Attached files
file | filename |
---|---|
EX-31.2 - Optex Systems Holdings Inc | v193242_ex31-2.htm |
EX-32.1 - Optex Systems Holdings Inc | v193242_ex32-1.htm |
EX-31.1 - Optex Systems Holdings Inc | v193242_ex31-1.htm |
EX-32.2 - Optex Systems Holdings Inc | v193242_ex32-2.htm |
EX-10.26 - Optex Systems Holdings Inc | v193242_ex10-26.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
For
the quarterly period ended June 27, 2010
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
For
the transition period from ______to______.
OPTEX SYSTEMS HOLDINGS, INC.
(Exact
Name of Registrant as Specified in Charter)
Delaware
|
333-143215
|
333-143215
|
||
(State
or other jurisdiction of
incorporation)
|
(Commission
File Number)
|
(IRS
Employer Identification
No.)
|
1420
Presidential Drive, Richardson, TX
|
75081-2439
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (972) 644-0722
(Former
Name or Former Address if Changed Since Last Report)
Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company filer.
See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act (Check one):
Large
Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o No
o
Indicate
by check mark whether the registrant is a shell company as defined in Rule
12b`-2 of the Exchange Act. Yes o No x
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of August 9, 2010: 139,444,940 shares of common stock.
OPTEX
SYSTEMS HOLDINGS, INC.
FORM
10-Q
June
27, 2010
INDEX
PART
I— FINANCIAL INFORMATION
|
|
||
|
|
||
Item
1.
|
Financial
Statements
|
|
3
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
4
|
Item
4.
|
Control
and Procedures
|
|
13
|
|
|||
PART
II— OTHER INFORMATION
|
|
||
|
|
||
Item
1
|
Legal
Proceedings
|
|
13
|
Item
1A
|
Risk
Factors
|
|
13
|
Item
6.
|
Exhibits
|
|
13
|
|
|
||
SIGNATURE
|
14
|
2
Item
1. Financial Information
OPTEX
SYSTEMS HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF
JUNE 27, 2010
BALANCE
SHEETS AS OF JUNE 27, 2010 (SUCCESSOR) (UNAUDITED) AND SEPTEMBER 27,
2009 (SUCCESSOR)
|
F-1
|
||
STATEMENTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 27, 2010
(SUCCESSOR) AND THE THREE MONTHS ENDED JUNE 28, 2009 (SUCCESSOR) AND
FOR THE PERIOD OCTOBER 15, 2008 THROUGH JUNE 28, 2009 (SUCCESSOR) AND FOR
THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008 (PREDECESSOR)
(UNAUDITED)
|
F-3
|
||
STATEMENTS
OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 27, 2010
(SUCCESSOR) AND FOR THE PERIOD OCTOBER 15, 2008 THROUGH JUNE 28, 2009
(SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008
(PREDECESSOR) (UNAUDITED)
|
F-4
|
||
FINANCIAL
STATEMENT FOOTNOTES (UNAUDITED)
|
F-6
|
3
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Balance Sheets
Successor
|
||||||||
June 27, 2010
(Unaudited)
|
Successor
September 27, 2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 782,294 | $ | 915,298 | ||||
Accounts
Receivable
|
2,715,171 | 1,802,429 | ||||||
Net
Inventory
|
6,975,481 | 8,013,881 | ||||||
Deferred
Tax Asset
|
953,916 | 711,177 | ||||||
Prepaid
Expenses
|
232,631 | 318,833 | ||||||
Total
Current Assets
|
$ | 11,659,493 | $ | 11,761,618 | ||||
Property
and Equipment
|
||||||||
Property
Plant and Equipment
|
$ | 1,348,932 | $ | 1,341,271 | ||||
Accumulated
Depreciation
|
(1,142,496 | ) | (1,094,526 | ) | ||||
Total
Property and Equipment
|
$ | 206,436 | $ | 246,745 | ||||
Other
Assets
|
||||||||
Security
Deposits
|
$ | 20,684 | $ | 20,684 | ||||
Intangibles
|
1,187,411 | 1,965,596 | ||||||
Goodwill
|
7,110,415 | 7,110,415 | ||||||
Total
