Item
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion should be read in conjunction with the consolidated financial statements and the related notes that are set
forth in our financial statements elsewhere in this annual report.
This
management’s discussion and analysis reflects information known to management as of our fiscal year end, September 30, 2018,
and the date of filing. This MD&A is intended to supplement and complement our audited financial statements and notes thereto
for the year ended September 30, 2018, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are
encouraged to read our financial statements in conjunction with your reading of this MD&A. The financial information in this
MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures
as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally
for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial
results as supplemental information, as we believe their use provides more insight into our performance. When a non-GAAP measure
is used in this MD&A, it is clearly identified as a non-GAAP measures and reconciled to the most closely corresponding GAAP
measure.
The
following discussion highlights the principal factors that have affected our financial condition and results of operations as
well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements.
Please see “Special cautionary statement concerning forward-looking statements” and “Risk factors” for
a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results
for the periods presented were not significantly affected by inflation.
Background
Optex Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies, primarily for Department of Defense applications.
Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles,
light armored and armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems,
Inc. (Delaware) also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision
optical assemblies. Optex Systems, Inc. (Delaware) products consist primarily of build-to-customer print products that are delivered
both directly to the armed services and to other defense prime contractors. Less than 1% of today’s revenue is related to
the resale of products substantially manufactured by others. In this case, the product would likely be a simple replacement part
of a larger system previously produced by Optex Systems, Inc. (Delaware).
We
are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major
defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE, NorcaTec and others. We are also a military supplier
to foreign governments such as Israel, Australia and NAMSA and South American countries and as a subcontractor for several large
U.S. defense companies serving foreign governments.
By
way of background, the Federal Acquisition Regulation is the principal set of regulations that govern the acquisition process
of government agencies and contracts with the U.S. government. In general, parts of the Federal Acquisition Regulation are incorporated
into government solicitations and contracts by reference as terms and conditions effecting contract awards and pricing solicitations
.
Many
of our contracts are prime or subcontracted directly with the Federal government and, as such, are subject to 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 our prime military contracts and generally apply to us as
subcontractors. It has been our experience that the termination for convenience is rarely invoked, except where it is mutually
beneficial for both parties. We are currently not aware of any pending terminations for convenience or for default on our existing
contracts.
In
the event a termination for convenience were to occur, Federal Acquisition Regulation clause 52.249-2 provides for full recovery
of all contractual costs and profits reasonably occurred up to and as a result of the terminated contract. In the event a termination
for default were to occur, we could be liable for any excess cost incurred by the government to acquire supplies from another
supplier similar to those terminated from us. We would not be liable for any excess costs if the failure to perform the contract
arises from causes beyond the control and without the fault or negligence of the company as defined by Federal Acquisition Regulation
clause 52.249-8.
In
addition, some of our contracts allow for government contract financing in the form of contract progress payments pursuant to
Federal Acquisition Regulation 52.232-16, “Progress Payments”. As a small business, and subject to certain limitations,
this clause provides for government payment of up to 90% of incurred program costs prior to product delivery. To the extent our
contracts allow for progress payments, we intend to utilize this benefit, thereby minimizing the working capital impact on Optex
Systems Holdings for materials and labor required to complete the contracts.
Recent
Orders
●
|
On February
19, 2018, we announced we have
been awarded three separate multi-year Indefinite
Delivery Indefinite Quantity (IDIQ) awards through Defense Logistics Agency (DLA) for Laser Protected Periscopes for a total
combined amount of up to $7.7 million over a 3-5 year period.
|
●
|
On March
27, 2018, we announced we have
been awarded a $1.62 million purchase order as part
of a multi-year strategic supplier agreement with a domestic manufacturer of premium optical devices.
|
|
●
|
On
September 10, 2018,
we announced we have been awarded
over $7 million in new contracts to date during the fourth fiscal quarter of 2018.
The majority of these contracts are for Laser Protected Periscopes but also contain Non-Laser
Protected Periscopes and various Sighting Systems.
|
|
●
|
On
November 19, 2018, the Company announced a follow on $0.9 million order from an international
customer for its patented Digital Day Digital Night (DDAN) Weapon System with deliveries
through 2021.
|
|
●
|
On
November 26, 2018, the Company announced a $1.9 million order from Defense Logistics
Agency Land and Maritime for Laser Protected Periscopes for delivery in 2019 and 2020.
|
Recent
Events
Stock
Repurchases
On
May 16, 2018, we announced that our Board of Directors has approved a purchase of 200,000 shares of its common stock in a private
transaction. The transaction was priced at $1.00 per share for a total transaction amount of $200,000.
On
July 10, 2018, we announced that our Board of Directors has approved a purchase of 500,000 shares of its common stock in a private
transaction. The transaction was priced at $1.00 per share for a total transaction amount of $500,000.
Upon
repurchase in the aforementioned transactions, the shares were returned to treasury thereby reducing
the
total outstanding common stock.
Sileas
Corp.
On
June 9, 2017, Sileas Corp. (“Sileas”), a related party to us, 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 cancel debt of $10,571,791 due under the Note. The remaining
amount due under the Note was $64,000 which was paid quarterly in cash by Sileas to Longview, over the four calendar quarters
commencing on or about June 30, 2017. In order to effect the above, Longview also released the pledge on all of our shares owned
by Sileas and previously pledged to Longview.
Simultaneously
with the above, Sileas sold 800,000 shares of our 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. The
notes were paid in full as of April 30, 2018. As a result, Sileas no longer owns any shares of our common stock.
Changes
to the Board of Directors
On
January 15, 2018, Owen Naccarato resigned as a director and member of our Audit Committee.
Executive
and Board Compensation
On
June 9, 2017, through Unanimous Written Consent, the Board of Directors amended Danny Schoening’s employment agreement to
increase his annual bonus from a maximum of 30% to 60% of his base salary and entered into a consulting agreement with Peter Benz
to provide advisory services at the rate of $10,000 per month through December 2017.
On
June 14, 2017, through Unanimous Written Consent, the Board of Directors increased the monthly fee paid to the remaining independent
directors from $1,000 to $1,500 per month, effective immediately, and granted Bill Bates, the Applied Optics Center General Manager
and new board member 50,000 Restricted Stock Units (RSU’s). 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.
On
December 19, 2017, our Board of Directors approved a bonus payment of 60%, or $152.4 thousand of Danny Schoening’s base
salary, and 30%, or $55.7 thousand, of Karen Hawkins’ base salary for 2017 performance.
On
November 20, 2018 the Company’s executive compensation committee recommended and the board of directors approved executive
compensation as follows:
|
●
|
A
30% officer bonus of base salary to Danny Schoening and Karen Hawkins for fiscal year
2018 performance to be paid during December 2018. The bonuses of $76 thousand, and $56
thousand were paid to Danny Schoening and Karen Hawkins, respectively on December 7,
2018.
|
|
●
|
A
base salary increase of 8% for Danny Schoening and Karen Hawkins effective as of January
1, 2019.
|
|
●
|
The
issuance of 150,000 and 50,000 restricted stock units with a January 2, 2019 grant date,
to Danny Schoening and Karen Hawkins, respectively, and vesting as of January 1 each
year subsequent to the grant date over a three year period at a rate of 34% in year one,
and 33% each year thereafter.
|
Dividends
On
June 26, 2017, the board of directors approved a resolution authorizing a $0.02 per share (and per warrant) dividend payment on
July 12, 2017, for common and preferred series C shareholders and warrant holders of record as of July 5, 2017 and for three subsequent
quarterly record dates thereafter. Quarterly dividends of $261 thousand were paid out to share and warrant holders on July 12,
2017. Optex Systems Holdings recorded an additional $261 thousand in dividends payable as of October 1, 2017 for declared dividends
paid on October 19, 2017. During the nine months ended July 1, 2018, Optex Systems Holdings recorded $523 in declared dividends
for dividends paid to share and warrant holders of record as of January 12, 2018 and April 12, 2018. As of period ended July
1, 2018, there were no outstanding dividends payable. There are no additional dividend payments declared subsequent to the April
12, 2018 record date or anticipated dividend declarations for the remainder of the fiscal year.
Results
of Operations
Non
GAAP Adjusted EBITDA
We
use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the
performance of our business as “net income” includes the significant impact of noncash valuation gains and losses
on warrant liabilities, noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest
expenses and federal income taxes. We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because
it permits period-over-period comparisons of our ongoing core operations before the excluded items. Adjusted EBITDA is a financial
measure not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).
Adjusted
EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP.
This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry
may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA
as a comparative measure.
The
table below summarizes our twelve month operating results for periods ended September 30, 2018 and October 1, 2017,
in terms of both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both
measures allows the reader to have a “complete picture” of our overall performance.
|
|
(Thousands)
Twelve
months ended
|
|
|
|
September 30, 2018
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
Net Income (Loss) — GAAP
|
|
$
|
1,394
|
|
|
$
|
(304
|
)
|
Add:
|
|
|
|
|
|
|
|
|
(Gain) Loss on Change in Fair Value of Warrants
|
|
|
(95
|
)
|
|
|
489
|
|
Federal Income Tax Expense - Current
|
|
|
167
|
|
|
|
—
|
|
Depreciation
|
|
|
327
|
|
|
|
337
|
|
Stock Compensation
|
|
|
153
|
|
|
|
220
|
|
Royalty License Amortization
|
|
|
30
|
|
|
|
30
|
|
Interest Expense
|
|
|
20
|
|
|
|
19
|
|
Adjusted EBITDA - Non GAAP
|
|
$
|
1,996
|
|
|
$
|
791
|
|
Our
adjusted EBITDA increased by $1.2 million to $2.0 million during the twelve months ended September 30, 2018 as compared
$0.8 million during the twelve months ended October 1, 2017. EBITDA improvements are directly correlated with significant
increases in revenue, improvements in our gross margins, combined with cost reductions in general and administrative costs.
During the year, we experienced product revenue growth of 12.4% and improved gross margin percentages of 3.3% over the prior
year. In addition, we have reduced general and administrative expenses by 5.6% during the twelve months ended September 30,
2018 as compared to the prior year twelve months ended October 1, 2017. Each of our operating segments realized impressive
revenue growth, increases in gross margin and lower administrative costs from the prior year. Operating segment performance
is discussed in greater detail throughout the following sections.
During
the year ended September 30, 2018, we recognized a gain on the change in fair value of warrants of ($0.1) million as
compared to a loss of $0.5 million in the prior year ended October 1, 2017. As this is a non-cash gain driven by the current
fair market value of our outstanding warrants and unrelated to our core business operating performance, the gain has been
excluded from our adjusted EBITDA calculations presented above. Further discussion regarding the gain on changes in fair
value of the warrants and the related warrant liability can be found in Item 1, “Consolidated Financial Statements,
Note 13 - Warrant Liabilities”.
