Item
1. Consolidated Financial Statements
OPTEX
SYSTEMS HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF JANUARY 2, 2022
Optex
Systems Holdings, Inc.
Condensed
Consolidated Balance Sheets
The
accompanying notes are an integral part of these financial statements
Optex
Systems Holdings, Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
The
accompanying notes are an integral part of these financial statements
Optex
Systems Holdings, Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
The
accompanying notes are an integral part of these financial statements
Optex
Systems Holdings, Inc.
Consolidated
Statement of Stockholders’ Equity
(Thousands,
except share data)
|
|
Three
months ended December 27, 2020
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
Treasury
|
|
|
Common
|
|
|
Treasury
|
|
|
Paid in
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Issued
|
|
|
Shares
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
Balance at September 27, 2020
|
|
|
8,795,869
|
|
|
|
105,733
|
|
|
$
|
9
|
|
|
$
|
(200
|
)
|
|
$
|
26,276
|
|
|
$
|
(12,109
|
)
|
|
$
|
13,976
|
|
Stock Compensation Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57
|
|
|
|
-
|
|
|
|
57
|
|
Common Stock Repurchase (1)
|
|
|
-
|
|
|
|
208,592
|
|
|
|
-
|
|
|
|
(415
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(415
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,087
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
27, 2020
|
|
|
8,795,869
|
|
|
|
314,325
|
|
|
$
|
9
|
|
|
$
|
(615
|
)
|
|
$
|
26,333
|
|
|
$
|
(11,022
|
)
|
|
$
|
14,705
|
|
|
(1)
|
Common
shares repurchased in the open market during the three months ended January 2, 2022 and December 27, 2020, respectively. The shares
are held as treasury stock using the cost method.
|
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. The Company also manufactures and delivers numerous periscope configurations, rifle and surveillance sights
and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that
are delivered both directly to the military and to other defense prime contractors or commercial customers. The Company’s consolidated
revenues for the three months ended January 2, 2022 were derived from the U.S. government (15%), three major U.S. defense contractors
(25%, 8% and 6%, respectively), one major commercial customer (26%) and all other customers (20%). Approximately 92% of the total company
revenue is generated from domestic customers and 8% is derived from foreign customers, primarily in Canada. Optex Systems Holdings’
operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of January 2, 2022, Optex
Systems Holdings operated with 87 full-time equivalent employees.
We
may be at risk as a result of the current COVID-19 pandemic. Risks that could affect our business include the duration and scope of the
COVID-19 pandemic and the impact on the demand for our products; impacts on our supply chain; actions by governments, businesses and
individuals taken in response to the pandemic; the length of time of the pandemic and the possibility of its reoccurrence; the timing
required to develop and implement effective treatments; the success of global vaccination efforts; the eventual impact of the pandemic
and actions taken in response to the pandemic on global and regional economies; and the pace of recovery when the pandemic subsides.
Beginning
in April 2020 through October 3, 2021, we experienced a significant reduction in new orders and ending customer backlog in our Optex
Richardson segment, resulting in an overall decrease in backlog of 40% between September 29, 2019 and October 3, 2021. We attribute the
lower orders to a combination of factors including a COVID-19 driven slow-down of contract awards for both U.S. military sales and foreign
military sales (FMS), combined with significant shifting in defense spending budget allocations in US military sales and FMS away from
Army ground system vehicles toward other military agency applications. In addition, the pandemic has caused several program delays throughout
the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar
supply chain issues.
While
the Applied Optics Center segment experienced a significant decline in orders during the second half of fiscal year 2020, the segment
saw a sizable increase in new orders during the fiscal year ended October 3, 2021 as a result of increased military spending in Army
infantry optical equipment, a larger customer base and higher customer demand for commercial optical assemblies. As of October 3, 2021,
the Applied Optics Center segment backlog had increased by 153% as compared to the level on September 29, 2019. As a result of this significant
shift in orders and backlog between segments, we anticipate corresponding shifts in revenue during the 2022 fiscal year, with revenue
from the Optex Richardson segment decreasing, and revenue from the Applied Optics Center segment increasing.
Note
2 - Accounting Policies
Basis
of Presentation
Principles
of Consolidation: The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary,
Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.
The
condensed consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings, without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote
disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make
the information presented not misleading.
These
condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and
the notes thereto included in the Optex Systems Holdings’ Form 10-K for the year ended October 3, 2021 and other reports filed
with the SEC.
The
accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature which
are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of Optex
Systems Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or
indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required
for interim financial reporting purposes has been omitted.
Inventory:
As of January 2, 2022, and October 3, 2021, inventory included:
Schedule
of Inventory
|
|
January
2, 2022
|
|
|
October
3, 2021
|
|
|
|
(Thousands)
|
|
|
|
January
2, 2022
|
|
|
October
3, 2021
|
|
Raw Material
|
|
$
|
4,580
|
|
|
$
|
4,926
|
|
Work in Process
|
|
|
3,287
|
|
|
|
2,664
|
|
Finished Goods
|
|
|
685
|
|
|
|
629
|
|
Gross Inventory
|
|
$
|
8,552
|
|
|
$
|
8,219
|
|
Less: Inventory Reserves
|
|
|
(633
|
)
|
|
|
(636
|
)
|
Net
Inventory
|
|
$
|
7,919
|
|
|
$
|
7,583
|
|
Concentration
of Credit Risk: Optex Systems Holdings’ accounts receivables as of January 2, 2022 consist of U.S. government agencies
(10%), five major U.S. defense contractors (17%, 17%, 14%, 9% and 6%, respectively), one foreign military agency (7%), one commercial
customer (13%) and all other customers (7%). The Company does not believe that this concentration results in undue credit risk because
of the financial strength of the customers and the Company’s long history with these customers.
Accrued
Warranties: Optex Systems Holdings accrues product warranty liabilities based on the historical return rate against period shipments
as they occur and reviews and adjusts these accruals quarterly for any significant changes in estimated costs or return rates. The accrued
warranty liability includes estimated costs to repair or replace returned warranty backlog units currently in-house plus estimated costs
for future warranty returns that may be incurred against warranty covered products previously shipped as of the period end date. As of
January 2, 2022, and October 3, 2021, the Company had warranty reserve balances of $122 thousand and $78 thousand, respectively.
Schedule
of Warranty Reserves
|
|
Three
months ended
|
|
|
|
January
2, 2022
|
|
|
December
27, 2020
|
|
Beginning balance
|
|
$
|
78
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
Incurred costs for warranties satisfied during
the period
|
|
|
(2
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
Warranty Expenses:
|
|
|
|
|
|
|
|
|
Warranties
reserved for new product shipped during the period(1)
|
|
|
46
|
|
|
|
4
|
|
Change
in estimate for pre-existing warranty liabilities (2)
|
|
|
-
|
|
|
|
5
|
|
Warranty Expense
|
|
|
46
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
122
|
|
|
$
|
49
|
|
(1)
|
|
Warranty expenses
accrued to cost of sales (based on current period shipments and historical warranty return rate).
|
(2)
|
|
Changes in estimated
warranty liabilities recognized in cost of sales associated with: the period end customer returned warranty backlog, or the actual costs
of repaired/replaced warranty units which were shipped to the customer during the current period.
|
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.
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 cash and cash equivalents, accounts receivable and accounts payable, are carried at, or approximate, fair value as
of the reporting date because of their short-term nature. The credit facility is reported at fair value as it bears market rates of interest.
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 6 “Warrant Liabilities”. The warrant liability measurement 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.
Revenue
Recognition: The majority of 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. We have elected to account for shipping and handling costs
as fulfillment costs after the customer obtains control of the goods. 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. During the three months ended January 2, 2022 and December 27, 2020, there was $120 thousand and $120 thousand
in service contract revenue recognized over time.
During
the three-month periods ended January 2, 2022 and December 27, 2020, there was zero and $1 thousand of revenue recognized from customer
deposit liabilities (deferred contract revenue). As of January 2, 2022, there are no customer deposit liabilities. As of the three months
ended January 2, 2022, there are no sales commissions or other significant deferred contract costs.
