UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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OPTEX SYSTEMS HOLDINGS, INC.
FORM 10-Q
For the period ended July 3, 2022
INDEX
| PART I— FINANCIAL INFORMATION | F-1 | |
| Item 1. | Unaudited Condensed Consolidated Financial Statements | F-1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 |
| Item 4. | Controls and Procedures | 15 |
| PART II— OTHER INFORMATION | 15 | |
| Item 1. | Legal Proceedings | 15 |
| Item 1A. | Risk Factors | 15 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 |
| Item 3. | Defaults Upon Senior Securities | 16 |
| Item 4. | Mine Safety Disclosures | 16 |
| Item 6. | Exhibits | 16 |
| SIGNATURE | 17 | |
| 2 |
PART 1. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
OPTEX SYSTEMS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| F-1 |
Optex Systems Holdings, Inc.
Condensed Consolidated Balance Sheets
| (Thousands, except share and per share data) | ||||||||
| July 3, 2022 | October 3, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Accounts Receivable, Net | ||||||||
| Inventory, Net | ||||||||
| Prepaid Expenses | ||||||||
| Current Assets | ||||||||
| Property and Equipment, Net | ||||||||
| Other Assets | ||||||||
| Deferred Tax Asset | ||||||||
| Right-of-use Asset | ||||||||
| Security Deposits | ||||||||
| Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | $ | $ | ||||||
| Operating Lease Liability | ||||||||
| Accrued Expenses | ||||||||
| Accrued Warranty Costs | ||||||||
| Customer Deposits | ||||||||
| Current Liabilities | ||||||||
| Operating Lease Liability, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common Stock – ($ par, authorized, and shares issued, and and outstanding, respectively) | ||||||||
| Treasury Stock (at cost, and shares held, respectively) | ( | ) | ||||||
| Additional Paid in Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| F-2 |
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| (Thousands, except share and per share data) | ||||||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross Margin | ||||||||||||||||
| General and Administrative Expense | ||||||||||||||||
| Operating Income (Loss) | ( | ) | ||||||||||||||
| Gain on Change in Fair Value of Warrants | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ||||||||||||
| Other Income | ||||||||||||||||
| Income Before Taxes | ||||||||||||||||
| Income Tax (Benefit) Expense, net | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Deemed dividends on participating securities | ( | ) | ( | ) | ||||||||||||
| Net income applicable to common shareholders | $ | $ | $ | $ | ||||||||||||
| Basic income per share | $ | $ | $ | $ | ||||||||||||
| Weighted Average Common Shares Outstanding - basic | ||||||||||||||||
| Diluted income per share | $ | $ | $ | $ | ||||||||||||
| Weighted Average Common Shares Outstanding – diluted | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| F-3 |
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Thousands) Nine months ended | ||||||||
| July 3, 2022 | June 27, 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities: | ||||||||
| Depreciation and Amortization | ||||||||
| Gain on Change in Fair Value of Warrants | ( | ) | ||||||
| Stock Compensation Expense | ||||||||
| Deferred Tax | ( | ) | ||||||
| Accounts Receivable | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid Expenses | ( | ) | ( | ) | ||||
| Leases | ||||||||
| Accounts Payable and Accrued Expenses | ( | ) | ||||||
| Accrued Warranty Costs | ( | ) | ||||||
| Customer Advance Deposits | ( | ) | ||||||
| Total Adjustments | ( | ) | ||||||
| Net Cash provided by Operating Activities | ||||||||
| Cash Flows used in Investing Activities | ||||||||
| Purchases of Property and Equipment | ( | ) | ( | ) | ||||
| Net Cash used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows used in Financing Activities | ||||||||
| Cash Paid for Taxes Withheld on Net Settled Restricted Stock Unit Shares Issued | ( | ) | ( | ) | ||||
| Stock Repurchase | ( | ) | ( | ) | ||||
| Net Cash used in Financing Activities | ( | ) | ( | ) | ||||
| Net Increase in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents at Beginning of Period | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Non Cash Transactions: | ||||||||
| Right-of-Use Asset | $ | $ | ||||||
| Operating Lease Liabilities | ( | ) | ( | ) | ||||
| Treasury Stock Retired | ||||||||
| Cash Transactions: | ||||||||
| Cash Paid for Taxes | ||||||||
| Cash Paid for Interest | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| F-4 |
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Thousands, except share data)
