers, 13%. The Optex Systems segment
revenue for the year ending October 1, 2017 was derived from external customers consisting of the U.S. government, 60%, General
Dynamics, 29%, 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 1, 2017, the Richardson facility
operated with 62 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,
Harris Corp and others. AOC also creates a new sector of opportunity for commercial products
.
Globally,
commercial optical products use thin film coatings to create product differentiation and performance levels. These coatings can
be used for redirecting light (mirrors), blocking light (laser protection), absorbing select light (desired wavelengths), and many
other combinations. They are used in telescopes, rifle scopes, binoculars, microscopes, range finders, protective eyewear, photography,
etc. The Applied Optics Center is a key supplier to Nightforce Optics, Inc. and provides optical assembly components to their markets
of interest in commercial sporting optics and select military optics. Given this broad potential, the commercial applications are
a key opportunity going forward. The Applied Optics Center segment also serves as the key supplier of the laser coated filters
used in the production of periscope assemblies at the Optex Systems Richardson segment.
The Applied Optics Center serves primarily
domestic U.S. customers. Approximately 81% of the Applied Optics Center revenue for the year ending October 1, 2017 was derived
from external customers consisting of Nightforce Optics, Inc., 56%, Harris Corp., 17%, L3 Communications, 11%, the U.S. government,
5%, and other external customers, 11%. Sales to commercial customers represent 60% and military sales to prime and subcontracted
customers represent 40% of the total segment revenue. Intersegment sales to Optex Systems – Richardson during the year ended
October 1, 2017, comprised 19% 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 44,867 square feet of space. As of October 1, 2017, 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, stock compensation associated with restricted stock units, or unusual items
to segments.
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
Twelve months ending October 1, 2017
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
Other
(non allocated costs and intersegment eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
11,256
|
|
|
$
|
7,291
|
|
|
$
|
—
|
|
|
$
|
18,547
|
|
Intersegment revenues
|
|
|
—
|
|
|
|
1,694
|
|
|
|
(1,694
|
)
|
|
|
—
|
|
Total Revenue
|
|
$
|
11,256
|
|
|
$
|
8,985
|
|
|
$
|
(1,694
|
)
|
|
$
|
18,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
56
|
|
|
$
|
281
|
|
|
$
|
—
|
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
$
|
338
|
|
|
$
|
46
|
|
|
$
|
(688
|
)
|
|
$
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(776
|
)
|
|
$
|
776
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss on change in fair value of warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
489
|
|
|
$
|
489
|
|
Stock compensation expense (1)
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
180
|
|
|
$
|
220
|
|
Royalty expense amortization
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,663
|
|
|
$
|
5,364
|
|
|
$
|
—
|
|
|
$
|
14,027
|
|
Expenditures for segment assets
|
|
$
|
(23
|
)
|
|
$
|
(126
|
)
|
|
$
|
—
|
|
|
$
|
(149
|
)
|
(1) General and administrative expenses for the twelve months ending October 1, 2017 of $180 thousand,
associated with amortized stock compensation attributeable to executive/director restricted stock units has been restated
from Optex Richardson to Other non allocated costs. Operating income (loss) for Optex Richardson and Other non allocated has
been restated to reflect the change.
|
|
|
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 expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
73
|
|
|
$
|
272
|
|
|
$
|
—
|
|
|
$
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes(1)
|
|
$
|
285
|
|
|
$
|
(345
|
)
|
|
$
|
(148
|
)
|
|
$
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(728
|
)
|
|
$
|
728
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(Gain) on change in fair value of warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(739
|
)
|
|
$
|
(739
|
)
|
Stock option compensation expense(1)
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
140
|
|
|
$
|
192
|
|
Royalty expense amortization
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Use of contract loss reserves
|
|
$
|
—
|
|
|
$
|
(54
|
)
|
|
$
|
—
|
|
|
$
|
(54
|
)
|
Warrants issued for underwriter expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
156
|
|
|
$
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
8,861
|
|
|
$
|
3,900
|
|
|
$
|
—
|
|
|
$
|
12,761
|
|
Expenditures for segment assets
|
|
$
|
(16
|
)
|
|
$
|
(18
|
)
|
|
$
|
—
|
|
|
$
|
(34
|
)
|
(1) General and administrative expenses for the twelve months ending October 2, 2016 of $140 thousand,
associated with amortized stock compensation attributeable to executive/director restricted stock units has been restated
from Optex Richardson to Other non allocated costs. Operating income (loss) for Optex Richardson and Other non allocated has
been restated to reflect the change.