Income
Tax/Deferred Tax: As of January 2, 2022 and October 3, 2021, Optex Systems, Inc. has a deferred tax asset valuation allowance
of ($0.8) million against deferred tax assets of $2.1 million. The valuation allowance has been established due to historical losses
resulting in a Net Operating Loss Carryforward for each of the fiscal years 2011 through 2016 which may not be fully recognized due to
an IRS Section 382 limitation related to a change in control. During the three months ended January 2, 2022, our deferred tax assets
increased by $14 thousand related to temporary tax adjustments].
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.
A
significant number of our warrants outstanding through August 26, 2021 were participating securities, which shared dividend distributions
and the allocation of any undistributed earnings (deemed dividends) with our common shareholders. Since the warrants expired in accordance
with their terms on August 26, 2021, during the three months ended January 2, 2022, there were no declared dividends and no allocated
undistributed earnings attributable to the participating warrants, respectively. During the three months ended December 27, 2020, there
were no declared dividends and $361 thousand in allocated undistributed earnings attributable to the participating warrants, respectively.
The
Company has potentially dilutive securities outstanding which include unvested restricted stock units, stock options and, for the quarter
ended December 27, 2020, warrants. In computing the dilutive effect of warrants, the numerator is adjusted to add back any deemed dividends
on participating securities (warrants) and the denominator is increased to assume the conversion of the number of additional incremental
common shares. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Unvested restricted
stock units, stock options and warrants that are anti-dilutive are excluded from the calculation of diluted earnings per common share.
For
the three months ended January 2, 2022, 66,000 unvested restricted stock units and 180,000 shares of unvested restricted stock (which
convert to an aggregate of 52,861 incremental shares) were included in the diluted earnings per share calculation due to the antidilutive
effect of the undistributed earnings. For the three months ended December 27, 2020, 182,000 unvested restricted stock units and 300,000
shares of unvested restricted stock (which convert to an aggregate of 188,764 incremental shares) were included in the diluted earnings
per share calculation and 4,125,200 warrants (which convert to 984,185 incremental shares) were excluded from the diluted earnings per
share calculation due to the antidilutive effect of the undistributed earnings
Note
3 - Segment Reporting
The
Company’s reportable segments are strategic businesses offering similar products to similar markets and customers; however, the
companies are operated and managed separately due to differences in manufacturing technology, equipment, geographic location, and specific
product mix. Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was retained. 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
The
Optex Systems segment revenue is comprised of approximately 82%
domestic military customers and 18%
foreign military customers. For the three months
ended January 2, 2022, Optex Systems – Richardson represented 43%
of the Company’s total consolidated revenue
and consisted of the U.S. government (15%)
one major U.S. defense contractor (19%),
and all other customers (9%).
Optex
Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of January 2, 2022, the
Richardson facility operated with 47 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 approximately 48%
and military sales to prime and subcontracted
customers represent approximately 52%
of the external segment revenue. Approximately
93%
of the AOC revenue is derived from external customers
and approximately 7%
is related to intersegment sales to Optex Systems
in support of military contracts. For the three months ended January 2, 2022, AOC represented 57%
of the Company’s total consolidated revenue
and consisted of three major defense contractors (8%,
6%
and 6%),
one commercial customer (26%),
and all other customers (11%).
The
Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of
January 2, 2022, AOC operated with 40 full time equivalent employees in a single shift operation.
The
financial tables below present information on the reportable segments’ profit or loss for each period, as well as segment assets
as of each period end The Company does not allocate interest expense, income taxes or unusual items to segments.
Schedule
of Segment Reporting Information
|
|
Reportable
Segment Financial Information
(thousands)
|
|
|
|
As
of and for the three months ended January 2, 2022
|
|
|
|
Optex
Systems
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non-allocated costs and intersegment eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
1,857
|
|
|
$
|
2,483
|
|
|
$
|
-
|
|
|
$
|
4,340
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
180
|
|
|
|
(180
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
1,857
|
|
|
$
|
2,663
|
|
|
$
|
(180
|
)
|
|
$
|
4,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
10
|
|
|
$
|
62
|
|
|
$
|
-
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
)
|
|
$
|
|
|
$
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(236
|
)
|
|
$
|
236
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Stock compensation expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
57
|
|
|
$
|
57
|
|
Warranty expense
|
|
$
|
-
|
|
|
$
|
46
|
|
|
$
|
-
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
14,267
|
|
|
$
|
7,088
|
|
|
$
|
-
|
|
|
$
|
21,355
|
|
Expenditures for segment assets
|
|
$
|
25
|
|
|
$
|
65
|
|
|
$
|
-
|
|
|
$
|
90
|
|
|
|
Reportable
Segment Financial Information
(thousands)
|
|
|
|
As
of and for the three months ended December 27, 2020
|
|
|
|
Optex
Systems
Richardson
|
|
|
Applied
Optics Center
Dallas
|
|
|
Other
(non-allocated costs and intersegment eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
3,029
|
|
|
$
|
1,442
|
|
|
$
|
-
|
|
|
$
|
4,471
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
366
|
|
|
|
(366
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
3,029
|
|
|
$
|
1,808
|
|
|
$
|
(366
|
)
|
|
$
|
4,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
11
|
|
|
$
|
52
|
|
|
$
|
-
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
|
|
$
|
)
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(200
|
)
|
|
$
|
200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain on change in fair
value of warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,027
|
)
|
|
$
|
(1,027
|
)
|
Stock compensation expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
57
|
|
|
$
|
57
|
|
Warranty expense
|
|
$
|
-
|
|
|
$
|
9
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
13,985
|
|
|
$
|
5,865
|
|
|
$
|
-
|
|
|
$
|
19,850
|
|
Expenditures for segment assets
|
|
$
|
20
|
|
|
$
|
61
|
|
|
$
|
-
|
|
|
$
|
81
|
|
Note
4 - Commitments and Contingencies
Non-cancellable
Operating Leases
Optex
Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc., Richardson address and the Applied Optics
Center Dallas address, as well as certain office equipment under non-cancellable operating leases.
The
leased facility under Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space
at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through
March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months,
commencing on April 1, 2021 and ending on May 31, 2028. The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each
year thereafter. The initial term included 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately
$11.3 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 located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet
of space at the premises. The previous lease term for this location expired on October 31, 2021 and the monthly base rent was $21.9 thousand
through the end of the lease. On January 11, 2021 the Company executed a first amendment extending the terms of the lease for eighty-six
(86) months, commencing on November 1, 2021 and ending on December 31, 2028. The initial base rent is set at $23.6 thousand as of January
1, 2022 and escalates 2.75% on January 1 each year thereafter. The initial term includes 2 months of rent abatement for November and
December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing
rental rate” or the then current base rental rate. Our obligations to make payments under the lease are secured by a $125,000 standby
letter of credit. The monthly rent includes approximately $7.9 thousand for additional CAM, to be adjusted annually based on actual expenses
incurred by the landlord.
Execution
of the new lease amendments for the Dallas and Richardson facilities on January 11, 2021 resulted in the balance sheet recognition of
a right-of-use asset of $3.7 million and corresponding operating lease liabilities of approximately $3.7 million during the twelve months
ended October 3, 2021.
The
Company had one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease
cost for the equipment was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November
18, 2021 for an additional 48 months at a cost of $1.2 thousand per month. Equipment
for the lease has not yet been delivered due to part shortages. The lease effectivity date has been delayed by the supplier pending
the receipt of the equipment by Optex.