| Three months ended July 3, 2022 | ||||||||||||||||||||||||||||
| Common | Additional | Total | ||||||||||||||||||||||||||
| Shares | Treasury | Common | Treasury | Paid in | Accumulated | Stockholders | ||||||||||||||||||||||
| Issued | Shares | Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at April 3, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock Compensation Expense | - | - | ||||||||||||||||||||||||||
| Common Stock Repurchase (1) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Cancellation of Treasury Shares(2) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Balance at July 3, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Three months ended June 27, 2021 | ||||||||||||||||||||||||||||
| Common | Additional | Total | ||||||||||||||||||||||||||
| Shares | Treasury | Common | Treasury | Paid in | Accumulated | Stockholders | ||||||||||||||||||||||
| Issued | Shares | Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at March 28, 2021 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Stock Compensation Expense | - | - | ||||||||||||||||||||||||||
| Common Stock Repurchase(1) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Cancellation of Treasury Shares(2) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Balance at June 27, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Nine months ended July 3, 2022 | ||||||||||||||||||||||||||||
| Common | Additional | Total | ||||||||||||||||||||||||||
| Shares | Treasury | Common | Treasury | Paid in | Accumulated | Stockholders | ||||||||||||||||||||||
| Issued | Shares | Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at October 3, 2021 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Stock Compensation Expense | - | - | ||||||||||||||||||||||||||
| Vested Restricted Stock Units Issued Net of Tax Withholding | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Common Stock Repurchase (1) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Cancellation of Treasury Shares(2) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Balance at July 3, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Nine months ended June 27, 2021 | ||||||||||||||||||||||||||||
| Common | Additional | Total | ||||||||||||||||||||||||||
| Shares | Treasury | Common | Treasury | Paid in | Accumulated | Stockholders | ||||||||||||||||||||||
| Issued | Shares | Stock | Stock | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at September 27, 2020 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Stock Compensation Expense | - | - | ||||||||||||||||||||||||||
| Vested Restricted Stock Units Issued Net of Tax Withholding | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Common Stock Repurchase (1) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Cancellation of Treasury Shares(2) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||
| Balance at June 27, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| (1) | |
| (2) |
The accompanying notes are an integral part of these condensed consolidated financial statements
| F-5 |
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 nine months ended July 3, 2022 were derived from the U.S. government (
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 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 as the pandemic subsides.
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.
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.
| F-6 |
Inventory: As of July 3, 2022 and October 3, 2021, inventory included:
| (Thousands) | ||||||||
| July 3, 2022 | October 3, 2021 | |||||||
| Raw Material | $ | $ | ||||||
| Work in Process | ||||||||
| Finished Goods | ||||||||
| Gross Inventory | $ | $ | ||||||
| Less: Inventory Reserves | ( | ) | ( | ) | ||||
| Net Inventory | $ | $ | ||||||
Concentration
of Credit Risk: Optex Systems Holdings’ accounts receivables as of July 3, 2022 consisted of U.S. government agencies (
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
July 3, 2022, and October 3, 2021, the Company had warranty reserve balances of $
| Three months ended | Nine months ended | |||||||||||||||
| July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
| Beginning balance | $ | $ | $ | $ | ||||||||||||
| Incurred costs for warranties satisfied during the period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Warranty Expenses: | ||||||||||||||||
| Warranties reserved for new product shipped during the period(1) | ||||||||||||||||
| Change in estimate for pre-existing warranty liabilities(2) | ( | ) | ( | ) | ||||||||||||
| Warranty Expense | ||||||||||||||||
| Ending balance | $ | $ | $ | $ | ||||||||||||
| (1) | |
| (2) |
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.