|
Note 5 — Property and Equipment
A summary of property and equipment
at October 1, 2017 and October 2, 2016 is as follows:
|
|
|
|
(Thousands)
|
|
|
|
Estimated Useful Life
|
|
Year Ended
October 1, 2017
|
|
|
Year Ended
October 2, 2016
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
Furniture and Fixtures
|
|
3-5yrs
|
|
$
|
368
|
|
|
$
|
356
|
|
Machinery and Equipment
|
|
5 yrs
|
|
|
3,364
|
|
|
|
3,233
|
|
Leasehold Improvements
|
|
7 yrs
|
|
|
276
|
|
|
|
276
|
|
Less: Accumulated Depreciation
|
|
|
|
|
(2,548
|
)
|
|
|
(2,214
|
)
|
Net Property & Equipment
|
|
|
|
$
|
1,460
|
|
|
$
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
|
|
$
|
337
|
|
|
$
|
345
|
|
During the twelve
months ending October 1, 2017, Optex Systems Holdings’ purchased $12 thousand and $137 thousand in new furniture and fixtures
and new machinery and equipment, respectively, and sold machinery and equipment with a net book value of $3 thousand for $41 thousand
in proceeds resulting in a gain on asset sales of $38 thousand.
Note 6 —
Accrued Expenses
The components
of accrued liabilities for the years ended October 1, 2017 and October 2, 2016 are summarized below:
|
|
(Thousands)
|
|
|
|
Year Ended
October 1,
2017
|
|
|
Year Ended
October 2,
2016
|
|
|
|
|
|
|
|
|
Deferred Rent Expense
|
|
$
|
123
|
|
|
$
|
108
|
|
Accrued Vacation
|
|
|
328
|
|
|
|
330
|
|
Property Taxes
|
|
|
105
|
|
|
|
101
|
|
Operating Expenses
|
|
|
778
|
|
|
|
144
|
|
Payroll & Payroll Related
|
|
|
116
|
|
|
|
127
|
|
Total Accrued Expenses
|
|
$
|
1,450
|
|
|
$
|
810
|
|
Note 7 — 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 inflationary increases
between 3.4% and 4.8% occurring each year beginning in 2016.
The leased facility under the Applied Optics
Center at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet of space at the premises. On November 17,
2016, we received a countersigned new lease for the Applied Optics Center from the landlord, dated October 21, 2016, and which
commenced retroactive to October 1, 2016. The new lease term will expire on October 31, 2021, with two renewal options available
to the tenant, each with a renewal term duration of five years. The monthly base rent is $19.4 thousand through September
30, 2017 and escalates approximately 3% October 1, each year thereafter through 2021. The lease includes a one month base rent
abatement for October 1 through October 31, 2016 for $19.4 thousand. 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 total monthly rent including CAM is $24.3 thousand beginning November 1, 2016. Our obligations to make payments under the lease
are secured by a $250,000 standby letter of credit which we may be reduced to $125,000 on October 31, 2019.
As of October 1, 2017 the unamortized deferred
rent was $123 thousand as compared to $108 thousand as of October 2, 2016. Deferred rent expense is amortized monthly over the
life of the leases.