As
of January 3, 2022, the remaining minimum lease and estimated CAM payments under the non-cancelable facility space leases are as follows:
Schedule
of Non-cancellable Operating Leases Minimum Payments
Fiscal Year
|
|
Facility
Lease
Payments
|
|
|
Facility
Lease
Payments
|
|
|
Total
Lease Payments
|
|
|
Total
Variable CAM Estimate
|
|
|
|
Non-cancellable
Operating Leases
(Thousands)
|
|
|
|
|
|
|
Optex
Richardson
|
|
|
Applied
Optics Center
|
|
|
Consolidated
|
|
Fiscal Year
|
|
Facility
Lease
Payments
|
|
|
Facility
Lease
Payments
|
|
|
Total
Lease Payments
|
|
|
Total
Variable CAM Estimate
|
|
2022 Base year lease
|
|
|
232
|
|
|
|
212
|
|
|
|
444
|
|
|
|
175
|
|
2023 Base year lease
|
|
|
317
|
|
|
|
288
|
|
|
|
605
|
|
|
|
235
|
|
2024 Base year lease
|
|
|
327
|
|
|
|
296
|
|
|
|
623
|
|
|
|
240
|
|
2025 Base year lease
|
|
|
336
|
|
|
|
305
|
|
|
|
641
|
|
|
|
245
|
|
2026 Base year lease
|
|
|
346
|
|
|
|
313
|
|
|
|
659
|
|
|
|
249
|
|
2027 Base year lease
|
|
|
357
|
|
|
|
322
|
|
|
|
679
|
|
|
|
254
|
|
2028 Base year lease
|
|
|
242
|
|
|
|
330
|
|
|
|
572
|
|
|
|
184
|
|
2029 Base year lease
|
|
|
-
|
|
|
|
83
|
|
|
|
83
|
|
|
|
27
|
|
Total base lease payments
|
|
|
2,157
|
|
|
$
|
2,149
|
|
|
|
4,306
|
|
|
$
|
1,609
|
|
Imputed
interest on lease payments (1)
|
|
|
(316
|
)
|
|
|
(341
|
)
|
|
|
(657
|
)
|
|
|
|
|
Total
Operating Lease Liability(2)
|
|
$
|
1,841
|
|
|
$
|
1,808
|
|
|
$
|
3,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use
Asset(3)
|
|
$
|
1,773
|
|
|
$
|
1,758
|
|
|
$
|
3,531
|
|
|
|
|
|
(1)
|
Assumes
a discount borrowing rate of 5.0% on the new lease amendments effective as of January 11, 2021.
|
(2)
|
Includes
$118 thousand of unamortized deferred rent.
|
(3)
|
Short-term
and Long-term portion of Operating Lease Liability is $579 thousand and $3,070 thousand, respectively.
|
Total
facilities rental and CAM expense for both facility lease agreements as of the three months ended January 2, 2022 and December 27, 2020
was $209 thousand and $178 thousand, respectively. Total office equipment rentals included in operating expenses was $4 and $5 thousand
for the three months ended January 2, 2022 and December 27, 2020, respectively.
Note
5 - Debt Financing
Credit
Facility — PNC Bank (formerly BBVA, USA)
On
April 16, 2020, the Company terminated its facility with Avidbank and entered into a new facility with BBVA USA.
On
April 16, 2020, Optex Systems Holdings, Inc. and its subsidiary, Optex Systems, Inc. (collectively, the “Borrower”)
entered into a line of credit facility (the “Facility”) with BBVA, USA. In June 2021, PNC Bank completed its acquisition
of BBVA, USA and the bank name changed to PNC Bank (“PNC”). The substantive terms are as follows:
|
●
|
The
principal amount of the Facility is $2.25 million. The Facility matures on April 15, 2022. The interest rate is variable based on
PNC’s Prime Rate plus a margin of -0.250%, initially set at 3% at loan origination, and all accrued and unpaid interest is
payable monthly in arrears starting on May 15, 2020; and the principal amount is due in full with all accrued and unpaid interest
and any other fees on April 15, 2022.
|
|
|
|
|
●
|
There
are commercially standard covenants including, but not limited to, covenants regarding maintenance of corporate existence, not incurring
other indebtedness except trade debt, not changing more than 25% stock ownership of Borrower, and a Fixed Charge Coverage Ratio of
1.25:1, with the Fixed Charge Coverage Ratio defined as (earnings before taxes, amortization, depreciation, amortization and rent
expense less cash taxes, distribution, dividends and fair value of warrants) divided by (current maturities on long term debt plus
interest expense plus rent expense). As of January 2, 2022, the Company was in compliance with the covenants.
|
|
|
|
|
●
|
The
Facility contains commercially standard events of default including, but not limited to, not making payments when due; incurring
a judgment of $10,000 or more not covered by insurance; not maintaining collateral and the like.
|
|
|
|
|
●
|
The
Facility is secured by a first lien on all of the assets of Borrower.
|
The
outstanding balance on the facility was zero as of January 2, 2022 and October 3, 2021. For the three months ended January 2, 2022 and
December 27, 2020, the total interest expense against the outstanding line of credit balance was zero and $3 thousand, respectively.
Note
6-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 entitled 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 and on or prior to the close of business on August 26, 2021 (the “Termination
Date”). The Company determined that these warrants were free standing financial instruments that were legally detachable and separately
exercisable from the common stock included in the public share offering. Management also determined that the warrants were 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 had no plans to consummate a fundamental transaction and did
not believe a fundamental transaction was likely to occur during the remaining term of the warrants. In accordance with the accounting
guidance, the outstanding warrants were recognized as a warrant liability on the balance sheet, and were measured at their inception
date fair value and subsequently re-measured at each reporting period with changes recorded as a component of other income in the consolidated
statement of income. The warrants expired on the Termination Date in accordance with their terms; therefore, no warrants were outstanding
as of October 3, 2021 or during the three months ended January 2, 2022.
The
fair value of the warrant liabilities presented below were measured using a Black Scholes Merton (BSM) valuation model. Significant inputs
into the respective model at the reporting period measurement dates are as follows:
Schedule
of Warrant Liabilities Assumptions Used
Valuation
Assumptions
|
|
Period
ended
September
27,
2020
|
|
|
Period
ended
December
27,
2020
|
|
Exercise Price (1)
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
Warrant Expiration Date (1)
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
Stock Price (2)
|
|
$
|
1.96
|
|
|
$
|
1.73
|
|
Interest Rate (annual) (3)
|
|
|
0.12
|
%
|
|
|
0.11
|
%
|
Volatility (annual)
|
|
|
51.67
|
%
|
|
|
44.77
|
%
|
Time to Maturity (Years)
|
|
|
0.9
|
|
|
|
0.7
|
|
Calculated fair value per share
|
|
$
|
0.62
|
|
|
$
|
0.37
|
|
(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 each presented period end date.
|
(3)
|
Interest rate for U.S. Treasury Bonds as each presented period ended date, as published by the U.S. Federal Reserve.
|
The
warrants outstanding and fair values at each of the respective valuation dates are summarized below:
Summary
of Warrants Outstanding and Fair Values
Warrant
Liability
|
|
Warrants
Outstanding
|
|
|
Fair
Value
per
Share
|
|
|
Fair
Value
(000’s)
|
|
Fair Value as of period ended
9/27/2020
|
|
|
4,125,200
|
|
|
$
|
0.62
|
|
|
$
|
2,544
|
|
Gain on Change in Fair
Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
(1,027
|
)
|
Fair Value as of period
ended 12/27/2020
|
|
|
4,125,200
|
|
|
$
|
0.37
|
|
|
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of period ended 10/3/2021
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain on Change in Fair
Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Fair Value as of period
ended 1/2/2022
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
During
the three months ended January 2, 2022 and December 27, 2020, there were no new issues or exercises of existing warrants.
The
warrant liabilities were considered Level 3 liabilities on the fair value hierarchy as the determination of fair value included various
assumptions about future activities and the Company’s stock prices and historical volatility as inputs.
Note
7-Stock Based Compensation
Stock
Options issued to Employees, Officers and Directors
The
Optex Systems Holdings 2009 Stock Option Plan provides for the issuance of up to 75,000 shares to the Company’s officers, directors,
employees and to independent contractors who provide services to Optex Systems Holdings as either incentive or non-statutory stock options
determined at the time of grant. There were no new grants of stock options during the three months ended January 2, 2022. As of January
2, 2022, there are zero stock options outstanding.