| F-7 |
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, 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 through February 2025. 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 and nine months ended July 3, 2022 and June 27, 2021, there was $
During
the three- and nine-month periods ended July 3, 2022, there were
Income
Tax/Deferred Tax: As of July 3, 2022, Optex Systems, Inc. had a deferred tax asset valuation allowance of ($
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 and nine months ended July 3, 2022, there were no declared dividends and no allocated undistributed earnings attributable to the participating warrants, respectively. During the three and nine months ended June 27, 2021, there were declared dividends and $ and $ thousand, respectively, in allocated undistributed earnings attributable to the participating warrants.
| F-8 |
The Company has potentially dilutive securities outstanding, which include unvested restricted stock units, stock options and, for the three and nine months ended June 27, 2021, 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 July 3, 2022, unvested restricted stock units and shares of unvested restricted stock (which convert to an aggregate of incremental shares) were included in the diluted earnings per share calculation. For the three months ended June 27, 2021, unvested restricted stock units and shares of unvested restricted stock (which convert to an aggregate of incremental shares) were included in the diluted earnings per share calculation.
For the nine months ended July 3, 2022, unvested restricted stock units and shares of unvested restricted stock (which convert to an aggregate of incremental shares) were included in the diluted earnings per share calculation. For the nine months ended June 27, 2021, unvested restricted stock units and restricted shares (which convert to an aggregate of incremental shares) were included in the diluted earnings per share calculation.
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
Optex
Systems is located in Richardson Texas, with leased premises consisting of approximately
Applied Optics Center (AOC) – Dallas, Texas
The
Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represent approximately
The
Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately
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.
| F-9 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
| As of and for the three months ended July 3, 2022 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||
| Total revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Interest expense | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Income (loss) before taxes | $ | $ | $ | ( | ) | $ | ||||||||||
| Other significant noncash items: | ||||||||||||||||
| Allocated home office expense | $ | ( | ) | $ | $ | $ | ||||||||||
| Stock compensation expense | $ | $ | $ | $ | ||||||||||||
| Warranty expense | $ | $ | $ | $ | ||||||||||||
| Segment assets | $ | $ | $ | $ | ||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||
Reportable Segment Financial Information (thousands) | ||||||||||||||||
| As of and for the three months ended June 27, 2021 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||
| Total revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Interest expense | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Income (loss) before taxes | $ | $ | ( | ) | $ | $ | ||||||||||
| Other significant noncash items: | ||||||||||||||||
| Allocated home office expense | $ | ( | ) | $ | $ | $ | ||||||||||
| Gain on change in fair value of warrants | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Stock compensation expense | $ | $ | $ | $ | ||||||||||||
| Warranty expense | $ | $ | $ | $ | ||||||||||||
| Segment assets | $ | $ | $ | $ | ||||||||||||
| Expenditures for segment assets | $ | ( | ) | $ | $ | $ | ||||||||||
| F-10 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
| As of and for the nine months ended July 3, 2022 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||
| Total revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Interest expense | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Income (loss) before taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Other significant noncash items: | ||||||||||||||||
| Allocated home office expense | $ | ( | ) | $ | $ | $ | ||||||||||
| Stock compensation expense | $ | $ | $ | $ | ||||||||||||
| Warranty expense | $ | $ | $ | $ | ||||||||||||
| Segment assets | $ | $ | $ | $ | ||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||
Reportable Segment Financial Information (thousands) | ||||||||||||||||
| As of and for the nine months ended June 27, 2021 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other (non-allocated costs and intersegment eliminations) | Consolidated Total | |||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||
| Total revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Interest expense | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Income (loss) before taxes | $ | $ | ( | ) | $ | $ | ||||||||||
| Other significant noncash items: | ||||||||||||||||
| Allocated home office expense | $ | ( | ) | $ | $ | $ | ||||||||||
| Gain on change in fair value of warrants | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Stock compensation expense | $ | $ | $ | $ | ||||||||||||
| Warranty expense | $ | $ | $ | $ | ||||||||||||
| Segment assets | $ | $ | $ | $ | ||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||
| F-11 |
Note 4 - Commitments and Contingencies
Non-cancellable Operating Leases
Optex Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc., Richardson location and the Applied Optics Center Dallas address location. The Company also leases certain office equipment under non-cancellable operating leases.