As of October 1, 2017, 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
|
|
|
|
|
Fiscal Year
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Lease
Payments
|
|
|
CAM
Estimate
|
|
|
Total
Payments
|
|
2018
|
|
$
|
271
|
|
|
$
|
108
|
|
|
$
|
240
|
|
|
$
|
60
|
|
|
$
|
679
|
|
2019
|
|
|
281
|
|
|
|
110
|
|
|
|
248
|
|
|
|
61
|
|
|
|
700
|
|
2020
|
|
|
291
|
|
|
|
112
|
|
|
|
255
|
|
|
|
62
|
|
|
|
720
|
|
2021
|
|
|
147
|
|
|
|
57
|
|
|
|
262
|
|
|
|
63
|
|
|
|
529
|
|
2022
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
|
5
|
|
|
|
27
|
|
Total minimum lease payments
|
|
$
|
990
|
|
|
$
|
387
|
|
|
$
|
1,027
|
|
|
$
|
251
|
|
|
$
|
2,655
|
|
Total expense under both
facility lease agreements as of the twelve months ended October 1, 2017 was $655 thousand. Total expense under both facility lease
agreements as of the twelve months ended October 2, 2016 was $627 thousand.
Note 8 —
Transactions with a Related Party
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.
On October 31, 2016, Longview Fund L.P.
authorized the return to Optex Systems Holdings’ treasury of 197,299 common shares, held by Sileas Corporation in settlement
of $155 thousand of accounts receivable due for expenses paid by Optex Systems Inc. on behalf of the Sileas Corporation. The shares
were subsequently cancelled in satisfaction of the outstanding accounts receivable balance as of October 31, 2016. As of October
1, 2017, and October 2, 2016, accounts receivable included $0 and $132 thousand, respectively of non-trade receivables due from
Sileas Corporation, a related party, for operating expenses paid by Optex Systems on their behalf.
On April 27, 2017, the Board of Directors of Optex Systems Holdings
approved a purchase of 700,000 shares of its common stock in a private transaction from The Longview Fund, L.P. The transaction
was priced at the closing sale price on April 28, 2017 of $0.74 per share for a total transaction amount of $518,000. Upon repurchase
on May 1, 2017, the shares were cancelled thereby reducing the total shares outstanding of its common stock.
There were no
other transactions with Related Parties during fiscal years 2017 or 2016 except as described below in Note 9 Debt Financing.
Note 9 — 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.
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 then new majority owner of Optex Systems, Inc. (Delaware),
executed and delivered to Longview, a Secured Promissory Note due February 20, 2012 in the original principal amount of $13,524,405.
The original 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. The maturity date of the Note was extended on November 22, 2011 and again on November 27, 2013. In exchange for
the extensions, Sileas Corp. agreed to pay the Longview Fund an extension fee equal to 2% of the principal amount of this Secured
Note as of each amendment date.
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.
|
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. These additional shares have been retroactively reflected in the ending common shares outstanding as of October
2, 2016.
On May 1, 2017, The Longview Fund, L.P.
converted $0.8 million of the Sileas Corp.(a related party) note principal in exchange for 700,000 shares of Optex Systems Holdings
common stock. The Sileas Corp. note balance to The Longview Fund, L.P. as of May 1, 2017, after conversion, is $14.2 million.
On June 9, 2017, Sileas Corp. (“Sileas”),
a related party to the Company, entered into a transaction with The Longview Fund, L.P.(“Longview”) to settle its February
20, 2009 note with Longview in the original principal amount of $13,524,405 (the “Note”). The parties agreed to a conversion
by Longview of $3,358,538 of the amount due under the Note into 2,798,782 shares of Company common stock owned by Sileas and previously
pledged to Longview as security with respect to the Note. Simultaneously therewith, Sileas made a $250,000 cash payment to Longview,
and Longview agreed to satisfy $10,571,791 of the amount due under the Note. The remaining amount due under the Note is $64,000
which shall be paid in cash by Sileas to Longview on a quarterly basis, upon the payment of quarterly dividends by the Company,
over the next four calendar quarters commencing on or about June 30, 2017. In order to effect the above, Longview also released
the pledge on all Company shares owned by Sileas and previously pledged to Longview. The Sileas Corp. note balance to The Longview
Fund, L.P. as of October 1, 2017 is $48 thousand.