Restricted
Stock and Restricted Stock Units issued to Officers and Employees
The
following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock
units, with the latter granted under the Company’s 2016 Restricted Stock Unit Plan:
Schedule
of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted
|
|
Restricted
Stock Units
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Restricted
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Outstanding at September 27, 2020
|
|
|
182,000
|
|
|
$
|
1.54
|
|
|
|
300,000
|
|
|
|
1.75
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(83,000
|
)
|
|
$
|
1.49
|
|
|
|
(60,000
|
)
|
|
$
|
1.75
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at October
3, 2021
|
|
|
99,000
|
|
|
$
|
1.59
|
|
|
|
240,000
|
|
|
$
|
1.75
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(33,000
|
)
|
|
|
1.73
|
|
|
|
(60,000
|
)
|
|
|
1.75
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at January 2, 2022
|
|
|
66,000
|
|
|
$
|
1.52
|
|
|
|
180,000
|
|
|
$
|
1.75
|
|
On
January 2, 2019, the Company granted 150,000 and 50,000 restricted stock units with a January 2, 2019 grant date to Danny Schoening and
Karen Hawkins, respectively, 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. The stock price at grant date was $1.32 per share. Effective December 1, 2021, the vesting
terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described in “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Recent Events – D. Schoening Employment Agreement,”
which disclosure is incorporated by reference herein. The Company amortizes the grant date fair value of $264 thousand to stock compensation
expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019. As of January 2, 2022, there was
no unrecognized compensation cost relating to this award.
The
Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021. The updated employment
agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date
for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,” that being
the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes
the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities;
or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which
would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting
power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or
(B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction)
in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s
then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.
As
of the December 1, 2021 modification date related to the third and final vesting date of the 49,500 unvested restricted stock units held
by Danny Schoening, there was no change in the fair value of the modified award as compared to the original award immediately prior to
the modification date. The restricted stock units were certain to vest on January 1, 2022, but due to the modification, they are less
certain to vest, contingent on a “change in control date” occurring prior to March 13, 2023. As of the modification date,
there was $5 thousand of unrecognized compensation cost associated with the original award. As a matter of expediency, the unrecognized
compensation expense as of the modification date was fully expensed through January 2, 2022. There is no additional compensation expense
associated with the modification of the restricted stock unit agreement.
On
February 17, 2020, the Company granted 50,000 restricted stock units to Bill Bates, General Manager of the Applied Optics Center. The
restricted stock units vest 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. The stock price at grant date was $2.13 per share. The Company will amortize the grant date fair value
of $107 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February 17,
2020.
On
January 2, 2021, the Company issued 58,392 common shares to directors and officers, net of tax withholding of $43 thousand, in settlement
of 83,000 restricted stock units which vested on January 1, 2021.
On
January 4, 2022, the Company issued 23,216 common shares to directors and officers, net of tax withholding of $19 thousand, in settlement
of 33,000 restricted stock units which vested on January 1, 2022.
On
April 30, 2020, the Optex Systems Holdings, Inc. Board of Directors held a meeting and voted to increase the annual board compensation
for the three independent directors from $22,000 to $36,000 with an effective date of January 1, 2020, in addition to granting 100,000
restricted shares to each independent director which shall vest at a rate of 20% per year (20,000 shares) each January 1st,
over the next five years, through January 1, 2025. The total market value for the 300,000 shares is $525 thousand based on the stock
price of $1.75 as of April 30, 2020. The Company will amortize the grant date fair value to stock compensation expense on a straight-line
basis across the five-year vesting period beginning on April 30, 2020. On January 1, 2021 and January 1, 2022, 60,000 of the restricted
director shares vested.
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:
Schedule of Unrecognized Compensation Costs
|
|
Stock Compensation
|
|
|
|
(thousands)
|
|
|
|
Recognized
Compensation Expense
|
|
|
Unrecognized
Compensation Expense
|
|
|
|
Three
months ended
|
|
|
As
of period ended
|
|
|
|
January
2, 2022
|
|
|
December
27, 2020
|
|
|
January
2, 2022
|
|
|
October
3, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
$
|
26
|
|
|
$
|
26
|
|
|
$
|
315
|
|
|
$
|
341
|
|
Restricted Stock Units
|
|
|
31
|
|
|
|
31
|
|
|
|
35
|
|
|
|
66
|
|
Total
Stock Compensation
|
|
$
|
57
|
|
|
$
|
57
|
|
|
$
|
350
|
|
|
$
|
407
|
|
Note
8 Stockholders’ Equity
Dividends
As
of the three months ended January 2, 2022 and the twelve months ended October 3, 2021, there were no declared or outstanding dividends
payable.
Common
stock
On
June 8, 2020 the Company announced authorization of a $1 million stock repurchase program. As of September 27, 2020 there were 105,733
shares held in treasury purchased under the June 2020 stock repurchase program. The Company purchased a total of 519,266 shares against
the program through April 2021, which were subsequently cancelled in June 2021.
On
September 22, 2021 the Company announced authorization of an additional $1 million stock repurchase program. The shares authorized to
be repurchased under the repurchase program may be purchased from time to time at prevailing market prices, through open market transactions
or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. As of October 3,
2021, there were 35,555 shares held in treasury purchased under the September 2021 stock repurchase program.
During
the three months ended January 2, 2022, there were 37,238 common shares repurchased under the program at a cost of $74 thousand. The
shares have been returned to the Treasury. A summary of the purchases under the program follows:
Summary of Purchases Under Plan
Fiscal
Period
|
|
Total
number of shares purchased
|
|
|
Total
purchase cost
|
|
|
Average
price paid per share (with commission)
|
|
|
Maximum
dollar value that may yet be purchased under the plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2020 through October 25, 2020
|
|
|
20,948
|
|
|
|
42
|
|
|
|
2.01
|
|
|
|
758
|
|
October 26, 2020 through November 22, 2020
|
|
|
129,245
|
|
|
|
265
|
|
|
|
2.05
|
|
|
|
493
|
|
November 23, 2020 through December 27, 2020
|
|
|
58,399
|
|
|
|
109
|
|
|
|
1.86
|
|
|
|
384
|
|
December 28, 2020 through January 24, 2021
|
|
|
40,362
|
|
|
|
73
|
|
|
|
1.80
|
|
|
|
311
|
|
January 25, 2021 through February 21, 2021
|
|
|
52,180
|
|
|
|
101
|
|
|
|
1.94
|
|
|
|
210
|
|
February 22, 2021 through March 28, 2021
|
|
|
73,800
|
|
|
|
140
|
|
|
|
1.90
|
|
|
|
70
|
|
March 29, 2021 through April 19, 2021
|
|
|
38,599
|
|
|
|
70
|
|
|
|
1.82
|
|
|
|
-
|
|
September 23, 2021 through October 1,
2021
|
|
|
35,555
|
|
|
$
|
69
|
|
|
$
|
1.93
|
|
|
$
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
for year ended October 3, 2021
|
|
|
449,088
|
|
|
$
|
869
|
|
|
$
|
1.93
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 4, 2021 through October 31, 2021
|
|
|
18,265
|
|
|
|
37
|
|
|
|
2.01
|
|
|
|
894
|
|
November 1, 2021 through November 28, 2021
|
|
|
4,415
|
|
|
|
9
|
|
|
|
2.04
|
|
|
|
885
|
|
November 29, 2021 through January 2, 2022
|
|
|
14,558
|
|
|
|
28
|
|
|
|
1.93
|
|
|
|
857
|
|
Total shares repurchased
for three months ended January 2, 2022
|
|
|
37,238
|
|
|
$
|
74
|
|
|
$
|
1.98
|
|
|
$
|
857
|
|
As
of October 3, 2021, and January 2, 2022, the total outstanding common shares were 8,488,149 and 8,474,127, respectively. As of October
3, 2021, and January 2, 2022, there were 35,555 and 72,793 shares held in Treasury, respectively.
As
of October 3, 2021, and January 2, 2022, the total issued common shares were 8,523,704 and 8,546,920, respectively.
Note
9 Subsequent Events
None.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to supplement and
complement our audited condensed consolidated financial statements and notes thereto for the fiscal year ended October 3, 2021 and our
unaudited consolidated financial statements and notes thereto for the quarter ended January 2, 2022, prepared in accordance with U.S.
generally accepted accounting principles (GAAP). You are encouraged to review our consolidated financial statements in conjunction with
your review of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise
indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position.
We use these non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning
purposes. We will also report non-GAAP financial results as supplemental information, as we believe their use provides more insight into
our performance. When a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP measure 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. The operating results for the periods presented were not significantly
affected by inflation.