The
leased facility under Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of
The
leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of
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 $
As of July 3, 2022, the remaining minimum lease and estimated CAM payments under the non-cancelable facility space leases are as follows:
| (Thousands) | ||||||||||||||||||||
| Optex Richardson | Applied Optics Center | Office Equipment | Consolidated | |||||||||||||||||
| Fiscal Year | Facility Lease Payments | Facility Lease Payments | Lease Payments | Total Lease Payments | Total Variable CAM Estimate | |||||||||||||||
| 2022 Base year lease | $ | $ | $ | $ | $ | |||||||||||||||
| 2023 Base year lease | ||||||||||||||||||||
| 2024 Base year lease | ||||||||||||||||||||
| 2025 Base year lease | ||||||||||||||||||||
| 2026 Base year lease | ||||||||||||||||||||
| 2027 Base year lease | ||||||||||||||||||||
| 2028 Base year lease | ||||||||||||||||||||
| 2029 Base year lease | ||||||||||||||||||||
| Total base lease payments | $ | $ | $ | $ | $ | |||||||||||||||
| Imputed interest on lease payments (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total Operating Lease Liability(2) | $ | $ | $ | $ | ||||||||||||||||
| Right-of-use Asset(3) | $ | $ | $ | $ | ||||||||||||||||
| (1) | |
| (2) | |
| (3) |
| F-12 |
Total
expense under both facility lease agreements for the three months ended July 3, 2022 and June 27, 2021 was $
Total
expense under both facility lease agreements for the nine months ended July 3, 2022 and June 27, 2021 was $
Note 5 - Debt Financing
Credit Facility — PNC Bank (formerly BBVA, USA)
On
April 12, 2022, the Company and its subsidiary, Optex Systems, Inc. (“Optex”, and with the Company, the “Borrowers”),
entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, successor
to BBVA USA (the “Lender”), pursuant to which the Borrowers’ existing revolving line of credit facility was decreased
from $
The
outstanding balance on the Facility was
Note 6 - Warrant Liabilities
On August 26, 2016, Optex Systems Holdings, Inc. issued 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 $ 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 condensed consolidated statements of operations. The warrants expired on the Termination Date in accordance with their terms; therefore, no warrants were outstanding as of July 3, 2022 or during the three or nine months ended July 3, 2022.
| F-13 |
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:
| Valuation Assumptions | Period ended September 27, 2020 | Period ended June 27, 2021 | ||||||
| Exercise Price (1) | $ | $ | ||||||
| Warrant Expiration Date (1) | ||||||||
| Stock Price (2) | $ | $ | ||||||
| Interest Rate (annual) (3) | % | % | ||||||
| Volatility (annual) | % | % | ||||||
| Time to Maturity (Years) | ||||||||
| Calculated fair value per share | $ | $ | ||||||
| (1) | |
| (2) | |
| (3) |
The warrants outstanding and fair values at each of the respective valuation dates are summarized below:
| Warrant Liability | Warrants Outstanding | Fair Value per Share | Fair Value (000’s) | |||||||||
| Fair Value as of period ended 9/27/2020 | $ | $ | ||||||||||
| Gain on Change in Fair Value of Warrant Liability | ( | ) | ||||||||||
| Fair Value as of period ended 6/27/2021 | $ | |||||||||||
| Fair Value as of period ended 10/3/2021 | $ | $ | ||||||||||
| Gain on Change in Fair Value of Warrant Liability | ||||||||||||
| Fair Value as of period ended 7/3/2022 | $ | $ | ||||||||||
During
the three and nine months ended July 3, 2022 and June 27, 2021, there were
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.