Simultaneously with the above on June
9, 2017, Sileas sold 800,000 shares of Company common stock to Danny Schoening and Karen Hawkins at a price equal to $314,000 (which
is a discounted amount based upon recognition of years of administrative support by Mr. Schoening and Ms. Hawkins for the Company)
as follows: (i) Danny Schoening: 640,000 Shares for $200,000 plus a $50,825 promissory note; and (ii) Karen Hawkins: 160,000 Shares
for $50,000 plus a $12,706 promissory note. Each promissory note has a one year term, with interest at 1.18% per annum and shall
be payable in four equal quarterly installments of $12,800 for Danny Schoening and $3,200 for Karen Hawkins, each installment payable
within five business days after the payment of cash dividends by the Company to each of them. As a result, Sileas no longer owns
any shares of Company common stock.
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.
|
|
|
|
The Company amended
its revolving credit facility with Avidbank on October 17, 2016 from $2 million to $2.2 million. The interest rate for all advances
against the line of credit shall be the then in effect prime rate plus 2.5% and is subject to a minimum interest payment requirement
per nine month period of $10,000. The renewable revolving maturity date is January 22, 2018 and is secured by a first lien on all
of its assets in favor of 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.
As of October
1, 2017 and October 2, 2016, the outstanding principal balance on the line of credit was $300 thousand. For the years ended October
1, 2017 and October 2, 2016, the total interest expense against the outstanding line of credit balance was $20 thousand and $36
thousand.
Note 10 —
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 1, 2017, 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
|
|
Options
|
|
|
Exercise
|
|
|
Options Outstanding
|
|
|
Expiration
|
|
Vesting
|
Grant
|
|
Granted
|
|
|
Price
|
|
|
As of 10/01/17
|
|
|
Date
|
|
Period
|
12/09/11
|
|
|
46,070
|
|
|
$
|
10.00
|
|
|
|
35,010
|
|
|
12/08/2018
|
|
4 years
|
12/19/13
|
|
|
25,000
|
|
|
$
|
10.00
|
|
|
|
25,000
|
|
|
12/18/2020
|
|
4 years
|
Total
|
|
|
71,070
|
|
|
|
|
|
|
|
60,010
|
|
|
|
|
|
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):
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Remaining
|
|
|
Fair
|
|
|
Average
|
|
|
Value
|
|
Subject to Exercise
|
|
Options
|
|
|
Value
|
|
|
Life (Years)
|
|
|
(Thousands)
|
|
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
|
|
|
$
|
—
|
|
Granted – 2017
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited – 2017
|
|
|
(330)
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Exercised – 2017
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Outstanding as of October 1, 2017
|
|
|
60,010
|
|
|
$
|
—
|
|
|
|
0.76
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of October 2, 2016
|
|
|
52,840
|
|
|
$
|
—
|
|
|
|
1.07
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of October 1, 2017
|
|
|
56,260
|
|
|
$
|
—
|
|
|
|
.60
|
|
|
$
|
—
|
|
There were no options granted in the twelve
months ended October 1, 2017 and October 2, 2016.
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 Options
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
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
|
|
|
(12,574
|
)
|
|
|
7.33
|
|
Forfeited — year ended October 2, 2016
|
|
|
(2,518
|
)
|
|
|
—
|
|
Non-vested as of October 2, 2016
|
|
|
7,500
|
|
|
$
|
8.00
|
|
Non-vested granted — year ended October 1, 2017
|
|
|
—
|
|
|
|
—
|
|
Vested — year ended October 1, 2017
|
|
|
(3,750
|
)
|
|
|
8.00
|
|
Forfeited — year ended October 1, 2017
|
|
|
—
|
|
|
|
—
|
|
Non-vested as of October 1, 2017
|
|
|
3,750
|
|
|
$
|
8.00
|
|
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.
On June 15, 2017,
the Company issued 50,000 RSUs to its Applied Optics Center General Manager and new board member, Bill Bates. Pursuant to the RSU
agreements the RSUs issued to Mr. Bates will vest as follows: 34% on January 1, 2018, 33% on January 1, 2019 and 33% on January
1, 2020. The total market value of the restricted stock units based on the shares price of $0.95 as of June 15, 2016 is $47.5 thousand.