Cautionary
Note Regarding Forward-Looking Information
This
Quarterly Report on Form 10-Q, in particular the MD&A, contains certain “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not
statements of historical fact may be deemed to be forward-looking statements. When used in this Quarterly Report on Form 10-Q and other
reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”),
in our press releases, presentations to securities analysts or investors, or in oral statements made by or with the approval of an executive
officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,”
“continue,” “anticipates,” “intends,” “will likely result,” “estimates,”
“projects” or similar expressions and variations thereof are intended to identify such forward-looking statements.
These
forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not
limited to, any statements regarding growth strategy; product and development programs; financial performance (including revenue and
net income); backlog; follow-on orders; the impact of the COVID-19 pandemic; supply chain challenges; the continuation of historical
trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting
policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and
the economy in general or the future of the defense industry.
We
caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results
may differ materially depending on a variety of important factors. Some of these risks and uncertainties are identified in “Risk
Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K and you are urged to review those sections. 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.
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 Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.
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, ADS Inc. 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.
We
may be at risk as a result of the current COVID-19 pandemic. Risks that could affect our business include the duration and scope of the
COVID-19 pandemic and the impact on the demand for our products; actions by governments, businesses and individuals taken in response
to the pandemic; the length of time of the pandemic and the possibility of its reoccurrence; the timing required to develop and implement
effective treatments; the success of global vaccination efforts; the eventual impact of the pandemic and actions taken in response to
the pandemic on global and regional economies; and the pace of recovery when the pandemic subsides.
Beginning
in April 2020 through October 3, 2021, we experienced a significant reduction in new orders and ending customer backlog in our Optex
Richardson segment, resulting in an overall decrease in backlog of 40% between September 29, 2019 and October 3, 2021. We attribute the
lower orders to a combination of factors including a COVID-19 driven slow-down of contract awards for both U.S. military sales and foreign
military sales (FMS), combined with significant shifting in defense spending budget allocations in US military sales and FMS away from
Army ground system vehicles toward other military agency applications. In addition, the pandemic has caused several program delays throughout
the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar
supply chain issues.
While
the Applied Optics Center segment experienced a significant decline in orders during the second half of fiscal year 2020, the segment
saw a sizable increase in new orders during the fiscal year ended October 3, 2021 as a result of increased military spending in Army
infantry optical equipment, a larger customer base and higher customer demand for commercial optical assemblies. As of October 3, 2021,
the Applied Optics Center segment backlog had increased by 153% as compared to the level on September 29, 2019. As a result of this significant
shift in orders and backlog between segments, we anticipate corresponding shifts in revenue during the 2022 fiscal year, with revenue
from the Optex Richardson segment decreasing, and revenue from the Applied Optics Center segment increasing.
Recent
Events
D.
Schoening Employment Agreement
The
Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021. The term of the agreement
commenced as of December 1, 2021 and the current term ends on November 30, 2022. Mr. Schoening’s base salary is $296,031 per annum.
Mr. Schoening will be eligible for a performance bonus based upon a rolling three-year operating plan adopted by the Company’s
Board of Directors (the “Board”). The bonus will be based on operating metrics decided annually by our Board and tied to
such three-year plan. The target bonus equates to 30% of Mr. Schoening’s base salary. Our Board will have discretion in good faith
to alter the performance bonus upward or downward by 20%.
The
updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and
final vesting date for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,”
that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions,
is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding
securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation
which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting
power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or
(B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction)
in which No “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s
then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.
The
employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by the Company
for cause (including conviction of a felony, commission of fraudulent acts, willful misconduct by Mr. Schoening, continued failure to
perform duties after written notice, violation of securities laws and breach of the employment agreement), (iii) termination by the Company
without cause and (iv) termination by Mr. Schoening for good reason (including breach by the Company of its obligations under the agreement,
the requirement for Mr. Schoening to move more than 100 miles away for his employment without consent, and merger or consolidation that
results in more than 66% of the combined voting power of the Company’s then outstanding securities or those of its successor changing
ownership or a sale of all or substantially all of its assets, without the surviving entity assuming the obligations under the agreement).
For a termination by the Company for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening will be paid salary
and for a termination due to his death or permanent disability, also any bonus earned through the date of termination. For a termination
by the Company without cause or by Mr. Schoening with good reason, Mr. Schoening will also be paid six months’ base salary in effect
and, if such termination occurs prior to a change of control, Mr. Schoening will not forfeit the unvested RSUs until and unless the change
of control does not occur by March 13, 2023.
Recent
Stock Repurchases
On
September 22, 2021, the Company announced authorization of a $1 million stock repurchase program. The shares authorized to be repurchased
under this repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in
negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. During the three months
ended January 2, 2022, 37,238 common shares were repurchased under the September 2021 repurchase program at an aggregate cost of $74
thousand. As of January 2, 2022, 72,793 shares repurchased under the September 2021 stock repurchase program were held in Treasury.
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, which we do not consider relevant to our operations. Adjusted EBITDA is a financial
measure not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).
Adjusted
EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This
non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate
Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative
measure.
The
table below summarizes our three-month operating results for the periods ended January 2, 2022 and December 27, 2020, 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 better
to evaluate our overall performance.
|
|
Three
months ended
|
|
|
|
January
2, 2022
|
|
|
December
27, 2020
|
|
|
|
|
|
|
|
|
Net Income - (GAAP)
|
|
$
|
29
|
|
|
$
|
1,087
|
|
Add:
|
|
|
|
|
|
|
|
|
Gain on Change in Fair Value of Warrants
|
|
|
-
|
|
|
|
(1,027
|
)
|
Federal Income Tax (Benefit) Expense
|
|
|
(14
|
)
|
|
|
16
|
|
Depreciation
|
|
|
72
|
|
|
|
63
|
|
Stock Compensation
|
|
|
57
|
|
|
|
57
|
|
Interest Expense
|
|
|
-
|
|
|
|
3
|
|
Adjusted
EBITDA – Non-GAAP
|
|
$
|
144
|
|
|
$
|
199
|
|
Our
net income decreased by $1.1 million to $0.0 million for the three months ended January 2, 2022, as compared to $1.1 million for the
three months ended December 27, 2020. Our adjusted EBITDA decreased by $0.1 million to $0.1 million for the three months ended January
2, 2022, as compared to $0.2 million for the three months ended December 27, 2020. The decrease in the three-month period is primarily
driven by lower revenue and operating profit in the Optex Richardson segment as compared to the prior year. Operating segment performance
is discussed in greater detail throughout the following sections.
During
the three months ended January 2, 2022, we did not recognize either a gain or a loss on the change in fair value of warrants, as the
warrants had expired on August 26, 2021 in accordance with their terms. By comparison, during the three months ended December 27, 2020,
we recognized a gain on the change in fair value of warrants of ($1.0) million. As this was a non-cash gain driven by then-current fair
market value of our outstanding warrants and unrelated to our core business operating performance, the change in fair value losses and
gains have historically been excluded from our adjusted EBITDA calculations presented above. Further discussion regarding the changes
in fair value of the warrants and the related warrant liability can be found in Item 1, “Consolidated Financial Statements, Note
6 - Warrant Liabilities”.
Segment
Information
We
have presented the operating results by segment to provide investors with an additional tool to evaluate our operating results and to
have a better understanding of the overall performance of each business segment. 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 are separately managed,
organized, and internally reported as separate business segments. The table below provides a summary of selective statement of operations
data by operating segment for the three months ended January 2, 2022 and December 27, 2020 reconciled to the Condensed Consolidated Results
of Operations as presented in Item 1, “Condensed Consolidated Financial Statements.”