Segment
Information
We
have presented the operating results by segment to provide investors with an additional tool to evaluate our operating results
and to have a better understanding of the overall performance of each business segment and its ability to perform in subsequent
periods. Management of Optex Systems Holdings uses the selected financial measures by segment internally to evaluate its ongoing
segment operations and to allocate resources within the organization accordingly. Segments are determined based on differences
in products, location, internal reporting and how operational decisions are made. Management has determined that the Optex Systems,
Richardson plant, and the Applied Optics Center, Dallas plant, which was acquired on November 3, 2014, are separately managed,
organized, and internally reported as separate business segments. The table below provides a summary of selective statement of
operations data by operating segment for the years ended September 30, 2018 and October 1, 2017 reconciled to the Audited Consolidated
Results of Operations as presented in Item 8, “Financial Statements and Supplementary Data”.
|
|
Results of Operations Selected Financial Info by Segment
|
|
|
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended
|
|
|
|
September 30, 2018
|
|
|
October 1, 2017
|
|
|
|
Optex
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
Other
(non-allocated costs and eliminations)
|
|
|
Consolidated
|
|
|
Optex
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
Other
(non-allocated costs and eliminations)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from External Customers
|
|
$
|
12,739
|
|
|
$
|
8,114
|
|
|
$
|
—
|
|
|
$
|
20,853
|
|
|
$
|
11,256
|
|
|
$
|
7,291
|
|
|
$
|
—
|
|
|
$
|
18,547
|
|
Intersegment Revenues
|
|
|
—
|
|
|
|
1,556
|
|
|
|
(1,556
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,694
|
|
|
|
(1,694
|
)
|
|
|
—
|
|
Total Segment Revenue
|
|
|
12,739
|
|
|
|
9,670
|
|
|
|
(1,556
|
)
|
|
|
20,853
|
|
|
|
11,256
|
|
|
|
8,985
|
|
|
|
(1,694
|
)
|
|
|
18,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
10,178
|
|
|
|
7,716
|
|
|
|
(1,556
|
)
|
|
|
16,338
|
|
|
|
9,099
|
|
|
|
7,728
|
|
|
|
(1,694
|
)
|
|
|
15,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
2,561
|
|
|
|
1,954
|
|
|
|
—
|
|
|
|
4,515
|
|
|
|
2,157
|
|
|
|
1,257
|
|
|
|
—
|
|
|
|
3,414
|
|
Gross Margin %
|
|
|
20.1
|
%
|
|
|
20.2
|
%
|
|
|
—
|
|
|
|
21.7
|
%
|
|
|
19.2
|
%
|
|
|
14.0
|
%
|
|
|
—
|
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expense
|
|
|
2,348
|
|
|
|
528
|
|
|
|
153
|
|
|
|
3,029
|
|
|
|
2,595
|
|
|
|
435
|
|
|
|
180
|
|
|
|
3,210
|
|
Segment Allocated G&A Expense
|
|
|
(669
|
)
|
|
|
669
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(776
|
)
|
|
|
776
|
|
|
|
—
|
|
|
|
—
|
|
Net General & Administrative Expense
|
|
|
1,679
|
|
|
|
1,197
|
|
|
|
153
|
|
|
|
3,029
|
|
|
|
1,819
|
|
|
|
1,211
|
|
|
|
180
|
|
|
|
3,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
882
|
|
|
|
757
|
|
|
|
(153
|
)
|
|
|
1,486
|
|
|
|
338
|
|
|
|
46
|
|
|
|
(180
|
)
|
|
|
204
|
|
Operating Income (Loss) %
|
|
|
6.9
|
%
|
|
|
7.8
|
%
|
|
|
—
|
|
|
|
7.1
|
%
|
|
|
3.0
|
%
|
|
|
0.5
|
%
|
|
|
—
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Change in Fair Value of Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
95
|
|
|
|
95
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(489
|
)
|
|
|
(489
|
)
|
Interest Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) before taxes
|
|
$
|
882
|
|
|
$
|
757
|
|
|
$
|
(78
|
)
|
|
$
|
1,561
|
|
|
$
|
338
|
|
|
$
|
46
|
|
|
$
|
(688
|
)
|
|
$
|
(304
|
)
|
Net Income (Loss) before taxes %
|
|
|
6.9
|
%
|
|
|
7.8
|
%
|
|
|
—
|
|
|
|
7.5
|
%
|
|
|
3.0
|
%
|
|
|
0.5
|
%
|
|
|
—
|
|
|
|
(1.6
|
%)
|
Our
total external sales revenues increased by $2.3 million, or 12.4%, in 2018 over the 2017 revenue levels. The Optex Systems Richardson
segment realized a $1.5 million, or 13.4%, increase in external revenue and the Applied Optics Center segment realized an increase
of $0.8 million, or 11.0%, in external revenue over the prior year period. Intersegment revenues decreased by ($0.1) million during
the 2018 year, from $1.7 million to $1.6 million. Intersegment revenues relate primarily to coated filters provided by the Applied
Optics Center to Optex Systems in support of the Optex Systems periscope line.
Gross
margin increased $1.1 million and the gross margin percentage increased by 3.3% points from 18.4% in 2017 to 21.7% in 2018. The
gross margin and the gross margin percentages increased significantly in 2018 for the Applied Optics Center segments over 2017.
The Applied Optics Center gross margin increased by $0.7 million and the gross margin percent increased by 6.2% points from 14.0%
in 2017 to 20.2% in 2018 over the 2017 gross margin. During 2018, the Optex Systems gross margin increased $0.4 million and the
gross margin percentage increased to 20.1% points in 2018 as compared to a gross margin percentage of 19.2% in 2017 primarily
driven by changes in product mix between the years. Increases in U.S. government military spending has a significant impact on
our product lines as our products directly support various types of U.S. military land vehicle procurements.
During
the year ended 2018, the Applied Optics Center absorbed ($0.7) million of fixed general and administrative costs incurred by
Optex Systems for support services, as compared to ($0.8) million in the prior year period. These expenses cover accounting, executive,
human resources, information technology, board fees and other corporate expenses paid by Optex Systems and shared across both
operating segments.
Operating
income increased significantly, by $1.3 million, in 2018, to $1.5 million, as compared to the prior year operating income of $0.2
million. The Applied Optics Center operating income increased by $0.7 million, from a prior year operating income of $0.05 million
to a 2018 operation income of $0.75 million. Optex Systems operating income increased $0.5 million, to $0.9 million in 2018 as
compared to $0.3 million 2017 on higher revenue.
The
net income before taxes increased from the prior year by $1.9 million, to $1.6 million in 2018 from a prior year net loss
before taxes of ($0.3) million. The increase in net income year over year is primarily due to increased operating income of
$1.3 million from the prior year, combined with an increase in income for non cash related changes to the fair value of
warrants of $0.6 million to a gain of $0.1 million 2018 from a prior year loss of ($0.5) million 2017.
Backlog
Backlog
as of September 30, 2018 was $23.4 million as compared to a backlog of $15.7 million as of October 1, 2017, representing an increase
of 49.0%. The following table depicts the current expected delivery by quarter of all contracts awarded as of September
30, 2018.
|
|
(Millions)
|
Product
Line
|
Q1
2019
|
Q2
2019
|
Q3
2019
|
Q4
2019
|
2019
Delivery
|
2020+
Delivery
|
Total
Backlog
9/30/2018
|
|
Total
Backlog
10/1/2017
|
Variance
|
%
Chg
|
Periscopes
|
2.6
|
3.5
|
1.3
|
0.2
|
7.6
|
0.7
|
8.3
|
|
4.9
|
3.4
|
69.4%
|
Sighting
Systems
|
0.7
|
0.2
|
1.1
|
0.3
|
2.3
|
0.5
|
2.8
|
|
4.1
|
(1.3)
|
(31.7%)
|
Other
|
0.8
|
2.0
|
1.5
|
0.9
|
5.2
|
0.4
|
5.6
|
|
0.6
|
5.0
|
833.3%
|
Optex
Systems - Richardson
|
4.1
|
5.7
|
3.9
|
1.4
|
15.1
|
1.6
|
16.7
|
|
9.6
|
7.1
|
74.0%
|
Applied
Optics Center - Dallas
|
2.0
|
1.7
|
1.6
|
0.7
|
6.0
|
0.7
|
6.7
|
|
6.1
|
0.6
|
9.8%
|
Total
Backlog
|
6.1
|
7.4
|
5.5
|
2.1
|
21.1
|
2.3
|
23.4
|
|
15.7
|
7.7
|
49.0%
|
During
2018, Optex Systems Holdings received new orders totaling $28.5 million, a 27.8% increase, as compared to new orders of $22.3
million during the prior year. The 2018 orders consist of $11.0 million in support of our periscope product line, $8.7 million
attributable to the Applied Optics Center and $2.2 million attributable to sighting systems and support, and $6.6 million in other
products. Approximately 20.7% or $5.9 million of the orders received in fiscal year 2018 were delivered within the year, with
$22.6 million of backlog deliverable in 2019 and beyond. During the first fiscal quarter of 2019, as of December 10, 2018 the
Company has booked an additional $5.6 million in new orders for deliveries in 2019 and 2020, primarily for periscopes $3.9 million
and the remaining $1.7 million spread across sighting systems, Applied Optics and other products. We expect our fiscal year 2019
customer orders to meet or exceed the $28.5 million 2018 customer orders, with a substantial portion, approximately 15-25% deliverable
within the second half of the fiscal year 2019 period.
We
attribute the increase in backlog and new orders, primarily to the lifting of the 2011 Budget Control Act sequestration caps combined
with increases in the U.S. military procurement budgets which were approved for the fiscal years 2018 and 2019 National Defense
Authorization Acts.
Optex
Systems - Richardson:
Backlog
for our periscope product line has increased 69.4% or $3.4 million to $8.3 million, from our ended 2017 fiscal year level of
$4.9 million. Our total periscope contract awards for fiscal 2018 totaled $11.0 million as compared to $8.6 million in the fiscal
year 2017, an increase of $2.4 million over the prior year. Approximately 42% of the new periscope orders booked during the fiscal
year were associated with contracts awarded during the current fiscal year as Indefinite Delivery Indefinite Quantity (IDIQ) contract
types which include three (3) base year ordering periods, plus two (2) year option periods. We expect to continue receiving task
delivery orders against these multiyear contracts over the next two to five years. During the first quarter of fiscal year 2019,
through December 10, 2018, we have received an additional $3.9 million in periscope orders against the existing IDIQ contracts
as well as a substantial new contract award of $1.9 million announced on November 26, 2018.