The cost of the shares is amortized on a straight line basis across the vesting periods.
The following
table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock units granted under the
Company’s 2016 Restricted Stock Unit Plan:
|
|
|
Outstanding Unvested RSU’s
|
|
Granted - year ended 2016
|
|
|
|
200,000
|
|
Vested 2016 - year ended 2016
|
|
|
|
—
|
|
Unvested as of October 2 ,2016
|
|
|
|
200,000
|
|
Granted - year ended 2017
|
|
|
|
50,000
|
|
Vested - year ended 2017
|
|
|
|
(68,000
|
)
|
Unvested as of October 1, 2017
|
|
|
|
182,000
|
|
On January 4, 2017, Optex Systems Holdings
issued 45,799 common shares related to the vesting of the 68,000 restricted stock units on January 1, 2017. The shares issued were
net of 22,201 common shares withheld for employee federal income tax requirements.
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. 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 1, 2017.
Stock Based Compensation Expense
Equity
compensation is amortized based on a straight line basis across the vesting or service period as applicable. The recorded compensation
costs for options and shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized
in the table below:
|
|
Stock Compensation
|
|
|
|
(thousands)
|
|
|
|
Recognized Compensation Expense
|
|
|
Unrecognized Compensation Expense
|
|
|
|
Twelve months ended
|
|
|
As of period ending
|
|
|
|
October 1, 2017
|
|
|
October 2, 2016
|
|
|
October 1, 2017
|
|
|
October 2, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
40
|
|
|
$
|
52
|
|
|
$
|
8
|
|
|
$
|
48
|
|
Restricted Stock Units
|
|
|
133
|
|
|
|
93
|
|
|
|
194
|
|
|
|
279
|
|
Consultant Shares (IRTH)
|
|
|
47
|
|
|
|
47
|
|
|
|
—
|
|
|
|
47
|
|
Total Stock Compensation
|
|
$
|
220
|
|
|
$
|
192
|
|
|
$
|
202
|
|
|
$
|
374
|
|
Note 11 —
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 1, 2017 and October 2, 2016, 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 1, 2017 and October 2, 2016 were $130 thousand and $133 thousand, respectively.
Note 12 —
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
October 2, 2016 and October 1, 2017, respectively.
|
|
|
Optex Systems Holdings Inc.
Stockholder Equity Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Warrants
|
|
Shares outstanding as of September 27, 2015
|
|
|
314,867
|
|
|
|
1,001
|
|
|
|
994
|
|
|
|
—
|
|
|
|
|
|
Preferred share conversions to common shares
|
|
|
5,619,587
|
|
|
|
(935
|
)
|
|
|
(198
|
)
|
|
|
(40
|
)
|
|
|
|
|
DTC roundup correction
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares for IRTH consulting
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Public offering issuances of common and Preferred C shares
(1)
|
|
|
2,291,900
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
|
|
3,958,700
|
|
Underwriter warrants issued with public offering
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,500
|
|
Preferred share redemptions for cash
(2)
|
|
|
—
|
|
|
|
(66
|
)
|
|
|
(796
|
)
|
|
|
|
|
|
|
|
|
Shares outstanding as of October 2, 2016
|
|
|
8,266,601
|
|
|
|
—
|
|
|
|
—
|
|
|
|
360
|
|
|
|
4,125,200
|
|
Preferred share conversions to common shares
|
|
|
775,000
|
|
|
|
|
|
|
|
|
|
|
|
(186
|
)
|
|
|
|
|
Common shares issued for vested restricted stock units, net of tax withheld
|
|
|
45,799
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Common stock repurchase
|
|
|
(700,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Common stock received and cancelled in settlement accounts receivable
|
|
|
(197,299
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Shares outstanding as of October 1, 2017
|
|
|
8,190,101
|
|
|
|
—
|
|
|
|
—
|
|
|
|
174
|
|
|
|
4,125,200
|
|
(1) 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. In connection with the
offering, 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.