Stock Options issued to Employees, Officers and Directors
The Optex Systems Holdings 2009 Stock Option Plan provides for the issuance of up to 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 or nine months ended July 3, 2022. As of July 3, 2022, there were stock options outstanding.
| F-14 |
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:
Restricted Stock Units | Weighted Average Grant Date Fair Value | Restricted Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Outstanding at September 27, 2020 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | $ | ( | ) | $ | ||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at October 3, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | ( | ) | ||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at July 3, 2022 | $ | $ | ||||||||||||||
On January 2, 2019, the Company granted and 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 % in year one, and % each year thereafter. The stock price at grant date was $ 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 $ 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.
As of the December 1, 2021 modification date related to the third and final vesting date of the 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 initially 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” occurring, which change in control, in case Mr. Schoening is terminated by the Company without cause or he resigns with good reason prior to such change in control, must occur prior to March 13, 2023. As of the modification date, there was $ 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 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 period at a rate of % in year one, and % each year thereafter. The stock price at grant date was $ per share. The Company will amortize the grant date fair value of $ 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 common shares to directors and officers, net of tax withholding of $ thousand, in settlement of restricted stock units which vested on January 1, 2021.
| F-15 |
On January 4, 2022, the Company issued common shares to directors and officers, net of tax withholding of $ thousand, in settlement of 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 $to $with The total market value for the shares is $thousand based on the stock price of $as of April 30, 2020. The Company amortizes the grant date fair value to stock compensation expense on a straight-line basis across the vesting period beginning on April 30, 2020. On each of January 1, 2021 and January 1, 2022, 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 restricted shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized in the table below:
| Stock Compensation | ||||||||||||||||||||||||
| (thousands) | ||||||||||||||||||||||||
| Recognized Compensation Expense | Unrecognized Compensation Expense | |||||||||||||||||||||||
| Three months ended | Nine months ended | As of period ended | ||||||||||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | July 3, 2022 | October 3, 2021 | |||||||||||||||||||
| Restricted Shares | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Restricted Stock Units | ||||||||||||||||||||||||
| Total Stock Compensation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Note 8 - Stockholders’ Equity
Dividends
As
of the three and nine months ended July 3, 2022 and the twelve months ended October 3, 2021, there were
Common stock
On
June 8, 2020 the Company announced authorization of a $
On
September 22, 2021 the Company announced authorization of an additional $
| F-16 |
During the nine months ended July 3, 2022, there were common shares repurchased under the program at a cost of $ thousand. A summary of the purchases under the program follows:
| 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 | $ | $ | $ | |||||||||||||
| October 26, 2020 through November 22, 2020 | ||||||||||||||||
| November 23, 2020 through December 27, 2020 | ||||||||||||||||
| December 28, 2020 through January 24, 2021 | ||||||||||||||||
| January 25, 2021 through February 21, 2021 | ||||||||||||||||
| February 22, 2021 through March 28, 2021 | ||||||||||||||||
| March 29, 2021 through April 19, 2021 | ||||||||||||||||
| September 23, 2021 through October 1, 2021 | $ | $ | $ | |||||||||||||
| Total shares repurchased for year ended October 3, 2021 | $ | $ | $ | |||||||||||||
| October 4, 2021 through October 31, 2021 | $ | $ | $ | |||||||||||||
| November 1, 2021 through November 28, 2021 | ||||||||||||||||
| November 29, 2021 through January 2, 2022 | ||||||||||||||||
| January 3, 2022 through January 30, 2022 | ||||||||||||||||
| January 31, 2022 through February 27, 2022 | ||||||||||||||||
| February 28, 2022 through April 3, 2022 | ||||||||||||||||
| April 4, 2022 through May 1, 2022 | ||||||||||||||||
| May 2, 2022 through May 29, 2022 | ||||||||||||||||
| May 30, 2022 through July 3, 2022 | ||||||||||||||||
| Total shares repurchased for nine months ended July 3, 2022 | $ | $ | $ | |||||||||||||
As of October 3, 2021, and July 3, 2022, the total outstanding common shares were and , respectively. As of October 3, 2021, and July 3, 2022, there were and shares held in Treasury, respectively.