Sighting
Systems backlog decreased by ($1.3) million or (31.7%) in the last twelve months from $4.1 million in 2017 to $2.8 million as
of the end of 2018. The decrease in backlog is primarily attributable to shipments in 2018 against long running contracts awarded
in prior years for DDAN and Commander Weapon Sighting Systems and revenue recognized against our three year OWSS maintenance contract
which was awarded in 2017. As of the September 2018 year end, only 35 units of the original 506 unit DDAN contract award units
from 2011 remained unshipped and were delivered during the first two months of fiscal year 2019. During 2018, we booked $2.2 million
in new orders for sighting systems consistent with the 2017 fiscal year. Through December 10, 2018 during the first fiscal quarter
of 2019, we have received an additional $0.9 million in sighting system orders for deliveries into December 2020, primarily for
spare DDAN sighting system units.
Our
backlog in other product groups increased by $5.0 million or 833.3% from $0.6 million in 2017 to $5.6 million in 2018. The increase
is driven by significant new U.S. Government orders received during the last fiscal quarter of 2018 for collimator assemblies
and cell assemblies combined with several smaller customer orders for spare parts and mirror assemblies.
Applied
Optics Center – Dallas
The
Applied Optics Center backlog increased by $0.6 million, or 9.8%, for the year ended 2018 from $6.1 million in 2017 to $6.7 million
in 2018. New orders for the Applied Optics Center during the 2018 year were $8.7 million as compared to the 2017 orders of $10.3
million, a decline of ($1.6) million. The decrease 2018 orders is primarily driven by lower orders of ($2.5) million on our commercial
optical assemblies which was offset by increases in military orders of $0.9 million during the year. We anticipate new orders
for the next twelve months to meet or exceed the 2018 order level with some shifts in product mix from commercial to military
products.
We
are optimistic that recent proposed boosts in military spending by the government administration will have a favorable impact
in the direction of funding or product need for the U.S. military and increased orders for the Company. Optex Systems Holdings
continues to pursue new international and commercial opportunities in addition to maintaining its current footprint with U.S.
military vehicle manufactures, with existing as well as new product lines. We continue exploring new market opportunities
for our M17 day/thermal periscopes and digital optics for commercial applications. We are also reviewing potential products, outside
our traditional product lines, which could be manufactured using our current production facilities in order to capitalize on our
existing capacity. Further, we continue to look for strategic businesses to acquire that will strengthen our existing product
line, expand our operations, and enter new markets.
Twelve
month period ended September 30, 2018 compared to the twelve month period ended October 1, 2017
Revenues:
The
table below details the revenue changes by segment and product line for the year ended September 30, 2018 as compared to the year
ended October 1, 2017.
|
|
Twelve months ended
|
|
|
|
|
|
|
(Millions)
|
|
|
|
|
|
|
|
|
|
|
|
Product Line
|
|
September 30, 2018
|
|
|
|
October 1, 2017
|
|
|
|
Variance
|
|
|
|
% Chg
|
|
Periscopes
|
|
$
|
7.5
|
|
|
$
|
7.1
|
|
|
$
|
0.4
|
|
|
|
5.6
|
|
Sighting Systems
|
|
|
3.6
|
|
|
|
1.1
|
|
|
|
2.5
|
|
|
|
227.3
|
|
Other
|
|
|
1.6
|
|
|
|
3.0
|
|
|
|
(1.4
|
)
|
|
|
(46.7
|
)
|
Optical Systems – Richardson
|
|
|
12.7
|
|
|
|
11.2
|
|
|
|
1.5
|
|
|
|
13.4
|
|
Applied Optics Center – Dallas
|
|
|
8.1
|
|
|
|
7.3
|
|
|
|
0.8
|
|
|
|
11.0
|
|
Total Revenue
|
|
$
|
20.8
|
|
|
$
|
18.5
|
|
|
$
|
2.3
|
|
|
|
12.4
|
|
Our
total revenues increased by $2.3 million, or 12.4%, in 2018 over the 2017 revenue levels. The Optex Systems Richardson segment
realized a $1.5 million, or 13.4%, increase in revenue and the Applied Optics Center segment realized an increase of $0.8 million,
or 11.0%, in revenue over the prior year period. Approximately 20.7%, or $5.9 million of our total revenue recognized during the
fiscal year was from new orders booked during the twelve months ended September 30, 2018.
Revenues
increased by $0.4 million or 5.6% on our periscope line during the twelve months ended September 30, 2018 as compared to the twelve
months ended October 1, 2017 based on increased customer demand combined with changes in periscope mix and delivery schedules
between the respective periods. Based on our strong ended September periscope backlog of $8.3 million and new orders of $3.9
million received in the first 70 days of fiscal 2019, we expect our 2019 periscope revenues exceed the 2018 levels by 20-25% with
a strong backlog scheduled into the fourth quarter.
Revenues
on sighting systems increased by $2.5 million, or 227.3% from the prior year period. Deliveries on our current backlog for DDAN
sighting systems were delayed during the three quarters of 2017 pending product configuration changes, long lead materials and
export license revisions. These issues were resolved during 2017 and we resumed full production on the DDAN sighting system orders
delivering and additional $1.5 million during the current year period as compared to the prior year period. The remaining undelivered
backlog against these orders of $0.5 million is scheduled for delivery during the first quarter of 2019 which will complete the
production order. We received an additional order for spare units of $0.9 million during the first quarter of 2019 and anticipate
additional orders during the next twelve months. We recognized an additional $0.4 million in revenue during the twelve month period
for new Commander Weapon System Sights (“CWSS”) orders, and $0.6 million in revenue for our ongoing OWSS repair and
maintenance contract which was awarded in September 2017 and continues through fiscal year 2020.
Revenue
on other product lines decreased by ($1.4) million, or (46.7%), compared to revenues in the prior year. During the prior year,
Optex Richardson delivered against several large orders for collimator assemblies and cable periscope assemblies for contracts
which were completed during the prior year fourth quarter. Our total backlog for the other product line has increased by $5.0
as of the end of 2018, primarily due to orders received during the last fiscal quarter. Based on our current customer delivery
schedule, we anticipate our revenues for other products will increase by up to 300% over the next twelve months.
The
Applied Optics Center external revenue increased by $0.8 million, or 11.0%, during the 2018 fiscal year as compared to the prior
year period due to increases in laser coated and bright light filters of $0.5 million, day and glass coated windows of $0.2 million
and commercial optical assemblies of $0.1 million. Increased revenues were primarily driven by increased U.S. military spending.
We are entering fiscal 2019 with a very strong backlog of $6.7 million, a 9.8% increase over the prior year ended backlog. Based
on current customer delivery schedules, we expect the Applied Optics Center revenue to decline by 8-9% during the first half,
and increase 34-35% during the second half from the prior year revenue levels, with significant shifts in product mix from commercial
optical assemblies to military products.
Gross
Margin
. The gross margin during the period ended September 30, 2018 was 21.7% of revenue as compared to a gross margin of
18.4% of revenue for the period ended October 1, 2017. Cost of sales increased by $1.2 million to $16.3 million for the
fiscal year ended 2018 compared to $15.1 million for the fiscal year ended 2017. The increased cost of sales was primarily driven
by higher revenues. The gross margin increased by $1.1 million to $4.5 million in 2018 as compared to $3.4 million in 2017. We
attribute the improvement in gross margin to higher revenue combined with cost efficiency improvements at the Applied Optics Center
and changes in product mix between the respective years.
G&A
Expenses
. During the fiscal year ended September 30, 2018, we recorded operating expenses of $3.0 million as opposed
to $3.2 million during the period ended October 1, 2017, a decrease of $0.2 million or 6.2%. The decrease in general and
administrative expenses in the year ended 2018 as compared to the year ended 2017 is primarily attributable to lower board fees
on the resignation of board members, lower executive bonus payments and lower investor relation fees as compared to the prior
year period.
Operating
Income
. During the period ended September 30, 2018, we recorded operating income of $1.5 million as compared to operating
income of $0.2 million during the period ended October 1, 2017. The $1.3 million increase in operating income in the current
year over the prior year is primarily due to the increased gross margin of $1.1 million on higher revenue and reduced general
and administrative costs of $0.2 million in 2018 as compared to 2017.
Net
income (loss) applicable to common shareholders
. During the year ended September 30, 2018, we recorded a net income applicable
to common shareholders of $0.9 million as compared to net loss applicable to common shareholders of ($0.5) million during the
year ended October 1, 2017. The increased net income of $1.4 million is primarily attributable to an increase in operating income
of $1.3 million and changes in the fair value of warrants of $0.6 million which was offset by increases in federal income tax
expense of ($0.2) million and changes in dividends distributed and deemed dividends of ($0.3) million as compared to the year ended
2017.
Liquidity
and Capital Resources
As
of September 30, 2018, Optex Systems Holdings had working capital of $8.5 million, as compared to $8.0 million as of October 1,
2017. During the year ended September 30, 2018, the Company generated a net income of $1.4 million as compared to a net loss
of $(0.3) million, and an increase in revenues of $2.3 million, or 12.4%, up to $20.8 million, from $18.5 million, as compared
to the prior year ended October 1, 2017. New orders increased 27.8% to $28.5 million, as compared to new orders of $22.3
million during the prior year. Backlog has increased by $7.7 million, or 49.0% to 23.4 million over the prior year backlog of
$15.7 million.
During
the prior two years, the Company has seen significant increases in new orders and revenue growth primarily in the U.S. military
products. We attribute the higher demand to increases in the U.S. military procurement budgets which were approved for the fiscal
years 2018 and 2019 National Defense Authorization Acts (NDAA). We believe that the procurement budget increases in the federal
government’s 2018 and 2019 NDAA combined with the lifting of the 2011 budget sequestration cap on defense spending levels
are favorable to the Company for its U.S. military products during the next twelve months. Significant increases in orders could
cause a strain on our working capital as we purchase additional inventories and ramp up production personnel required to meet
the higher production schedules.
The
Company has historically funded its operations through operations, convertible notes, common and preferred stock offerings
and bank debt. The Company’s ability to generate positive cash flows depends on a variety of factors, including
the continued development and successful marketing of the Company’s products. At September 30, 2018, the Company had
approximately $1.1 million in cash and an outstanding payable balance of $0.3 million against our working line of
credit. The line of credit allows for borrowing up to a maximum of $2.2 million, which fluctuates based on our open
accounts receivable balance. As of September 30, 2018, our outstanding accounts receivable was $2.5. We expect the
accounts to be collected during the first quarter of fiscal 2019. The Company expects to generate net income and
positive cash flow from operating activities throughout 2019 on higher projected revenue growth and contribution toward fixed
costs, combined with increased gross margins for existing and planned productivity and cost efficiency. Our net income
of $1.4 million during the fiscal year 2018 marked a significant improvement of $1.7 million from the prior year net loss of
($0.3) million. Successful transition to attaining and maintaining profitable operations is dependent upon maintaining a
level of revenue adequate to support the Company’s cost structure. We are entering 2019 with a 49% increase in
backlog from the prior year end on increased customer orders. Management intends to manage operations commensurate with its
level of working capital and facilities line of credit during the next twelve months; however, uneven revenue levels driven
by changes in customer delivery demands, first article inspection requirements or other program delays combined with
increasing inventory and production costs required to support the increases in backlog could create a working capital
shortfall. In the event the Company does not successfully implement its ultimate business plan, certain assets may not
be recoverable.