(2) On August
26, 2016, 66 Series A and 796 Series B preferred shares were redeemed for $1.75 million, as a condition of the public offering
Dividends
On June 26, 2017, the board of directors approved a resolution
authorizing a $0.02 per share (and per warrant) dividend payment on July 12, 2017, for common and preferred series C shareholders
and warrant holders of record as of July 5, 2017 and for three subsequent quarterly record dates thereafter. Quarterly dividends
of $261 thousand were paid out to share and warrant holders on July 12, 2017. Optex recorded an additional $261 thousand in dividends
payable as of October 1, 2017 for the fourth quarter declared dividends which were paid on October 19, 2017. There were no dividends
declared or paid for year ending October 2, 2016.
Common stock
As of October
2, 2016, 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 10). As of October 2, 2016, the outstanding common shares are 8,266,601.
On October 31, 2016, Longview Fund L.P.
authorized the return to Optex Systems Holdings’ treasury of 197,299 common shares, held by Sileas Corporation in settlement
of $155 thousand of accounts receivable due for expenses paid by Optex Systems Inc. on behalf of the Sileas Corporation. The shares
were subsequently cancelled in satisfaction of the outstanding accounts receivable balance as of October 31, 2016.
On April 27, 2017, the Board of Directors
of Optex Systems Holdings approved a purchase of 700,000 shares of its common stock in a private transaction from The Longview
Fund, L.P. The transaction was priced at the closing sale price on April 28, 2017 of $0.74 per share for a total transaction amount
of $518,000. Upon repurchase on May 1, 2017, the shares were cancelled thereby reducing the total shares outstanding of its common
stock.
During the twelve months ending October
1, 2017, Optex Systems Holdings issued 775,000 common shares due to conversions of Series C preferred stock, and 45,799 common
shares were issued related to the vesting of restricted stock units. There were no other issuances of common or preferred stock
during the twelve months ended October 1, 2017. As of October 1, 2017, the outstanding common shares were 8,190,101.
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: $1.20 per share, as adjusted from time
to time; and (v) voting rights: votes along with the common stock on an as converted basis with one vote per share (vi) par value
$0.001 per share. 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.
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 in effect
as of the conversion date. 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.
Optex Systems Holdings had 1,001 of preferred
shares outstanding as of September 28, 2015. During the twelve months ending October 2, 2016 there were conversions of 935 preferred
Series A shares, or $6.4 million, into 5,318,896 common shares, and cash redemptions for $0.5 million of 66 Series A preferred
shares. During the twelve months ending October 2, 2016, Optex System Holdings recognized a $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 October
1, 2017 there were no conversions and no new issues of Series A preferred shares. Optex Systems Holdings had zero preferred shares
outstanding as of October 1, 2017.
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:
$1.20 per share, as adjusted from time to time; (v) voting rights: votes along with the common stock on an as converted basis with
one vote per share; and (vi) par value of $0.001 per share.
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 in effect
as of the conversion date. 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.
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.
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 $1.3 million. As of October 2, 2016 and October 1, 2017 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.
During the twelve months ending October 2, 2016, Optex System
Holdings recognized an additional $0.4 million adjustment to retained earnings for dividends due to a beneficial conversion feature
on 400 Series C preferred shares, whereas the effective accounting conversion price at inception, after allocation of warrant proceeds
was $0.27 and was “in the money” as it was significantly below the then current market price of $0.94 per common share
as of the public offering on August 26, 2016.
During the twelve months ending October
12, 2017, there were no new issues of preferred Series C shares, and conversions of 186 preferred Series C shares, or $0.9 million,
into 775,000 common shares. As of October 1, 2017 there were 174 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 1, 2017, zero warrants had been exercised. As of October 1, 2017 the outstanding warrants were 4,125,200.
Note 13 —
Warrant Liabilities
On August 26, 2016, Optex Systems Holdings
Inc. issued 4,125,200 warrants to new shareholders and the underwriter, in connection with a public share offering. The warrants
entitle the holder to purchase one share of our common stock at an exercise price equal to $1.50 per share at any time on or after
August 26, 2016 (the “Initial Exercise Date”) and on or prior to the close of business on August 26, 2021 (the “Termination
Date”). The Company determined that these warrants are free standing financial instruments that are legally detachable and
separately exercisable from the common stock included in the public share offering. Management also determined that the warrants
are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability
pursuant to ASC 480
“Distinguishing Liabilities from Equity”
. In accordance with the accounting guidance,
the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair
value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement
of operations.