Results
of Operations Selective Financial Info
(Thousands)
|
|
Three
months ended
|
|
|
|
January
2, 2022
|
|
|
December
27, 2020
|
|
|
|
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
|
|
$
|
1,857
|
|
|
$
|
2,483
|
|
|
$
|
-
|
|
|
$
|
4,340
|
|
|
$
|
3,029
|
|
|
$
|
1,442
|
|
|
$
|
-
|
|
|
$
|
4,471
|
|
Intersegment Revenues
|
|
|
-
|
|
|
|
180
|
|
|
|
(180
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
366
|
|
|
|
(366
|
)
|
|
|
-
|
|
Total Segment
Revenue
|
|
|
1,857
|
|
|
|
2,663
|
|
|
|
(180
|
)
|
|
|
4,340
|
|
|
|
3,029
|
|
|
|
1,808
|
|
|
|
(366
|
)
|
|
|
4,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Sales
|
|
|
1,667
|
|
|
|
2,030
|
|
|
|
(180
|
)
|
|
|
3,517
|
|
|
|
2,443
|
|
|
|
1,559
|
|
|
|
(366
|
)
|
|
|
3,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
190
|
|
|
|
633
|
|
|
|
-
|
|
|
|
823
|
|
|
|
586
|
|
|
|
249
|
|
|
|
-
|
|
|
|
835
|
|
Gross
Margin %
|
|
|
10.2
|
%
|
|
|
23.8
|
%
|
|
|
-
|
|
|
|
19.0
|
%
|
|
|
19.3
|
%
|
|
|
13.8
|
%
|
|
|
-
|
|
|
|
18.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
Expense
|
|
|
642
|
|
|
|
109
|
|
|
|
57
|
|
|
|
808
|
|
|
|
573
|
|
|
|
126
|
|
|
|
57
|
|
|
|
756
|
|
Segment Allocated G&A Expense
|
|
|
(236
|
)
|
|
|
236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
Net General & Administrative
Expense
|
|
|
406
|
|
|
|
345
|
|
|
|
57
|
|
|
|
808
|
|
|
|
373
|
|
|
|
326
|
|
|
|
57
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
(216
|
)
|
|
|
288
|
|
|
|
(57
|
)
|
|
|
15
|
|
|
|
213
|
|
|
|
(77
|
)
|
|
|
(57
|
)
|
|
|
79
|
|
Operating
Income (Loss) %
|
|
|
(11.6
|
)%
|
|
|
10.8
|
%
|
|
|
-
|
|
|
|
0.3
|
%
|
|
|
7.0
|
%
|
|
|
(4.3
|
)%
|
|
|
-
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain on Change in Fair
Value of Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,027
|
|
|
|
1,027
|
|
Interest Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
(Loss) before taxes
|
|
$
|
(216
|
)
|
|
$
|
288
|
|
|
$
|
(57
|
)
|
|
$
|
15
|
|
|
$
|
213
|
|
|
$
|
(77
|
)
|
|
$
|
967
|
|
|
$
|
1,103
|
|
Net
Income before taxes %
|
|
|
(11.6
|
)%
|
|
|
(10.8
|
)%
|
|
|
-
|
|
|
|
0.3
|
%
|
|
|
7.0
|
%
|
|
|
(4.3
|
)%
|
|
|
-
|
|
|
|
24.7
|
%
|
Our
total revenues decreased by $131 thousand, or 2.9%, comparing the three months ended January 2, 2022 with the three months ended December
27, 2020. The decrease in revenue was primarily driven by a $1.2 million decrease in external revenue at the Optex Richardson segment
and a $1.1 million increase in external revenue at the Applied Optics Center segment, respectively, over the prior year period. During
the year ended October 3, 2021, we realized a significant increase in customer orders and backlog for the Applied Optics Center segment.
We expect revenue for the Applied Optics Center to increase over the course of the 2022 fiscal
year as compared to the prior year periods consistent with the recent increases in customer demand for optical assemblies and laser filter
units.
Consolidated
gross margin for the three months ended January 2, 2022 decreased by $12 thousand, or 1.4%, compared to the prior year period. The decrease
in margin was primarily attributable to a decrease in consolidated revenue and changes in revenue mix between the segments.
Our
operating income for the three months ended January 2, 2022 decreased by $64 thousand to $15 thousand, as compared to the prior year
period operating income of $79 thousand. The decrease in operating income was primarily driven by lower gross margin and increased general
and administrative spending.
Backlog
During
the three months ended January 2, 2022 and December 27, 2020 the Company booked $3.5 million and $3.2 million, respectively, in new orders,
representing a 9.4% increase over the prior year period. The increase in orders is primarily attributable to an increase in Applied Optics
Center orders over the prior year period.
The
orders for the most recently completed quarter consist of $2.6 million for our Optex Richardson segment and $0.9 million attributable
to the Applied Optics Center. The following table depicts the new customer orders for the three months ending January 2, 2022 as compared
to the three-month period ending December 27, 2020 in millions of dollars:
|
|
(Millions)
|
|
|
|
|
Product
Line
|
|
Q1
2022
|
|
|
Q1
2021
|
|
|
Variance
|
|
|
%
Chg
|
|
Periscopes
|
|
$
|
2.2
|
|
|
$
|
2.6
|
|
|
$
|
(0.4
|
)
|
|
|
(15.4
|
)%
|
Sighting Systems
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
100.0
|
%
|
Howitzer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
Other
|
|
|
0.3
|
|
|
|
-
|
|
|
|
0.3
|
|
|
|
100.0
|
%
|
Optex Systems – Richardson
|
|
|
2.6
|
|
|
|
2.6
|
|
|
|
-
|
|
|
|
-
|
%
|
Optical Assemblies
|
|
|
0.2
|
|
|
|
-
|
|
|
|
0.2
|
|
|
|
100.0
|
%
|
Laser Filters
|
|
|
-
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
(100.0
|
)%
|
Day Windows
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
Other
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
40.0
|
%
|
Applied Optics Center –
Dallas
|
|
|
0.9
|
|
|
|
0.6
|
|
|
|
0.3
|
|
|
|
50.0
|
%
|
Total Customer Orders
|
|
$
|
3.5
|
|
|
$
|
3.2
|
|
|
$
|
0.3
|
|
|
|
9.4
|
%
|
Backlog
as of January 2, 2022, was $26.5 million as compared to a backlog of $27.3 million as of October 3, 2021, representing a decrease of
$0.8 million or 2.9%. The following table depicts the January 2, 2022 backlog as compared the prior year end period.