In
2017 the Board of Directors of Optex Systems Holdings approved a purchase of 700,000 shares of its common stock in a private transaction
for a total transaction amount of $518,000. In 2018 the
Board of Directors approved two
separate purchases 200,000 shares and 500,000 shares of its common stock in two separate private transactions for $1.00 per share
each for a total of $700,000. All of the stock repurchases from 2017 and 2018 have been returned to the treasury.
During
the twelve months ended October 1, 2017, the Company declared $522 thousand in dividends and paid $261 thousand during the fiscal
year. As of October 1, 2017 there was $261 thousand in dividends payable for outstanding dividends declared during 2017. During
the twelve months ended September 30, 2018 the Company declared $523 thousand in dividends and paid $784 thousand during the
fiscal year. As of September 30, 2018 there are no outstanding declared and unpaid dividends.
Period
from October 1, 2017 through September 30, 2018
Cash
and Cash Equivalents
. As of September 30, 2018, we had cash and cash equivalents of $1.1 million as compared to $1.7
million as of October 1, 2017, a decrease in cash and cash equivalents of ($0.6) million.
Net
Cash Provided by Operating Activities
. Net cash provided by operating activities during the period beginning October
1, 2017 and ended September 30, 2018 was $1.0 million. The primary source of cash provided by operations was driven by net income
of $1.4 offset by decreases in accounts payable and customer deposits.
Net
Cash (Used) by Investing Activities
.
In the twelve months ended September 30, 2018, cash used by investing
activities was ($0.2) million for new asset purchases used in support of production.
Net
Cash (Used) by Financing Activities
. Net cash used in financing activities was ($1.4) million during the twelve months ended
September 30, 2018 due to the repurchase of outstanding common stock of ($0.7) million and dividend payments of ($0.8) million
offset by $0.1 million cash received for the exercise of warrants. As of September 30, 2018, the outstanding line of credit balance
was $0.3 million as compared to $0.3 million as of October 1, 2017.
Critical
Accounting Policies
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. 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.
As
of fiscal year beginning on October 1, 2018, the Company has adopted FASB ASC 606—Revenue from Contracts with Customers,
which is required for public business entities for annual reporting periods beginning after December 15, 2017, including interim
reporting periods within that reporting period. The Company has selected a modified retrospective application of the standard for all periods presented as of the October 1, 2018 implementation date. The new revenue recognition standard requires revenue recognition based on a five-step
model that includes: identifying the contract, identifying the performance obligations, determining the transaction price, allocating
the transaction price and recognizing the revenue. The standard results in the recognition of revenue depicting the transfer of
promised goods or services to customers in an amount reflecting the expected consideration to be received from the customer for
such goods and services, based on the satisfaction of performance obligations, occurring when the control of the goods or services
transfer to the customer. The majority the Company’s contracts and customer orders originate with fixed determinable unit
prices for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the
specific due date for the transfer of control and title of each of those deliverables to the customer at pre-established payment
terms, which are generally within thirty to sixty days from the transfer of title and control. In addition, the company has one
ongoing service contract which began in October 2017 which relates to optimized weapon system support (OWSS) and includes ongoing
program maintenance, repairs and spare inventory support for the customer’s existing fleet units in service over a three
year period. Revenue recognition for this program has been recorded by the Company, and compensated by the customer, at fixed
monthly increments over time, consistent with the defined contract maintenance period.
The
Company believes it’s current revenue recognition policy as related to the production contracts (“units of delivery”),
and maintenance contract (“passage of time”), are consistent with the new revenue recognition standard defined within
FASB ASC 606 which requires unique performance obligations be recognized upon satisfaction of the customers performance obligation
at the point in time when the control of goods is transferred to the customer, or over time as the customer benefits from provided
maintenance and support services. Based on the contract revenues recognized during the fiscal year ended September 30, 2018 and
the Company’s existing undelivered contract backlog as of the end of the fiscal year period, Optex Systems Holdings does
not expect the adoption of the new revenue recognition standard to have a material effect on the financial statement presentation
on a restrospective or prospective basis for the upcoming interim, annual and comparative periods covered. The Company has on
occasion, outside of the presented periods, received selective contract awards and modifications which included substantive milestone
performance obligations, contract modifications, negotiated settlements and financing arrangements which could fall within the
scope of the new revenue recognition guidance on reoccurrence, and as such, the Company has expanded their contract review process
to ensure any new contract awards, changes, modifications, financing arrangements or potential negotiated settlements are recorded
in compliance to the new standard guidance.
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.
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 September 30, 2018 Optex Systems Inc. has a deferred tax asset valuation allowance of ($2.9) million against deferred tax assets
of $2.9 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
fiscal year ended September 30, 2018, 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.
Recent
Accounting Pronouncements
Recent
Accounting Pronouncements are detailed under Note 3 of Item 8 “Financial Statements and Supplementary Data” of this
report.
Cautionary
Factors That May Affect Future Results
This
Report on Form 10-K and other written reports and oral statements made from time to time by Optex Systems Holdings may contain
so-called “forward-looking statements,” all of which are subject to risks and uncertainties. You can identify these
forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,”
“forecasts,” “projects” and other words of similar meaning. You can identify them by the fact that they
do not relate strictly to historical or current facts. These statements are likely to address Optex Systems Holdings’ growth
strategy, financial results and product and development programs. You must carefully consider any such statement and should understand
that many factors could cause actual results to differ from Optex Systems Holdings’ forward-looking statements. These
factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and
some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.
We
do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light
of factors described in this annual report. In this annual report Optex Systems Holdings has identified important factors that
could cause actual results to differ from expected or historic results. You should understand that it is not possible to predict
or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks
or uncertainties.
Item
8 Financial Statements and Supplementary Data
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Optex
Systems Holdings, Inc.
We
have audited the accompanying consolidated balance sheets of Optex Systems Holdings, Inc. and subsidiaries (the “Company”),
as of September 30, 2018 and October 1, 2017, and the related consolidated statements of operations, stockholders’ equity,
and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
September 30, 2018 and October 1, 2017, and the results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
Whitley Penn LLP
We
have served as the Company’s auditor since 2017.
Dallas,
Texas
December
20, 2018
Optex
Systems Holdings, Inc.
Consolidated
Balance Sheets
|
|
(Thousands, except share and per share data)
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,133
|
|
|
$
|
1,682
|
|
Accounts Receivable, Net
|
|
|
2,458
|
|
|
|
3,125
|
|
Net Inventory
|
|
|
7,639
|
|
|
|
7,614
|
|
Prepaid Expenses
|
|
|
104
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
11,334
|
|
|
|
12,484
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
1,300
|
|
|
|
1,460
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid Royalties
|
|
|
30
|
|
|
|
60
|
|
Security Deposits
|
|
|
23
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
53
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
12,687
|
|
|
$
|
14,027
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
943
|
|
|
$
|
1,362
|
|
Dividends Payable
|
|
|
—
|
|
|
|
261
|
|
Federal Income Taxes Payable
|
|
|
22
|
|
|
|
—
|
|
Accrued Expenses
|
|
|
1,169
|
|
|
|
1,450
|
|
Accrued Warranties
|
|
|
101
|
|
|
|
174
|
|
Customer Advance Deposits
|
|
|
308
|
|
|
|
927
|
|
Credit Facility
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
2,843
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
3,500
|
|
|
|
3,607
|
|
Total Liabilities
|
|
|
6,343
|
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred Stock Series C ($0.001 par 400 authorized, 0 and 174 issued and outstanding, respectively)
|
|
|
—
|
|
|
|
—
|
|
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,333,353 and 8,190,101 shares issued and outstanding, respectively)
|
|
|
8
|
|
|
|
8
|
|
Additional Paid-in-capital
|
|
|
25,938
|
|
|
|
26,411
|
|
Accumulated Deficit
|
|
|
(19,602
|
)
|
|
|
(20,473
|
)
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
6,344
|
|
|
|
5,946
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
12,687
|
|
|
$
|
14,027
|
|
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
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20,853
|
|
|
$
|
18,547
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
16,338
|
|
|
|
15,133
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
4,515
|
|
|
|
3,414
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expense
|
|
|
3,029
|
|
|
|
3,210
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
1,486
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Change in Fair Value of Warrants
|
|
|
95
|
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(20
|
)
|
|
|
(19
|
)
|
Other Income (Expense)
|
|
|
75
|
|
|
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
1,561
|
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
Current Income Tax Expense
|
|
|
(167
|
)
|
|
|
—
|
|
Net income (loss)
|
|
$
|
1,394
|
|
|
$
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
Dividends declared on participating securities
|
|
|
(178
|
)
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
Deemed dividends on participating securities
|
|
|
(286
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
930
|
|
|
$
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.11
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - basic
|
|
|
8,458,466
|
|
|
|
7,995,092
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
0.11
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - diluted
|
|
|
8,795,799
|
|
|
|
7,995,092
|
|
The
accompanying notes are an integral part of these financial statements.
Optex
Systems Holdings, Inc.