The proceeds of the offering are allocated between the common
stock, Series C preferred shares and warrant liability as of the initial measurement as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
Thousands, except share and per share data)
|
|
|
|
|
|
As of August 26, 2016
|
|
Common Shares
|
|
|
Series C Preferred Shares
|
|
|
Total
|
|
|
Underwriter Warrants*
|
|
|
Warrant Liability*
|
|
Shares
|
|
|
2,291,900
|
|
|
|
400
|
|
|
|
|
|
|
|
166,500
|
|
|
|
4,125,200
|
|
Price per share
|
|
$
|
1.20
|
|
|
$
|
5,000
|
|
|
|
|
|
|
$
|
0.9349
|
|
|
$
|
0.9349
|
|
Proceeds received
|
|
$
|
2,750
|
|
|
$
|
2,000
|
|
|
$
|
4,750
|
|
|
|
|
|
|
|
|
|
Less: Warrant liability at fair value
|
|
|
(2,142
|
)
|
|
|
(1,558
|
)
|
|
|
(3,700
|
)
|
|
$
|
(156
|
)
|
|
$
|
(3,856
|
)
|
Residual proceeds to shares
|
|
$
|
608
|
|
|
$
|
442
|
|
|
$
|
1,050
|
|
|
|
|
|
|
|
|
|
The fair value of the warrant liabilities
was measured using a binomial lattice model. Significant inputs into the model at the inception and reporting period measurement
dates are as follows:
Binomial Assumptions
|
|
Issuance date
(1)
August 26, 2016
|
|
|
Period ending
October 2, 2016
|
|
|
Period ending
October 1, 2017
|
|
Exercise Price
(1)
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
Warrant Expiration Date
(1)
|
|
|
August 26, 2021
|
|
|
|
August 26, 2021
|
|
|
|
August 26, 2021
|
|
Stock Price
(2)
|
|
$
|
0.95
|
|
|
$
|
0.77
|
|
|
$
|
0.98
|
|
Interest Rate (annual)
(3)
|
|
|
1.23
|
%
|
|
|
1.14
|
%
|
|
|
1.62
|
%
|
Volatility (annual)
(4)
|
|
|
246.44
|
%
|
|
|
242.17
|
%
|
|
|
179.36
|
%
|
Time to Maturity (Years)
|
|
|
5.0
|
|
|
|
4.9
|
|
|
|
3.9
|
|
Number of Steps (Quarters)
|
|
|
20
|
|
|
|
20
|
|
|
|
16
|
|
Calculated fair value per share
|
|
$
|
0.93
|
|
|
$
|
0.76
|
|
|
$
|
0.87
|
|
Quarterly Dividend per share for Next Three Quarters
(5)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.02
|
|
Future Estimated Quarterly Dividend per share
(6)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.01
|
|
(
1) Based on the terms provided
in the warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26, 2016.
(2) Based on the trading
value of common stock of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending date.
(3) Interest rate for U.S. Treasury Bonds, as
of August 26, 2016 and each presented period ending date, as published by the U.S. Federal Reserve.
(4) Based on the historical
daily volatility of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending date.
(5) Pursuant to June 12,
2017 Board of Directors authorization of a $0.02 per share (and per warrant) dividend payment in July for shareholders and warrant
holders of record on July 5, 2017 and for three subsequent quarterly record dates thereafter.
(6) Current estimated dividend
payments beyond initial four quarters. At a future date, the company will review the working capital needs and make a final determination
of any future dividend payments and amounts beyond the initial four quarter payments.