As of October 3, 2021, and July 3, 2022, the total issued common shares were and , respectively.
Note 9 - Subsequent Events
None.
| F-17 |
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 condensed consolidated financial statements and notes thereto for the quarter ended July 3, 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; orders; the impact of the COVID-19 pandemic; the impact of the Russian invasion of Ukraine; 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.
| 3 |
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, Harris Corp. 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.
| 4 |
Recent Events
Product Opportunities
As disclosed in the Company’s annual report on Form 10-K for the year ended October 3, 2021, the Company has been offering mil-spec quality high efficiency anti-reflective coatings for infrared applications. We anticipate continuing revenue growth and new opportunities relating to this offering in the near term.
Strategic Alternatives
As disclosed in the Company’s current report on Form 8-K on September 10, 2021, in September 2021, the Company’s Board of Directors formed a Strategic Alternatives Committee. The Committee’s purpose is to explore and evaluate strategic alternatives for the Company, including a possible strategic investment, merger or sale of the Company. This Committee continues to assess strategic alternatives from time to time.
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 nine months ended July 3, 2022, 188,414 common shares were repurchased under the September 2021 repurchase program at an aggregate cost of $366 thousand. As of July 3, 2022, all shares repurchased under the September 2021 stock repurchase program have been cancelled and there were no shares held in Treasury.
K. Hawkins Salary Increase and Employment Agreement
On March 28, 2022, the Board of Directors Compensation Committee approved a salary increase of 4% for Karen Hawkins, CFO to be effective on April 1, 2022. As a result of the increase, the salary has been changed from $205,425 to $213,642.
On July 1, 2022, Ms. Hawkins’ employment agreement was automatically extended in accordance with its terms for an additional eighteen months. The current term of the extended agreement expires on December 31, 2023, subject to further auto-renewal.
Line of Credit Renewal
On April 12, 2022, the Company and its subsidiary, Optex Systems, Inc. (“Optex”, and with the Company, the “Borrowers”), entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, successor to BBVA USA (the “Lender”), pursuant to which the Borrowers’ existing revolving line of credit facility was decreased from $2.25 million to $1.125 million, and the maturity date was extended from April 15, 2022 to April 15, 2023. Obligations outstanding under the credit facility accrue interest at a rate equal to the Lender’s prime rate minus 0.25%.
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 nine 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.
| 5 |
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-and six-month operating results for the periods ended July 3, 2022 and June 27, 2021, 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.
| (Thousands) | ||||||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
| Net Income (GAAP) | $ | 428 | $ | 1,374 | $ | 306 | $ | 1,859 | ||||||||
| Add: | ||||||||||||||||
| (Gain) on Change in Fair Value of Warrants | - | (1,167 | ) | - | (2,025 | ) | ||||||||||
| Federal Income Tax (Benefit) Expense | 82 | (154 | ) | 28 | (122 | ) | ||||||||||
| Depreciation | 74 | 67 | 221 | 195 | ||||||||||||
| Stock Compensation | 36 | 57 | 127 | 171 | ||||||||||||
| Interest Expense | - | 4 | - | 9 | ||||||||||||
| Adjusted EBITDA - Non GAAP | $ | 620 | $ | 181 | $ | 682 | $ | 87 | ||||||||
Our net income decreased by ($1.0) million to $0.4 million net income for the three months ended July 3, 2022, as compared to net income of $1.4 million for the prior year period. Our adjusted EBITDA increased by $0.4 million to $0.6 million for the three months ended July 3, 2022, as compared to $0.2 million for the prior year period. The increase in adjusted EBITDA for the most recent three-month period is primarily driven by increased revenue as compared to the prior year period. Operating segment performance is discussed in greater detail throughout the following sections.