Consolidated
Statements of Cash Flows
|
|
(Thousands)
|
|
|
|
Twelve months ended
|
|
|
|
September 30, 2018
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,394
|
|
|
$
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
327
|
|
|
|
337
|
|
(Gain) loss on change in fair value of warrants
|
|
|
(95
|
)
|
|
|
489
|
|
Stock compensation expense
|
|
|
153
|
|
|
|
220
|
|
Provision for inventory valuation
|
|
|
50
|
|
|
|
(34
|
)
|
(Gain) on sale of fixed assets
|
|
|
—
|
|
|
|
(38
|
)
|
Accounts receivable
|
|
|
666
|
|
|
|
(1,185
|
)
|
Inventory
|
|
|
(75
|
)
|
|
|
(1,366
|
)
|
Prepaid expenses
|
|
|
(41
|
)
|
|
|
57
|
|
Accounts payable and accrued expenses
|
|
|
(700
|
)
|
|
|
1,296
|
|
Federal income taxes payable
|
|
|
22
|
|
|
|
—
|
|
Accrued warranty costs
|
|
|
(73
|
)
|
|
|
146
|
|
Prepaid royalties
|
|
|
30
|
|
|
|
30
|
|
Customer advance deposits
|
|
|
(619
|
)
|
|
|
368
|
|
Total adjustments
|
|
|
(355
|
)
|
|
|
320
|
|
Net cash provided by operating activities
|
|
|
1,039
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(167
|
)
|
|
|
(149
|
)
|
Proceeds from sale of fixed assets
|
|
|
—
|
|
|
|
41
|
|
Net cash used in investing activities
|
|
|
(167
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(784
|
)
|
|
|
(261
|
)
|
Cash paid for taxes withheld on net settled restricted stock unit share issue
|
|
|
(30
|
)
|
|
|
(15
|
)
|
Proceeds from warrant exercise
|
|
|
93
|
|
|
|
—
|
|
Stock repurchase
|
|
|
(700
|
)
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,421
|
)
|
|
|
(794
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(549
|
)
|
|
|
(886
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
1,682
|
|
|
|
2,568
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,133
|
|
|
$
|
1,682
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Exchange of common stock for non-trade accounts receivable
|
|
$
|
—
|
|
|
$
|
155
|
|
Exchange of preferred stock for common stock
|
|
|
870
|
|
|
|
930
|
|
Dividends declared and unpaid
|
|
|
—
|
|
|
|
261
|
|
Cash paid for taxes
|
|
|
144
|
|
|
|
—
|
|
Cash paid for interest
|
|
|
20
|
|
|
|
19
|
|
Correction for warrants
|
|
|
41
|
|
|
|
—
|
|
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 C Preferred Shares
|
|
|
|
Common Stock
|
|
|
|
Additional Paid in Capital
|
|
|
|
Retained Earnings
|
|
|
|
Total Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 2, 2016
|
|
|
8,266,601
|
|
|
|
360
|
|
|
$
|
8
|
|
|
$
|
26,879
|
|
|
$
|
(19,647
|
)
|
|
$
|
7,240
|
|
Stock Compensation Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
220
|
|
|
|
—
|
|
|
|
220
|
|
Vested restricted stock units issued net of tax withholding
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
153
|
|
|
|
—
|
|
|
|
153
|
|
Vested restricted stock units issued net of tax withholding
|
|
|
55,902
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30
|
)
|
|
|
—
|
|
|
|
(30
|
)
|
Conversions of Series C Preferred Shares
|
|
|
725,000
|
|
|
|
(174
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
Stock Buyback and Cancellation
|
|
|
(700,000
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(700
|
)
|
|
|
—
|
|
|
|
(701
|
)
|
Declared Dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(523
|
)
|
|
|
(523
|
)
|
Correction for Warrants
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
(41
|
)
|
Exercise of Warrants for Common Shares at $1.50
(2)
|
|
|
62,350
|
|
|
|
—
|
|
|
|
—
|
|
|
|
146
|
|
|
|
—
|
|
|
|
146
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,394
|
|
|
|
1,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
|
|
8,333,353
|
|
|
|
—
|
|
|
$
|
8
|
|
|
$
|
25,938
|
|
|
$
|
(19,602
|
)
|
|
$
|
6,344
|
|
(1)
Correction related to 197,935 outstanding warrants issued to underwriters for August 26, 2016 public offering
(2)
Exercise of warrants for gross proceeds of $93 thousand and a warrant liability fair market value of $53 thousand as of the exercise
date
The
accompanying notes are an integral part of these financial statements
Note
1 — Organization and Operations
Optex
Systems Holdings, Inc. (“the Company”) manufactures optical sighting systems and assemblies for the U.S. Department
of Defense, foreign military applications and commercial markets. Its products are installed on a variety of U.S. military land
vehicles, such as the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected
for installation on the Stryker family of vehicles. Optex Systems Holdings also manufactures and delivers numerous periscope configurations,
rifle and surveillance sights and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of
build to customer print products that are delivered both directly to the military and to other defense prime contractors or commercial
customers. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising
93,967 square feet. As of September 30, 2018, Optex Systems Holdings operated with 100 full-time equivalent employees.
Note
2 — Accounting Policies
Basis
of Presentation
Principles
of Consolidation:
The consolidated financial statements include the accounts of Optex Systems Holdings and
its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated
in consolidation.
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 and evaluated regularly by the chief operating decision maker in decisions regarding resource allocations and performance
assessments. 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 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 2017
ended on September 30, 2018 and included 52 weeks. Fiscal year 2017 ended on October 1, 2017 and included 53 weeks.
Fair
Value of Financial Instruments:
Fair value estimates discussed herein are based upon certain market assumptions and
pertinent information available to management as of the financial statement presentation date.
The
carrying value of the balance sheet cash and cash equivalents, accounts and notes receivable, accounts payable, accrued liabilities,
and notes payable, are carried at, or approximate, fair value as of the reporting date because of their short-term nature. Fair
values for the Company’s warrant liabilities and derivatives are estimated by utilizing valuation models that consider current
and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates. Such amounts
and the recognition of such amounts are subject to significant estimates that may change in the future.
The
fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities
carried at fair value be classified and disclosed in one of the following three categories:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level
3: Unobservable inputs reflecting the reporting entity’s own assumptions.
The
accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize
the use of unobservable inputs. An asset or liability’s level is based on the lowest level of input that is significant
to the fair value measurement. Fair value estimates are reviewed at the origination date and again at each applicable measurement
date and interim or annual financial reporting dates, as applicable for the financial instrument, and are based upon certain market
assumptions and pertinent information available to management at those times.
The
methods and significant inputs and assumptions utilized in estimating the fair value of the warrant liabilities, as well as the
respective hierarchy designations are discussed further in Note 13 “Warrant Liabilities”. Each of the measurements
is considered a Level 3 measurement based on the availability of market data and inputs and the significance of any unobservable
inputs as of the measurement date.
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 $1,133 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.
Concentration
of Credit Risk:
Optex Systems Holdings’ revenues and accounts receivables for fiscal year ended September 30,
2018 are derived from sales to U.S. government agencies (38%), one major U.S. defense contractor (29%), one major commercial customer
(20%) and all other customers (13%). 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
September 30, 2018 and October 1, 2017, Optex Systems Holdings had an allowance for doubtful accounts of $5 thousand and $2 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 2018 we recognized
$3 thousand in bad debt expenses associated with uncollectible accounts. 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.
As
of September 30, 2018, 88% of the accounts receivable balance was comprised of three customers: the U.S. government, 25%, a major
defense contractor, 53%, a major commercial customer, 10%. As of October 1, 2017, 94% of the accounts receivable balance was comprised
of four customers: two major defense contractors, 42% and 23% one commercial customer, 15%, and the U.S. government, 14%.
Inventory:
Inventory
is recorded at the lower of cost or net realizable value, 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. As of September 30, 2018 and October 1, 2017 inventory included:
|
|
(Thousands)
|
|
|
|
As of
September
30, 2018
|
|
|
As of
October 1,
2017
|
|
Raw Materials
|
|
$
|
5,580
|
|
|
$
|
5,931
|
|
Work in Process
|
|
|
3,478
|
|
|
|
2,859
|
|
Finished Goods
|
|
|
254
|
|
|
|
441
|
|
Gross Inventory
|
|
|
9,312
|
|
|
|
9,231
|
|
Less: Inventory Reserves
|
|
|
(1,673
|
)
|
|
|
(1,617
|
)
|
Net Inventory
|
|
$
|
7,639
|
|
|
$
|
7,614
|
|
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 estimated warranty expenses associated the period end backlog of returned customer units awaiting repair or replacement
plus any estimated warranty expenses related to anticipated future returns on previous deliveries. As of September 30, 2018
and October 1, 2017, the existing warranty reserve balances of $101 thousand and $174 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 decrease in warranty reserves of ($73) thousand during the twelve months ended September
30, 2018 represents a reduction in the ending backlog of warranty returns awaiting repairs or replacement for quality issues encountered
on our Applied Optics Center optical assemblies during the previous year. We have made numerous improvements to our supplier bases
and internal production process to reduce the return rate on future shipments but will continue to review and monitor the reserve
balances related to this product line against any existing warranty backlog and current trend data as we repair and replace our
current warranty backlog and process future warranty returns.
The
table below summarizes the warranty expenses and incurred warranty costs for the twelve months ended September 30, 2018 and October
1, 2017.
|
|
(Thousands)
|
|
|
|
Year
ended
|
|
Warranty
Reserves
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
174
|
|
|
$
|
28
|
|
Incurred Warranty Costs
|
|
|
(346
|
)
|
|
|
(182
|
)
|
Expensed
to Cost of Sales
(1)
|
|
|
273
|
|
|
|
328
|
|
Ending
Balance
|
|
$
|
101
|
|
|
$
|
174
|
|
(1)
Includes $98 thousand in expenses related to a change in estimated cost for repairs on 2017 accrued warranty returns due to
supplier quality issues on warranty replacement materials.
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. 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.
As
of fiscal year beginning on October 1, 2018, the Company has adopted FASB ASC 606—Revenue from Contracts with Customers,
which is required for public business entities for annual reporting periods beginning after December 15, 2017, including interim
reporting periods within that reporting period. The Company has selected a modified retrospective application of the standard for all periods presented as of the October 1, 2018 implementation date. The new revenue recognition standard requires revenue recognition based on a five-step
model that includes: identifying the contract, identifying the performance obligations, determining the transaction price, allocating
the transaction price and recognizing the revenue. The standard results in the recognition of revenue depicting the transfer of
promised goods or services to customers in an amount reflecting the expected consideration to be received from the customer for
such goods and services, based on the satisfaction of performance obligations, occurring when the control of the goods or services
transfer to the customer. The majority the Company’s contracts and customer orders originate with fixed determinable unit
prices for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the
specific due date for the transfer of control and title of each of those deliverables to the customer at pre-established payment
terms, which are generally within thirty to sixty days from the transfer of title and control. In addition, the company has one
ongoing service contract which began in October 2017 which relates to optimized weapon system support (OWSS) and includes ongoing
program maintenance, repairs and spare inventory support for the customer’s existing fleet units in service over a three
year period. Revenue recognition for this program has been recorded by the Company, and compensated by the customer, at fixed
monthly increments over time, consistent with the defined contract maintenance period.
The
Company believes its current revenue recognition policy as related to the production contracts (“units of
delivery”), and maintenance contract (“passage of time”), are consistent with the new revenue recognition
standard defined within FASB ASC 606 which requires unique performance obligations be recognized upon satisfaction of the
customers performance obligation at the point in time when the control of goods is transferred to the customer, or over time
as the customer benefits from provided maintenance and support services. Based on the contract revenues recognized during the
fiscal year ended September 30, 2018 and the Company’s existing undelivered contract backlog as of the end of the
fiscal year period, Optex Systems Holdings does not expect the adoption of the new revenue recognition standard to have a
material effect on the financial statement presentation on a restrospective or prospective basis for the upcoming interim,
annual and comparative periods covered. The Company has on occasion, outside of the presented periods, received selective
contract awards and modifications which included substantive milestone performance obligations, contract modifications,
negotiated settlements and financing arrangements which could fall within the scope of the new revenue recognition guidance
on reoccurrence, and as such, the Company has expanded their contract review process to ensure any new contract awards,
changes, modifications, financing arrangements or potential negotiated settlements are recorded in compliance to the new
standard guidance.