The warrants outstanding and fair values
at each of the respective valuation dates are summarized below:
Warrant Liability
|
|
Warrants
Outstanding
|
|
|
Fair Value
per Share
|
|
|
Fair Value (000’s)
|
|
Fair Value at initial measurement date of 8/26/2016
|
|
|
4,125,200
|
|
|
$
|
0.93
|
|
|
$
|
3,857
|
|
(Gain) on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
(739
|
)
|
Fair Value as of period ending 10/2/2016
|
|
|
4,125,200
|
|
|
$
|
0.76
|
|
|
$
|
3,118
|
|
Loss on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
489
|
|
Fair Value as of period ending 10/1/2017
|
|
|
4,125,200
|
|
|
$
|
0.87
|
|
|
$
|
3,607
|
|
During the twelve months ending October 1, 2017 Optex Systems
Holdings recorded a loss on changes in fair value of warrant liability of $489 thousand. During the twelve months ending October
2, 2016, Optex Systems Holdings recognized a gain on change in fair value of warranty liabilities of ($739) thousand. During the
twelve months ending October 1, 2017 and October 2, 2016 none of the warrants have been exercised.
The warrant liabilities are considered
Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various assumptions about of future
activities and the Company’s stock prices and historical volatility as inputs.
Note 14 —
Income Taxes
The income tax
provisions as of October 1, 2017 and October 2, 2016 include the following:
|
|
(Thousands)
|
|
|
|
2017
|
|
|
2016
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
76
|
|
|
|
(65
|
)
|
State
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(76
|
)
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Provision for (Benefit from) income taxes, net
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
The income tax
provision for Optex Systems as of October 1, 2017 differs from those computed using the statutory federal tax rate of 34%, due
to the following permanent differences:
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit) at statutory federal rate
|
|
$
|
63
|
|
|
|
34
|
|
|
$
|
(80
|
)
|
|
|
34
|
|
Nondeductible expenses
|
|
|
13
|
|
|
|
7
|
|
|
|
15
|
|
|
|
25
|
|
Change in valuation and other
|
|
|
(76
|
)
|
|
|
(41
|
)
|
|
|
65
|
|
|
|
(59
|
)
|
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 1,
2017
|
|
|
As of
October 2,
2016
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
$
|
382
|
|
|
$
|
308
|
|
Inventory Reserve
|
|
|
321
|
|
|
|
332
|
|
Unicap
|
|
|
50
|
|
|
|
41
|
|
Deferred Compensation
|
|
|
55
|
|
|
|
—
|
|
Contract Loss Reserve
|
|
|
(279
|
)
|
|
|
(279
|
)
|
Fixed assets
|
|
|
130
|
|
|
|
89
|
|
Goodwill Amortization
|
|
|
1,128
|
|
|
|
1,289
|
|
Intangible Asset Amortization
|
|
|
549
|
|
|
|
641
|
|
Net Operating Losses
|
|
|
2,210
|
|
|
|
2,244
|
|
Other
|
|
|
30
|
|
|
|
(14
|
)
|
Subtotal
|
|
$
|
4,576
|
|
|
$
|
4,651
|
|
Valuation allowance
|
|
|
(4,576
|
)
|
|
|
(4,651
|
)
|
Net deferred asset (liability)-long term
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
As of October
1, 2017, the Company has a net operating loss carryforward of $6,503 thousand as compared to net loss carryforwards of $6,601 thousand
available as of October 2, 2016.
As of October 1, 2017 management assessed
the recoverability of deferred tax assets and determined due to historical 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 $75 thousand
during the twelve months ended October 1, 2017, consistent with the 2017 change in deferred tax assets. As of October 1, 2017 Optex
Systems Inc. has a deferred tax asset valuation allowance of ($4.6) million against a deferred tax asset of $4.6 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 1, 2017, October 2, 2016 and September 27, 2015 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 1, 2017 or October 2, 2016.
Note 15 —
Subsequent Events
On November 15, 2017 there were 48 Series C preferred shares
converted into 200,000 shares of common stock at the Conversion price of $1.20, or $240 thousand. On December 18, 2017 there were 48 Series C preferred shares converted into 200,000 shares of common stock at the conversion price of $1.20, or $240 thousand. After the conversions, there are
78 Series C preferred shares and 8,590,101 common shares outstanding.