Product
Line
|
|
Total
Backlog
1/2/2022
|
|
|
Total
Backlog
10/3/2021
|
|
|
Variance
|
|
|
%
Chg
|
|
Periscopes
|
|
$
|
6.9
|
|
|
$
|
5.6
|
|
|
$
|
1.3
|
|
|
|
23.2
|
%
|
Sighting Systems
|
|
|
1.5
|
|
|
|
1.7
|
|
|
|
(0.2
|
)
|
|
|
(11.8
|
)%
|
Howitzer
|
|
|
2.3
|
|
|
|
2.3
|
|
|
|
-
|
|
|
|
-
|
%
|
Other
|
|
|
1.0
|
|
|
|
1.4
|
|
|
|
(0.4
|
)
|
|
|
(28.8
|
)%
|
Optex Systems - Richardson
|
|
|
11.7
|
|
|
|
11.0
|
|
|
|
0.7
|
|
|
|
6.4
|
%
|
Optical Assemblies
|
|
|
4.1
|
|
|
|
5.0
|
|
|
|
(1.1
|
)
|
|
|
22.0
|
%
|
Laser Filters
|
|
|
9.0
|
|
|
|
9.9
|
|
|
|
(0.9
|
)
|
|
|
(9.1
|
)%
|
Day Windows
|
|
|
0.9
|
|
|
|
1.1
|
|
|
|
(0.2
|
)
|
|
|
(18.2
|
)%
|
Other
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
166.7
|
%
|
Applied Optics Center -
Dallas
|
|
|
14.8
|
|
|
|
16.3
|
|
|
|
(1.5
|
)
|
|
|
(9.2
|
)%
|
Total Backlog
|
|
$
|
26.5
|
|
|
$
|
27.3
|
|
|
$
|
(0.8
|
)
|
|
|
(2.9
|
)%
|
Backlog
as of January 2, 2022, was $26.5 million as compared to a backlog of $15.0 million as of December 27, 2020, representing an increase
of $11.5 million or 76.7%. The following table depicts the current expected delivery by period of all contracts awarded as of January
2, 2022 in millions of dollars:
|
|
(Millions)
|
|
Product
Line
|
|
Q2
2022
|
|
|
Q3
2022
|
|
|
Q4
2022
|
|
|
2022
Delivery
|
|
|
2023+
Delivery
|
|
|
Total
Backlog
1/2/2022
|
|
|
Total
Backlog
12/27/2020
|
|
|
Variance
|
|
|
%
Chg
|
|
Periscopes
|
|
$
|
1.6
|
|
|
$
|
2.5
|
|
|
$
|
1.0
|
|
|
$
|
5.1
|
|
|
$
|
1.8
|
|
|
$
|
6.9
|
|
|
$
|
5.9
|
|
|
$
|
1.0
|
|
|
|
16.9
|
%
|
Sighting Systems
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
1.1
|
|
|
|
1.5
|
|
|
|
1.9
|
|
|
|
(0.4
|
)
|
|
|
(21.1
|
)%
|
Howitzer
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
2.0
|
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
(0.1
|
)
|
|
|
(4.2
|
)%
|
Other
|
|
|
0.4
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
2.4
|
|
|
|
(1.3
|
)
|
|
|
(54.2
|
)%
|
Optex Systems - Richardson
|
|
|
2.2
|
|
|
|
2.7
|
|
|
|
1.4
|
|
|
|
6.3
|
|
|
|
5.4
|
|
|
|
11.7
|
|
|
|
12.6
|
|
|
|
(0.9
|
)
|
|
|
(7.1
|
)%
|
Optical Assemblies
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
2.4
|
|
|
|
1.7
|
|
|
|
4.1
|
|
|
|
0.4
|
|
|
|
3.7
|
|
|
|
925.0
|
%
|
Laser Filters
|
|
|
1.5
|
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
4.2
|
|
|
|
4.8
|
|
|
|
9.0
|
|
|
|
0.4
|
|
|
|
8.6
|
|
|
|
2,150.0
|
%
|
Day Windows
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
0.9
|
|
|
|
1.1
|
|
|
|
(0.2
|
)
|
|
|
(18.2
|
)%
|
Other
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
-
|
|
|
|
0.8
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
60.0
|
%
|
Applied Optics Center -
Dallas
|
|
|
2.7
|
|
|
|
2.5
|
|
|
|
2.9
|
|
|
|
8.1
|
|
|
|
6.7
|
|
|
|
14.8
|
|
|
|
2.4
|
|
|
|
12.4
|
|
|
|
516.7
|
%
|
Total Backlog
|
|
$
|
4.9
|
|
|
$
|
5.2
|
|
|
$
|
4.3
|
|
|
$
|
14.4
|
|
|
$
|
12.1
|
|
|
$
|
26.5
|
|
|
$
|
15.0
|
|
|
$
|
11.5
|
|
|
|
76.7
|
%
|
Optex
Systems Richardson backlog as of January 2, 2022, was $11.7 million as compared to a backlog of $12.6 million as of December 27, 2020,
representing a decrease of $0.9 million or 7.1%.
Applied
Optics Center backlog as of January 2, 2022, was $14.8 million as compared to a backlog of $2.4 million as of December 27, 2020, representing
an increase of $12.4 million, or 516.7%. During the fourth quarter of the fiscal year ended October 3, 2020, we booked significant new
orders in both commercial optical assemblies and laser filter units including a significant new defense contract customer.
As
a result of the significant backlog increases in our Applied Optics Center, we have expanded our presentation of backlog, order and revenue
data to include comparative period product line information for the segment. Furthermore, the period end backlog is now presented
as compared to the prior year period end backlog in addition to the previous fiscal year-end backlog as we believe it provides a better
indication of the twelve-month market trends by product line and segment.
Please
refer to “—Background” above or “Liquidity and Capital Resources” below for more information
on recent developments and trends with respect to our orders and backlog, which information is incorporated herein by reference.
The
Company continues to aggressively pursue international and commercial opportunities in addition to maintaining its current footprint
with U.S. vehicle manufactures, with existing as well as new product lines. We 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 excess capacity.
Three
Months Ended January 2, 2022 Compared to the Three Months Ended December 27, 2020
Revenues.
For the three months ended January 2, 2022, revenues decreased by $131 thousand or 2.9% compared to the prior year period as set forth
in the table below:
|
|
Three months
ended
|
|
|
|
(Thousands)
|
|
Product
Line
|
|
January
2, 2022
|
|
|
December
27, 2020
|
|
|
Variance
|
|
|
%
Chg
|
|
Periscopes
|
|
$
|
1,065
|
|
|
$
|
1,953
|
|
|
$
|
(888
|
)
|
|
|
(45.5
|
)
|
Sighting Systems
|
|
|
274
|
|
|
|
778
|
|
|
|
(504
|
)
|
|
|
(64.8
|
)
|
Howitzers
|
|
|
-
|
|
|
|
106
|
|
|
|
(106
|
)
|
|
|
(100.0
|
)
|
Other
|
|
|
518
|
|
|
|
192
|
|
|
|
326
|
|
|
|
169.8
|
|
Optex Systems - Richardson
|
|
|
1,857
|
|
|
|
3,029
|
|
|
|
(1,172
|
)
|
|
|
(38.7
|
)
|
Optical Assemblies
|
|
|
1,145
|
|
|
|
197
|
|
|
|
948
|
|
|
|
481.2
|
|
Laser Filters
|
|
|
937
|
|
|
|
899
|
|
|
|
38
|
|
|
|
4.2
|
|
Day Windows
|
|
|
220
|
|
|
|
227
|
|
|
|
(7
|
)
|
|
|
(3.1
|
)
|
Other
|
|
|
181
|
|
|
|
119
|
|
|
|
62
|
|
|
|
52.1
|
|
Applied Optics Center -
Dallas
|
|
|
2,483
|
|
|
|
1,442
|
|
|
|
1,041
|
|
|
|
72.2
|
|
Total Revenue
|
|
$
|
4,340
|
|
|
$
|
4,471
|
|
|
$
|
(131
|
)
|
|
|
(2.9
|
)
|
Optex
Systems Richardson revenue decreased by $1.2 million or 38.7% for the three months ended January 2, 2022 as compared to the three months
ended December 27, 2020 on lower customer demand for periscopes, sighting systems and howitzers as compared to the prior year period.
We anticipate higher revenues on the periscope product line during the next three quarters and the full twelve month revenue to approximate
the prior year level. Deliveries against our howitzer program have been delayed by our customer pending resolution of issues related
to customer furnished materials. Sighting systems and other products are expected to be below our prior year levels for the remainder
of the fiscal year as several previous contracts have completed or are nearing completion. We anticipate future awards for these programs,
however at reduced levels based on the most recent U.S. defense budget for ground systems programs, more specifically reductions in government
spending on the Abrams tank platform.
Applied
Optics Center revenue increased by $1.1 million or 72.2% for the three months ended January 2, 2022 as compared to the three months
ended December 27, 2020. The revenue increase is primarily attributable to increased customer demand for commercial optical assemblies
as compared to the prior year period. Based on our backlog, we are anticipating higher revenue over the remaining fiscal year period
for optical assemblies, laser filters and other products. Day window revenues are projected at rates comparable to the year ended October
3, 2021, with the current orders expected to be completed in the first fiscal quarter of 2023. We anticipate additional orders for delivery
in 2023.
Gross
Margin. The gross margin during the three-month period ended January 2, 2022 was 19.0% of revenue as compared to a gross margin of
18.7% of revenue for the period ended December 27, 2020. The gross margin decreased by $12 thousand to $823 thousand for the three months
ended January 2, 2022 as compared to $835 thousand in the prior year three months. The decrease in gross margin is primarily attributable
to lower consolidated revenue partially offset by changes in mix between products and operating segments. Cost of sales decreased to
$3.5 million for the current period as compared to the prior year period of $3.6 million on lower period revenue.
G&A
Expenses. During the three months ended January 2, 2022 and December 27, 2020, we recorded operating expenses of $808 thousand and
$756 thousand, respectively. Operating expenses increased by 6.9% between the respective periods primarily due to increased labor costs,
office expenses, and legal & audit fees.