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 September 30, 2018 and October 1, 2017, Optex Systems, Inc. had a balance of $308 thousand and $927 thousand, respectively,
in customer advance deposits which are related to contracts for our sighting system product line. The product associated with
the sighting systems customer deposits generally have high material content with long lead items which require purchase well in
advance of final product delivery. We expect the deliveries against the contracts to complete within the twelve months and as
such are classified as short term customer advance deposits.
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.
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.
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 September 30, 2018 Optex Systems Inc. has a deferred tax asset valuation allowance of ($2.9) million against deferred tax assets
of $2.9 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
fiscal year ended September 30, 2018, 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.
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 September 30, 2018, 4,260,785 warrants and 59,980 stock options were excluded as anti-dilutive as
the instruments were “Out of the money” and not exercisable during the Year. For the twelve months ended October
1, 2017, 4,323,135 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.
A
significant number of our outstanding warrants and series C preferred shares are participating securities which share dividends
distributions and the allocation of any undistributed earnings (deemed dividends) with our common shareholders. During the twelve
months ended September 30, 2018, we declared dividends of $178 thousand and had allocated undistributed earnings of $286 thousand
attributable to the participating warrants and series C preferred shares. During the twelve months ended October 1, 2017, we
declared dividends of $206 thousand and had zero in undistributed earnings attributable to the participating warrants and series
C preferred shares due to the net loss. We have reflected the net income (loss) applicable to common shareholders to exclude the
declared and deemed dividends related to the participating securities in both the basic and dilutive earning per share calculations
for the twelve months ended September 30, 2018 and October 1, 2017. The impact of inclusion of the participation securities to
the basic and diluted income (loss) per share calculation to common shareholders is a net decrease of ($0.05) per common share
for the year ended September 30, 2018 and ($0.02) per common share for the year ended October 1, 2017.
The
net loss applicable to common shareholders for the period ended October 1, 2017, previously reflected as ($0.04) per share, has
been corrected to ($0.06) per common share to include the effect of the prior year dividends related to participating securities
to the common shares.
Note
3 — Recent Accounting Pronouncements
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain
disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The analysis should present a reconciliation
of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be
filed. This final rule was effective on November 5, 2018. The Company is evaluating the impact of this guidance on its consolidated
financial statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on recurring
and nonrecurring fair value measurements in Topic 820. The amendments in the update are effective for all entities for fiscal
years and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. As such Optex
Systems Holdings is required to adopt these provisions as of the fiscal year beginning on September 28, 2020. Entities are permitted
to early adopt any removed or modified disclosure upon issuance of ASU 2018-13 and delay adoption of the additional disclosures
until their effective date. We do not anticipate any material impact on our financial statement disclosures as a result of the
amendment and are currently assessing the changes in disclosure requirements as applicable for the potential of early adoption.
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 do not anticipate
a material impact on our consolidated financial statements and results of operations as a result of the October 1, 2018 adoption
of ASU 2017-09.
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. 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 adopted these provisions as of the fiscal year beginning on October
2, 2017 and ended September 30, 2018. Adoption of FASB ASU 2015-11 has had no material effect on Optex Systems Holdings’
financial statements and related disclosures for the periods presented.
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
has adopted these provisions as of the fiscal year beginning on October 1, 2018 and does not expect the adoption of the new revenue
recognition standard to have a material effect to the financial statement presentation on a restrospective or prospective basis
for the upcoming interim, annual and comparative periods covered. See additional discussion related to our revenue recognition
policy under Note 2 “Revenue Recognition”.
Note
4 Segment Reporting
The
Company’s reportable segments are strategic businesses offering similar products to similar markets and customers; however,
the companies are operated and managed separately due to differences in manufacturing technology, equipment, geographic location,
and specific product mix. Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was
retained. Both the Applied Optics Center and Optex Systems – Richardson operate as reportable segments under the Optex Systems,
Inc. corporate umbrella.
The
Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies
for the Optex Systems-Richardson (“Optex Systems”) segment. Intersegment sales and transfers are accounted for at
annually agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general
and administrative costs, but exclude profits that would apply to third party external customers.
Optex
Systems (OPX) – Richardson, Texas
Optex
Systems revenues are primarily in support of prime and subcontracted military customers. Approximately 71% of the Optex
Systems segment revenue is comprised of domestic military customers, and 29% is comprised of foreign military customers. The
Optex Systems segment revenue from the U.S. government and one other major U.S. defense contractor represent approximately
28% and 27% of the Company’s consolidated revenue, respectively.
Optex
Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of September 30,
2018, the Richardson facility operated with 64 full time equivalent employees in a single shift operation. Optex Systems, Richardson
serves as the home office for both the Optex Systems and Applied Optics Center segments.
Applied
Optics Center (AOC) – Dallas, Texas
The
Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represent 61% and military sales
to prime and subcontracted customers represent 26% of the total segment revenue. Approximately 84% of the AOC revenue is derived
from external customers and approximately 16% is related to intersegment sales to Optex Systems in support of military contracts.
The AOC segment revenue from the U.S. government and one major commercial customer represents approximately 10% and 20% of the
Company’s consolidated revenue, respectively.
The
Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space.
As of September 30, 2018, AOC operated with 36 full time equivalent employees in a single shift operation.
The
financial table below presents the information for each of the reportable segments profit or loss as well as segment assets for
each year. The Company does not allocate interest expense, income taxes or unusual items to segments.
|
|
Reportable
Segment Financial Information
(thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
months ended September 30, 2018
|
|
|
|
Optex
Systems
Richardson
|
|
|
|
Applied
Optics
Center
Dallas
|
|
|
|
Other
(non-allocated costs
and intersegment eliminations)
|
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$
|
12,739
|
|
|
$
|
8,114
|
|
|
$
|
—
|
|
|
$
|
20,853
|
|
Intersegment
revenues
|
|
|
—
|
|
|
|
1,556
|
|
|
|
(1,556
|
)
|
|
|
—
|
|
Total
Revenue
|
|
$
|
12,739
|
|
|
$
|
9,670
|
|
|
$
|
(1,556
|
)
|
|
$
|
20,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
$
|
39
|
|
|
$
|
288
|
|
|
$
|
—
|
|
|
$
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before taxes
|
|
$
|
882
|
|
|
$
|
757
|
|
|
$
|
(78
|
)
|
|
$
|
1,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
home office expense
|
|
$
|
(669
|
)
|
|
$
|
669
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain
on change in fair value of warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(95
|
)
|
|
$
|
(95
|
)
|
Stock
compensation expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
153
|
|
|
$
|
153
|
|
Royalty
expense amortization
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Assets
|
|
$
|
8,343
|
|
|
$
|
4,344
|
|
|
$
|
—
|
|
|
$
|
12,687
|
|
Expenditures
for segment assets
|
|
$
|
54
|
|
|
$
|
113
|
|
|
$
|
—
|
|
|
$
|
167
|
|
|
|
Reportable
Segment Financial Information
(thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
months ended 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
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain
on change in fair value of warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
489
|
|
|
$
|
489
|
|
Stock
option compensation expense
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
180
|
|
|
$
|
220
|
|
Royalty
expense amortization
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Assets
|
|
$
|
8,663
|
|
|
$
|
5,364
|
|
|
$
|
—
|
|
|
$
|
14,027
|
|
Expenditures
for segment assets
|
|
$
|
23
|
|
|
$
|
126
|
|
|
$
|
—
|
|
|
$
|
149
|
|
Note
5 — Property and Equipment
A
summary of property and equipment at September 30, 2018 and October 1, 2017 is as follows:
|
|
|
|
(Thousands)
|
|
|
|
Estimated
Useful Life
|
|
Year
Ended
September 30, 2018
|
|
|
Year
Ended
October 1, 2017
|
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
|
|
Furniture
and Fixtures
|
|
3-5yrs
|
|
$
|
378
|
|
|
$
|
368
|
|
Machinery
and Equipment
|
|
5
yrs
|
|
|
3,521
|
|
|
|
3,364
|
|
Leasehold
Improvements
|
|
7
yrs
|
|
|
276
|
|
|
|
276
|
|
Less:
Accumulated Depreciation
|
|
|
|
|
(2,875
|
)
|
|
|
(2,548
|
)
|
Net
Property & Equipment
|
|
|
|
$
|
1,300
|
|
|
$
|
1,460
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
Expense
|
|
|
|
$
|
327
|
|
|
$
|
337
|
|
During
the twelve months ended September 30, 2018, Optex Systems Holdings’ purchased $10 thousand and $157 thousand in new
furniture and fixtures and new machinery and equipment, respectively. There were no sales or retirements of property and
equipment during the twelve month period.
Note
6 — Accrued Expenses
The
components of accrued liabilities for the years ended September 30, 2018 and October 1, 2017 are summarized below:
|
|
Thousands
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
September
30, 2018
|
|
|
|
October
1, 2017
|
|
|
|
|
|
|
|
|
|
|
Deferred Rent Expense
|
|
$
|
111
|
|
|
$
|
123
|
|
Accrued Vacation
|
|
|
345
|
|
|
|
328
|
|
Property Taxes
|
|
|
111
|
|
|
|
105
|
|
Operating Expenses
|
|
|
470
|
|
|
|
778
|
|
Payroll & Payroll Related
|
|
|
132
|
|
|
|
116
|
|
Total Accrued Expenses
|
|
$
|
1,169
|
|
|
$
|
1,450
|
|
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. The monthly base
rent is $23.0 thousand through March 31, 2019, and annual rental payment inflationary increases between 3.4% and 4.8% occurring
April 1, each year. The monthly rent includes approximately $9.2 thousand for additional Common Area Maintenance fees and taxes
(CAM), to be adjusted annually based on actual expenses incurred by the landlord.
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 $20.0
thousand through September 30, 2018 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
$5.1 thousand for additional Common Area Maintenance fees and taxes (CAM), to be adjusted annually based on actual expenses incurred
by the landlord. Our obligations to make payments under the lease are secured by a $250,000 standby letter of credit which may
be reduced to $125,000 on October 31, 2019.
As
of September 30, 2018 the unamortized deferred rent was $111 thousand as compared to $123 thousand as of October 1, 2017. Deferred
rent expense is amortized monthly over the life of the leases.
As
of September 30, 2018, 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
|
|
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
|
|
$
|
719
|
|
|
$
|
279
|
|
|
$
|
787
|
|
|
$
|
191
|
|
|
$
|
1,976
|
|
Total
expense under both facility lease agreements for the twelve months ended September 30, 2018 was $688 thousand. Total expense
under both facility lease agreements as of the twelve months ended October 1, 2017 was $655 thousand.
Note
8 — Transactions with a Related Party
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 September 30, 2018, and October 1, 2017, accounts receivable
included no 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. On May 16, 2018, we announced that our Board of Directors approved a purchase
of 200,000 shares of its common stock in a private transaction.
As
of October 1, 2017 Sileas Corporation had zero Optex Systems Holdings, Inc. preferred and common share holdings remaining.