Our net income decreased by ($1.6) million to a net income of $0.3 million for the nine months ended July 3, 2022, as compared to a net income of $1.9 million for the prior year period. Our adjusted EBITDA increased by $0.6 million to $0.7 million for the nine months ended July 3, 2022, as compared to $0.1 million for the prior year period. The increase in adjusted EBITDA for the most recent nine-month period is primarily driven by increased revenue as compared to the prior year period. Operating segment performance is discussed in greater detail throughout the following sections.
| 6 |
During the three and nine months ended July 3, 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 June 27, 2021, we recognized a gain on the change in fair value of warrants of $1.2 million, and during the nine months ended June 27, 2021, we recognized a gain on the change in fair value of warrants of $2.0 million. As this was a non-cash gain driven by then-current fair 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, “Unaudited Condensed Consolidated Financial Statements, Note 6 - Warrant Liabilities”.
Results of Operations Selective Financial Info by Segment (Thousands) | ||||||||||||||||||||||||||||||||
| Three months ended | ||||||||||||||||||||||||||||||||
| July 3, 2022 | June 27, 2021 | |||||||||||||||||||||||||||||||
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 | $ | 2,653 | $ | 3,517 | $ | - | $ | 6,170 | $ | 3,126 | $ | 1,307 | $ | - | $ | 4,433 | ||||||||||||||||
| Intersegment Revenues | - | 258 | (258 | ) | - | - | 41 | (41 | ) | - | ||||||||||||||||||||||
| Total Segment Revenue | 2,653 | 3,775 | (258 | ) | 6,170 | 3,126 | 1,348 | (41 | ) | 4,433 | ||||||||||||||||||||||
| Total Cost of Sales | 2,125 | 3,035 | (258 | ) | 4,902 | 2,436 | 1,292 | (41 | ) | 3,687 | ||||||||||||||||||||||
| Gross Margin | 528 | 740 | - | 1,268 | 690 | 56 | - | 746 | ||||||||||||||||||||||||
| Gross Margin % | 19.9 | % | 19.6 | % | - | 20.6 | % | 22.1 | % | 4.2 | % | - | 16.8 | % | ||||||||||||||||||
| General and Administrative Expense | 611 | 111 | 36 | 758 | 539 | 93 | 57 | 689 | ||||||||||||||||||||||||
| Segment Allocated G&A Expense | (268 | ) | 268 | - | - | (177 | ) | 177 | - | - | ||||||||||||||||||||||
| Net General & Administrative Expense | 343 | 379 | 36 | 758 | 362 | 270 | 57 | 689 | ||||||||||||||||||||||||
| Operating Income (Loss) | 185 | 361 | (36 | ) | 510 | 328 | (214 | ) | (57 | ) | 57 | |||||||||||||||||||||
| Operating Income (Loss) % | 7.0 | % | 9.6 | % | - | 8.3 | % | 10.5 | % | (15.9 | )% | - | 1.3 | % | ||||||||||||||||||
| Loss on Change in Fair Value of Warrants | - | - | - | - | - | - | 1,167 | 1,167 | ||||||||||||||||||||||||
| Interest Expense | - | - | - | - | - | - | (4 | ) | (4 | ) | ||||||||||||||||||||||
| Net Income (Loss) before taxes | $ | 185 | $ | 361 | $ | (36 | ) | $ | 510 | $ | 328 | $ | (214 | ) | $ | 1,106 | $ | 1,220 | ||||||||||||||
| Net Income (Loss) % | 7.0 | % | 9.6 | % | - | 8.3 | % | 10.5 | % | (15.9 | )% | - | 27.5 | % | ||||||||||||||||||
| 7 |
Results of Operations Selected Financial Info by Segment (Thousands) | ||||||||||||||||||||||||||||||||
| Nine months ended | ||||||||||||||||||||||||||||||||
| July 3, 2022 | June 27, 2021 | |||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||