Operating
Income. During the three months ended January 2, 2022, we recorded operating income of $15 thousand, as compared to operating income
of $79 thousand during the three months ended December 27, 2020. The $64 thousand decrease in operating income for the current year period
from the prior year period is primarily due to increased general and administrative costs combined with lower revenue and gross margin
in the current year quarter as compared to the prior year quarter.
Other
(Expense) Income. During the three months ended January 2, 2022, we did not recognize either a gain or a loss on the change in fair
value of warrants, as the warrants had expired on August 26, 2021 in accordance with their terms. By comparison, during the three months
ended December 27, 2020, we recognized a gain on the change in fair value of warrants of ($1.0) million. Further discussion regarding
the changes in fair value of the warrants and the related warrant liability can be found in Item 1, “Consolidated Financial Statements,
Note 6 - Warrant Liabilities”.
Net
(Loss) Income applicable to common shareholders. During the three months ended January 2, 2022, we recorded a net income applicable
to common shareholders of $29 thousand as compared to a net income applicable to common shareholders of $726 thousand during the three
months ended December 27, 2020. The change in net income of $697 thousand is primarily attributable to the expiration of the warrants,
which eliminated the fair value and deemed dividend impacts on net income for the current year period.
Liquidity
and Capital Resources
As
of January 2, 2022, the Company had working capital of $12.9 million, as compared to $12.9 million as of October 3, 2021. Some
of our contracts may allow for government contract financing in the form of contract progress payments pursuant to Federal Acquisition
Regulation 52.232-16, “Progress Payments.” Subject to certain limitations, this clause provides for government payment of
up to 90% of incurred program costs prior to product delivery for small businesses like us. To the extent any contracts allow for progress
payments and the respective contracts would result in significant preproduction cash requirements for design, process development, tooling,
material or other resources which could exceed our current working capital or line of credit availability, we intend to utilize this
benefit to minimize any potential negative impact on working capital prior to receipt of payment for the associated contract deliveries.
Backlog
as of January 2, 2022 has increased by $11.5 million or 76.7% to $26.5 million as compared to backlog of $15.0 million as of December
27, 2020.
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 January 2, 2022, the Company had $5.3
million in cash and an outstanding payable balance of zero against its line of credit. The line of credit allows for borrowing up to
a maximum of $2.3 million. We intend to renew or replace this line of credit, which expires on April 15, 2022. If adequate funds are
not available on acceptable terms, or at all, we may be unable to finance our operations, develop or enhance our products, expand our
sales and marketing programs, take advantage of future opportunities or respond to competitive pressures.
As
of January 2, 2022, our outstanding accounts receivable balance was $2.0 million. The Company currently expects to generate net income
and positive cash flow from operating activities throughout fiscal 2022. To remain profitable, we need to maintain a level of revenue
adequate to support the Company’s cost structure. Management intends to manage operations commensurate with its level of working
capital and line of credit during the next twelve months and beyond; however, uneven revenue levels driven by changes in customer delivery
demands, first article inspection requirements or other program delays associated with the pandemic could create a working capital shortfall.
In the event the Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.
On
September 22, 2021, the Company announced authorization of a $1 million stock repurchase program. The shares authorized to be repurchased
under this repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in
negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. During the three months
ended January 2, 2022, 37,238 common shares were repurchased under the September 2021 repurchase program at an aggregate cost of $74
thousand. As of January 2, 2022, 72,793 shares repurchased under the September 2021 stock repurchase program were held in Treasury.
On
August 26, 2021, 3,936,391 outstanding warrants expired worthless, resulting in the elimination of the balance sheet warrant liability.
As
of October 3, 2021, and January 2, 2022, there were no outstanding declared and unpaid dividends.
On
January 11, 2021, the Company executed amendments for each of its leased facilities extending the terms for eighty-six (86) months, commencing
at the end of the current lease agreements. The Richardson lease amendment commenced on April 1, 2021 for an eighty-six (86) month term
ending on May 31, 2028. The Dallas lease amendment commenced on November 1, 2021 for an eighty-six (86) month term ending on December
31, 2028. Each of the leases include two full months of rent abatement at the beginning of the commencement term. The new lease agreements
resulted in the balance sheet recognition of a right-of-use asset of $3.7 million and corresponding operating lease liabilities of approximately
$3.7 million as of the period ended June 27, 2021.
Cash
Flows for the Period from October 3, 2021 through January 2, 2022
Cash
and Cash Equivalents: As of January 2, 2022, and October 3, 2021, we had cash and cash equivalents of $5.3 million and $3.9 million,
respectively.
Net
Cash Provided by Operating Activities. Net cash provided by operating activities during the three months from October 3, 2022 to
January 2, 2022 totaled $1.5 million. The primary sources of cash during the period relate to decreases in accounts receivable of $1.2
million, increased accounts payable of $0.5 million, increased inventory of ($0.3) million and other changes in working capital of $0.1
million.
Net
Cash Used in Investing Activities. In the three months ended January 2, 2022, cash used in investing activities was $0.1 million
for purchases of equipment and leasehold improvements.
Net
Cash Used in Financing Activities. Net cash used in financing activities was $0.1 million during the three months ended January 2,
2022 and relates to the repurchases of common stock of as part of our stock repurchase program.
Critical
Accounting Estimates
A
critical accounting estimate is an estimate that:
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is
made in accordance with generally accepted accounting principles,
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involves
a significant level of estimation uncertainty, and
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has
had or is reasonably likely to have a material impact on the company’s financial condition or results of operation.
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Our
significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies
require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies
are described in “Critical Policies and Accounting Pronouncements” and Note 2 (Accounting Policies) to consolidated financial
statements in our Annual Report on Form 10-K for the year ended October 3, 2021.
Our
critical accounting estimates include warranty costs, contract losses and the deferred tax asset valuation. 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. Our warranty covered sales primarily include the Applied Optics Center optical assemblies. While our warranty
period is 12 months, our reserve balances assume a general 90-day return period for optical assemblies previously delivered plus any
returned backlog inhouse that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly
exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around
times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our
warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty
costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of January 2, 2022, the Company had
accrued warranty costs of $122 thousand, as compared to $78 thousand as of October 3, 2021. The primary reason for the $44 thousand increase
in reserve balances relates directly to increased revenues during the 90-day period preceding January 2, 2022 as compared to the
90-day period preceding October 3, 2021, combined with an increase in customer returned backlog pending repair or replacement to our
customer.
As
of January 2, 2022 and October 3, 2021, we had $50 thousand, and $51 thousand, respectively, of contract loss reserves included in our
balance sheet accrued expenses. These loss contracts are related to some of our older legacy periscope IDIQ contracts which were priced
in 2018 through early 2020, prior to Covid-19 and the significant downturn in defense spending on ground system vehicles. Due to inflationary
price increases on component parts and higher internal manufacturing costs (as a result of escalating labor costs and higher burden
rates on reduced volume), some of these contracts are in a loss condition, or at marginal profit rates. These contracts are typically
three-year IDIQ contracts with two optional award years, and as such, we are obligated to accept new task awards against these contracts
until the contract expiration. Should contract costs continue to increase above the negotiated selling price, or in the event the customer
should release substantial quantities against these existing loss contracts, the losses could be material. For contracts currently in
a loss status based on the estimated per unit contract costs, losses are booked immediately on new task order awards. During the three
months ended January 2, 2022, there was no significant change to the accrued contract losses. There is no way to reasonably estimate
future inflationary impacts, or customer awards on the existing loss contracts.
As
of January 2, 2022 and October 3, 2021, our deferred tax assets consisted of $2.1 million, partially offset by a valuation reserve
of $0.8 million against those assets for a net deferred tax asset of $1.3 million. The valuation allowance covers certain deferred tax
assets where we believe we will be unlikely to recover those tax assets through future operations. The valuation reserve includes assumptions
related to future taxable income which would be available to cover net operating loss carryforward amounts. Because of the uncertainties
of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are subject to change over time.
While we believe our current estimate to be reasonable, changing market conditions and profitability, changes in equity structure and
changes in tax regulations may impact our estimated reserves in future periods.