There
were no other transactions with Related Parties during fiscal years 2018 or 2017 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.
|
As
of May 1, 2017 The Sileas Corp. note balance to The Longview Fund, L.P. was $14,244,329. 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 was 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. The note balance was paid in full as
of April 2018. In order to effect the above, Longview also released the pledge on all Company shares owned by Sileas and previously
pledged to Longview.
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
The
Company amended its revolving credit facility with Avidbank pursuant to a Seventh Amendment to Amended and Restated Loan Agreement,
dated as of April 5, 2018. The new renewable revolving maturity date is April 21, 2020. The facility provides up to $2.2 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.
|
|
●
|
The
loan period is from April 5, 2018 through April 21, 2020 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.
|
|
●
|
On
April 21, 2018 and each anniversary thereof for so long as the Revolving Facility is in effect, the Company shall pay a facility
fee equal to one half of one percent (0.5%) of the Revolving Line.
|
|
●
|
The
Company can maintain accounts at third party banks so long as the total in those other bank accounts does not exceed 20% of
the total on deposit at Avidbank, and it shall remit to Avidbank monthly statements for all of those accounts within 30 days
of the end of each month.
|
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, 2019 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 September 30, 2018 and October 1, 2017, the outstanding principal balance on the line of credit was $300 thousand. For the
years ended September 30, 2018 and October 1, 2017, the total interest expense against the outstanding line of credit balance
was $20 thousand and $19 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 September 30, 2018, Optex Systems Holdings has granted stock options to officers
and employees as follows:
Date
of
|
|
Options
|
|
|
Exercise
|
|
|
Options
Outstanding
|
|
|
Expiration
|
|
Vesting
|
Grant
|
|
Granted
|
|
|
Price
|
|
|
As
of 09/30/18
|
|
|
Date
|
|
Period
|
12/09/11
|
|
|
46,070
|
|
|
$
|
10.00
|
|
|
|
34,980
|
|
|
12/08/2018
|
|
4
years
|
12/19/13
|
|
|
25,000
|
|
|
$
|
10.00
|
|
|
|
25,000
|
|
|
12/18/2020
|
|
4
years
|
Total
|
|
|
71,070
|
|
|
|
|
|
|
|
59,980
|
|
|
|
|
|
The
following table summarizes the status of Optex Systems Holdings’ aggregate stock options granted under the incentive stock
option plan:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Remaining
|
|
|
Fair
|
|
|
Average
|
|
|
Value
|
|
Subject
to Exercise
|
|
Options
|
|
|
Value
|
|
|
Life
(Years)
|
|
|
(Thousands)
|
|
Outstanding
as of October 2, 2016
|
|
|
60,340
|
|
|
$
|
—
|
|
|
|
3.02
|
|
|
$
|
—
|
|
Granted
– 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
– 2017
|
|
|
(330)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
– 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
as of October 1, 2017
|
|
|
60,010
|
|
|
$
|
—
|
|
|
|
2.03
|
|
|
$
|
—
|
|
Granted
– 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
– 2018
|
|
|
(30)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
– 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
as of September 30, 2018
|
|
|
59,980
|
|
|
$
|
—
|
|
|
|
1.03
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of October 1, 2017
|
|
|
56,260
|
|
|
$
|
—
|
|
|
|
1.95
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of September 30, 2018
|
|
|
59,980
|
|
|
$
|
—
|
|
|
|
1.03
|
|
|
$
|
—
|
|
There
were no options granted in the twelve months ended September 30, 2018 and October 1, 2017.
The
following table summarizes the status of Optex Systems Holdings’ aggregate non-vested shares granted under the 2009 Stock
Option Plan:
|
|
Number of
Non-vested Options
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Non-vested
as of October 2, 2016
|
|
|
7,500
|
|
|
$
|
8.00
|
|
Non-vested
granted — year ended October 1, 2017
|
|
|
—
|
|
|
|
—
|
|
Vested
— year ended October 1, 2017
|
|
|
(3,750
|
)
|
|
|
8.00
|
|
Forfeited
— year ended October 1, 2017
|
|
|
—
|
|
|
|
—
|
|
Non-vested
as of October 1, 2017
|
|
|
3,750
|
|
|
$
|
8.00
|
|
Non-vested
granted — year ended September 30, 2018
|
|
|
—
|
|
|
|
—
|
|
Vested
— year ended September 30, 2018
|
|
|
(3,750
|
)
|
|
|
8.00
|
|
Forfeited
— year ended September 30, 2018
|
|
|
—
|
|
|
|
—
|
|
Non-vested
as of September 30, 2018
|
|
|
-0-
|
|
|
$
|
—
|
|
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
|
|
Unvested
as of October 2 ,2016
|
|
|
|
200,000
|
|
Granted
- year ended 2017
|
|
|
|
50,000
|
|
Vested
- year ended 2017
|
|
|
|
(68,000
|
)
|
Unvested
as of October 1 ,2017
|
|
|
|
182,000
|
|
Granted
- year ended 2018
|
|
|
|
—
|
|
Vested
- year ended 2018
|
|
|
|
(83,000
|
)
|
Unvested
as of September 30, 2018
|
|
|
|
99,000
|
|
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.
On January 2, 2018, Optex Systems Holdings issued 55,902 common shares related to the vesting of the 83,000 restricted stock units
on January 1, 2018. The shares issued were net of 27,098 common shares withheld for employee federal income tax requirements.
Consulting
and Vendor Equity
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 equity instruments issued to consultants and vendors during the twelve months ended September
30, 2018.
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
|
|
|
|
September
30, 2018
|
|
|
October
1, 2017
|
|
|
September
30, 2018
|
|
|
October
1, 2017
|
|
Stock
Options
|
|
$
|
8
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Restricted
Stock Units
|
|
|
145
|
|
|
|
133
|
|
|
|
49
|
|
|
|
194
|
|
Consultant
Shares (IRTH)
|
|
|
—
|
|
|
|
47
|
|
|
|
—
|
|
|
|
—
|
|
Total
Stock Compensation
|
|
$
|
153
|
|
|
$
|
220
|
|
|
$
|
49
|
|
|
$
|
202
|
|
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 ended September 30, 2018 and October 1, 2017, 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 September 30, 2018 and October 1, 2017 were $136 thousand and $130 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 ended October 1, 2017 and September 30, 2018, respectively.
|
|
Common
|
|
Series
C
|
|
Warrants
|
(1)
|
Shares
outstanding as of October 2, 2016
|
|
|
8,266,601
|
|
|
360
|
|
|
4,323,135
|
|
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
|
|
|
4,323,135
|
|
Preferred
share conversions to common shares
|
|
|
725,000
|
|
|
(174
|
)
|
|
|
|
Common
shares issued for vested restricted stock units, net of tax withheld
|
|
|
55,902
|
|
|
—
|
|
|
|
|
Common
stock repurchases
|
|
|
(700,000
|
)
|
|
—
|
|
|
|
|
Common
stock issued for warrants exercised
|
|
|
62,350
|
|
|
—
|
|
|
(62,350)
|
|
Shares
outstanding as of September 30, 2018
|
|
|
8,333,353
|
|
|
—
|
|
|
4,260,785
|
|
(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, 364,435 five-year warrants to purchase one share of common stock with an
exercise price of $1.50 per share were issued to the underwriter. The total outstanding warrants have been corrected to reflect
197,935 underwriter warrants issued on August 26, 2016 related the public offering which were erroneously omitted from the total
outstanding balance.
Dividends
On
June 26, 2017, the board of directors approved a resolution authorizing a $0.02 per share (and per warrant) dividend payment on
July 12, 2017, for common and preferred series C shareholders and warrant holders of record as of July 5, 2017 and for three subsequent
quarterly record dates thereafter. Quarterly dividends of $261 thousand were paid out to share and warrant holders on July 12,
2017. Optex Systems Holdings recorded an additional $261 thousand in dividends payable as of October 1, 2017 for declared dividends
paid on October 19, 2017. During the twelve months ended September 30, 2018, Optex Systems Holdings recorded $523 in declared
dividends for dividends paid to share and warrant holders of record as of January 12, 2018 and April 12, 2018. There are no additional
dividend payments declared subsequent to the April 12, 2018 record date. As of period ended September 30, 2018, there were no
outstanding dividends payable.
Common
stock
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 ended 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.
On
May 16, 2018 and on July 10, 2018 we announced that our Board of Directors approved a purchase of 200,000 and 500,000 shares of
its common stock two separate private transactions. Each of the transactions were priced at $1.00 per share for total transaction
amounts of $700,000. Upon repurchase, the shares were returned to treasury and cancelled.
On
September 17, 2018, we issued 62,350 common shares for the exercise of 62,350 warrants at an exercise price of $1.50 per share
for a total transaction value of $93,525 cash.
During
the twelve months ended September 30, 2018, Optex Systems Holdings issued 725,000 common shares due to conversions of Series
C preferred stock, and 55,902 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 September 30, 2018. As of September 30, 2018,
the outstanding common shares were 8,333,353.
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”).
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.
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 as of October 2, 2016 there were 360 preferred Series C shares outstanding.
During
the twelve months ended October 1, 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.
During
the twelve months ended September 30, 2018, there were no new issues of preferred Series C shares, and conversions of 174
preferred Series C shares, or $0.9 million, into 725,000 common shares. As of September 30, 2018 all 400 of the Series C
shares have been converted into common shares and there are zero outstanding Series C preferred shares.
Warrants
On
August 26, 2016, Optex Systems Holdings Inc. issued 4,323,135 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.
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 under ticker
symbol “OPXXW”.
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 ended October 1, 2017, none of the 4,323,135 warrants had been exercised. During the twelve months ended September
30, 2018, 62,350 warrants had been exercised for a transaction amount of $93.5 thousand. As of September 30, 2018 there were 4,260,785
outstanding warrants remaining.
Note
13 — Warrant Liabilities
On
August 26, 2016, Optex Systems Holdings, Inc. issued 4,323,135 warrants to new shareholders and the underwriter, in connection
with a public share offering. The warrants entitle the holder to purchase one share of our common stock at an exercise price equal
to $1.50 per share at any time on or after August 26, 2016 (the “Initial Exercise Date”) and on or prior to the close
of business on August 26, 2021 (the “Termination Date”). The Company determined that these warrants are free standing
financial instruments that are legally detachable and separately exercisable from the common stock included in the public share
offering. Management also determined that the warrants are puttable for cash upon a fundamental transaction at the option of the
holder and as such required classification as a liability pursuant to ASC 480 “Distinguishing Liabilities from Equity”.
The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur
during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are
recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured
at each reporting period with changes being recorded as a component of other income in the statement of operations.
As
of the twelve months September 30, 2018, the Company reviewed the valuation technique and inputs used to determine the fair
value of the outstanding warrants. For each of the prior year measurement dates, the Company engaged an outside valuation
company to calculate the fair value of warrants based on both the binomial lattice model (“Binomial”) and the
Black Scholes-Merton option pricing model (“BSM”). For each of the periods previously presented through the year
ended October 1, 2017, the Company disclosed the valuation technique as binomial, although the two models yielded comparable
results with minimal or no variation in the fair value calculation of the warrants at each of the respective measurement
dates. As the BSM model yielded similar results with the Binomial model and can be completed with in-house expertise at a
lower cost, effective as of April 1, 2018, the Company determined the BSM model will be used exclusively to value the
outstanding warrants throughout the remaining term of the warrants.
Further,
the Company reviewed the model volatility rate input by comparing the historical volatility of the traded common stock (OPXS)
against similarly traded equities over the same time period, the historical volatility of the Optex common stock subsequent to
the August 26, 2016 public offering as compared to the volatility rate during the period which preceded the public offering, and
the implied volatility based on the Optex warrant shares traded on the over-the-counter market (“OTC”) under ticker
OPXXW. Based on the review, the Company believes the historical 2.9 year volatility rate on the common shares, based on the remaining
term of the warrants, includes periods of significantly lower trading volume that precedes the public offering and which is not
representative of the expected volatility over their remaining life. Recent trend information indicates the increase in common
share float subsequent to the public offering combined with the concurrent preferred share conversions have significantly increased
the frequency of trades and the average daily volume levels minimizing the volatility fluctuations which had previously existed
on the common shares prior to the capitalization change. In addition, a substantially lower implied volatility on the warrants
based on the available OTC market data, indicate that current market participants have assumed a future volatility comparable
to the most recent experience rate. Accordingly, the current period BSM model fair value measurement assumes the adjusted 2.1
year historical volatility input rate of 64.05%, which exceeds the implied volatility rate of 33.0% derived from the OTC market
data as of the measurement date but values the warrants within the range of trading prices during the most recent period end date.
The
fair value of the warrant liabilities presented below were measured using either a Binomial (through October 1, 2017) or BSM (as
of September 30, 2018) valuation model. Significant inputs into the respective model at the inception and reporting period measurement
dates are as follows:
Binomial
Assumptions
|
|
Issuance
date
(1)
August 26, 2016
|
|
|
Period
ended
October 1, 2017
|
|
|
Period
ended
September 30, 2018
|
|
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
|
|
|
$
|
0.98
|
|
|
$
|
1.71
|
|
Interest
Rate (annual)
(3)
|
|
|
1.23
|
%
|
|
|
1.62
|
%
|
|
|
2.88
|
%
|
Volatility
(annual)
(4)
|
|
|
246.44
|
%
|
|
|
179.36
|
%
|
|
|
64.05
|
%
|
Time
to Maturity (Years)
|
|
|
5.0
|
|
|
|
3.9
|
|
|
|
2.9
|
|
Calculated
fair value per share
|
|
$
|
0.93
|
|
|
$
|
0.87
|
|
|
$
|
0.82
|
|
(
1)
Based on the terms provided in the warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26,
2016.
(2)
Based on the trading value of common stock of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending
date.
(3)
Interest rate for U.S. Treasury Bonds, as of August 26, 2016 and each presented period ending date, as published by the U.S. Federal
Reserve.
(4)
Based on the historical daily volatility of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending
date.
The
warrants outstanding and fair values at each of the respective valuation dates are summarized below:
Warrant
Liability
|
|
Warrants
Outstanding
|
|
Fair
Value
per Share
|
|
Fair
Value
(000’s)
|
Fair
Value as of period ended 10/2/2016
(1)
|
|
|
4,323,135
|
|
|
$
|
0.76
|
|
|
$
|
3,118
|
|
Loss
on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
489
|
|
Fair
Value as of period ended 10/01/2017
(1)
|
|
|
4,323,135
|
|
|
$
|
0.87
|
|
|
$
|
3,607
|
|
Reclassification
to additional paid in capital for correction to underwriter warrants outstanding
(1)
|
|
|
—
|
|
|
|
|
|
|
|
41
|
|
Reclassification
to additional paid in capital upon exercise of warrants
(2)
|
|
|
(62,350
|
)
|
|
|
|
|
|
|
(53
|
)
|
(Gain)
on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
Fair
Value as of period ended 09/30/2018
|
|
|
4,260,785
|
|
|
$
|
0.82
|
|
|
$
|
3,500
|
|
|
(1)
|
Correction
to Additional Paid in Capital and Warrant Liability for 197,935 outstanding warrants
issued to underwriters on August 26, 2016. Total warrants were incorrectly reflected
as 4,125,200 and should have been 4,323,135.
|
|
(2)
|
Warrants
exercised on September 17, 2018 for gross proceeds of $93.5 thousand. The fair market
value of the warrants as of the exercise date was $53 thousand and was reclassed to additional
paid in capital.
|
During
the twelve months ended September 30, 2018 Optex Systems Holdings recorded a gain on changes in fair value of warrant liability
of ($95) thousand. During the twelve months ended October 1, 2017, Optex Systems Holdings recognized a loss on change in fair
value of warranty liabilities of $489 thousand. During the twelve months ended September 30, 2018, 62,350 warrants were exercised
for cash proceeds of $93.5 thousand and a re-measurement fair value of $53 thousand as of the September 17, 2018 exercise date.
During the twelve months ended October 1, 2017 none of the warrants were exercised. During the twelve month period ended September
30, 2018, the Company made a correction of 197,935 outstanding restricted warrants which were issued to underwriters during the
public offering on August 26, 2016 which resulted in a $41 thousand correction to additional paid in capital and depicted separately
in the table presented above.
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 September 30, 2018 and October 1, 2017 include the following:
|
|
(Thousands)
|
|
|
|
2018
|
|
|
2017
|
|
Current
income tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
167
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
167
|
|
|
|
—
|
|
Deferred
income tax provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,682
|
|
|
|
76
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Change
in valuation allowance
|
|
|
(1,682
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for (Benefit from) income taxes, net
|
|
$
|
167
|
|
|
$
|
-0-
|
|
During
the twelve months ended September 30, 2018, the Company recognized a $1.6 million change to our deferred tax asset and
corresponding valuation account allowance primarily related to the change in statutory tax rate from 34% to 21% which was
effective as of December 22, 2017.
The
income tax provision for Optex Systems as of September 30, 2018 differs from those computed using the statutory federal tax rate
in the respective years due to the following permanent differences:
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
provision (benefit) at statutory federal rate
(1)
|
|
$
|
378
|
|
|
|
24
|
|
|
$
|
63
|
|
|
|
34
|
|
Nondeductible
expenses
|
|
|
(23
|
)
|
|
|
(1)
|
|
|
|
13
|
|
|
|
7
|
|
Change
in valuation and other temporary differences
|
|
|
(188
|
)
|
|
|
(12)
|
|
|
|
(76
|
)
|
|
|
(41
|
)
|
Provision
for (Benefit from) income taxes, net
|
|
$
|
167
|
|
|
|
11
|
|
|
$
|
-0-
|
|
|
|
-0-
|
|
(1)
|
Due
the Company fiscal period beginning date of October 2, 2017 and the effective date of
January 1, 2018 of the statutory rate change from 34% to 21%, the Company is required
to use a weighted average statutory rate for the fiscal year period. The anticipated
statutory rate for the fiscal year period beginning October 1, 2018 will be 21.0%.
|
Deferred
income taxes recorded in the balance sheets result 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
|
|
|
|
As
of
September 30,
2018
|
|
|
As
of
October 1,
2017
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
$
|
139
|
|
|
$
|
382
|
|
Inventory
Reserve
|
|
|
351
|
|
|
|
321
|
|
Unicap
|
|
|
31
|
|
|
|
50
|
|
Deferred
Compensation
|
|
|
46
|
|
|
|
55
|
|
Contract
Loss Reserve
|
|
|
—
|
|
|
|
(279
|
)
|
Fixed
assets
|
|
|
(23
|
)
|
|
|
130
|
|
Goodwill
Amortization
|
|
|
498
|
|
|
|
1,128
|
|
Intangible
Asset Amortization
|
|
|
283
|
|
|
|
549
|
|
Net
Operating Losses
|
|
|
1,451
|
|
|
|
2,210
|
|
Other
|
|
|
117
|
|
|
|
30
|
|
Subtotal
|
|
$
|
2,893
|
|
|
$
|
4,576
|
|
Valuation
allowance
|
|
|
(2,893
|
)
|
|
|
(4,576
|
)
|
Net
deferred asset (liability)-long term
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
The
Company has a net loss carryforward of $6.9 million as of September 30, 2018 as compared to a net loss carryforward of $6.5 million
as of October 1, 2017. Due to an IRS section 382 change in control limitation which was effective during the fiscal year ended
2017, it is anticipated that the company may only realize $3.1 million of the current net operating loss carryforward for a net
tax benefit of $0.7 million over the next nineteen years.
During
the twelve months ended September 30, 2018, the Company recognized a $1.6 million change in the deferred tax assets and
corresponding deferred tax asset valuation as result of a change in statutory tax rates from 34% to 21% which was effective
as of December 22, 2017 and an additional $0.1 million for current year changes in the net operating
loss carryforward and other deferred tax assets related to the current year period activity. As of September 30, 2018
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. As of September 30,
2018 Optex Systems Inc. has a deferred tax asset valuation allowance of ($2.9) million against a deferred tax asset of $2.9
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 ended in September 30, 2018, October 1, 2017 and October 2, 2016 are open to examination by the major taxing jurisdictions
to which the Optex Systems Holdings is subject.
During
the twelve months ended September 30, 2018 the Company paid $144 thousand in income taxes, and the outstanding accrued federal
income tax liability related to the fiscal year 2018 tax year is $22 thousand. There were no income taxes paid during the fiscal
year ended October 1, 2017 or outstanding tax liabilities accrued as of the fiscal year 2017 period end.
Note
15 — Subsequent Events
On
November 20, 2018 the Company’s board of directors approved executive compensation as follows:
|
-
|
30%
bonus payable in December 2018 to Danny Schoening, CEO and Karen Hawkins, CFO based on
exceeding the annual revenue and profit performance targets as well as increasing shareholder
value during the twelve month period. The bonus was paid on December 7, 2018.
|
|
-
|
8%
salary increases for Danny Schoening, CEO and Karen Hawkins, CFO, effective as of January
1, 2019
|
|
-
|
The
issuance of 150,000 and 50,000 restricted stock units with a January 2, 2019 grant date,
to Danny Schoening and Karen Hawkins, respectively, and vesting as of January 1 each
year subsequent to the grant date over a three year period at a rate of 34% in year one,
and 33% each year thereafter.
|
On
November 19, 2018, the Company announced a follow on $0.9 million order from an international customer for its patented Digital
Day Digital Night (DDAN) Weapon System with deliveries through 2021.
On
November 26, 2018, the Company announced a $1.9 million order from Defense Logistics Agency Land and Maritime for Laser Protected
Periscopes for delivery in 2019 and 2020.