Other Assets
|
$ | 8,318,510 | $ | 9,096,695 | ||||
Total
Assets
|
$ | 20,184,439 | $ | 21,105,058 |
The
accompanying notes are an integral part of these financial
statements
F-1
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Balance Sheets – Continued
Successor
|
||||||||
June 27, 2010
(Unaudited)
|
Successor
September 27, 2009
|
|||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
Payable
|
$ | 868,597 | $ | 2,497,322 | ||||
Accrued
Expenses
|
510,596 | 671,045 | ||||||
Accrued
Warranties
|
25,000 | 81,530 | ||||||
Accrued
Contract Losses
|
1,331,007 | 1,348,060 | ||||||
Credit
Facility
|
959,061 | - | ||||||
Total
Current Liabilities
|
$ | 3,694,261 | $ | 4,597,957 | ||||
Stockholders'
Equity
|
||||||||
Optex
Systems Holdings, Inc. – (par $0.001, 200,000,000 authorized, 139,444,940
shares issued and outstanding)
|
$ | 139,445 | $ | 139,445 | ||||
Optex
Systems Holdings, Inc. Preferred Stock (.001 par 5,000 authorized, 1027
series A preferred shares issued and
outstanding)
|
1 | 1 | ||||||
Additional
Paid-in-capital
|
17,037,740 | 16,643,388 | ||||||
Retained
Earnings (Deficit)
|
(687,008 | ) | (275,733 | ) | ||||
Total
Stockholders' Equity
|
$ | 16,490,178 | $ | 16,507,101 | ||||
Total
Liabilities and Stockholders' Equity
|
$ | 20,184,439 | $ | 21,105,058 |
The
accompanying notes are an integral part of these financial
statements
F-2
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Statements of Operations (Unaudited)
Successor
Three months
ended June 27,
2010
|
Successor
Three months
ended June 28,
2009
|
Successor
Nine months ended
June 27, 2010
|
Successor
For the period October
15, 2008 through June
28, 2009
|
Predecessor
For the period
September 29,
2008 through
October 14, 2008
|
||||||||||||||||
Revenues
|
$ | 5,905,456 | $ | 6,983,930 | $ | 18,138,883 | $ | 20,084,362 | $ | 871,938 | ||||||||||
Total
Cost of Sales
|
5,498,140 | 6,417,926 | 16,246,026 | 18,135,020 | 739,868 | |||||||||||||||
Gross
Margin
|
$ | 407,316 | $ | 566,004 | $ | 1,892,857 | $ | 1,949,342 | $ | 132,070 | ||||||||||
General
and Administrative
|
||||||||||||||||||||
Salaries
and Wages
|
$ | 225,174 | $ | 161,695 | $ | 571,032 | $ | 487,709 | $ | 22,028 | ||||||||||
Employee
Benefits and Taxes
|
46,135 | 29,716 | 155,374 | 169,279 | 495 | |||||||||||||||
Employee
Stock/Option Bonus Plan
|
24,937 | 15,174 | 72,374 | 19,986 | (4,812 | ) | ||||||||||||||
Amortization
of Intangibles
|
79,823 | 101,159 | 239,468 | 303,475 | - | |||||||||||||||
Rent,
Utilities and Building Maintenance
|
29,713 | 50,838 | 134,263 | 150,780 | 12,493 | |||||||||||||||
Investor
Relations
|
90,408 | 88,326 | 292,478 | 88,326 | - | |||||||||||||||
Legal
and Accounting Fees
|
78,585 | 128,274 | 186,491 | 296,627 | 360 | |||||||||||||||
Consulting
and Contract Service Fees
|
46,619 | 43,210 | 132,650 | 167,261 | 10,527 | |||||||||||||||
Travel
Expenses
|
4,857 | 16,294 | 21,527 | 41,317 | - | |||||||||||||||
Board
of Director Fees
|
30,000 | 37,500 | 100,000 | 87,500 | - | |||||||||||||||
Other
Expenses
|
102,823 | 87,749 | 285,398 | 227,099 | 16,155 | |||||||||||||||
Total
General and Administrative
|
$ | 759,074 | $ | 759,935 | $ | 2,191,055 | $ | 2,039,359 | $ | 57,246 | ||||||||||
Operating
Income (Loss)
|
$ | (351,758 | ) | $ | (193,931 | ) | $ | (298,198 | ) | $ | (90,017 | ) | $ | 74,824 | ||||||
Other
Expenses
|
||||||||||||||||||||
Other
Income and Expense
|
$ | - | $ | (351 | ) | $ | - | $ | (1,434 | ) | $ | - | ||||||||
Interest
(Income) Expense - Net
|
26,939 | - | 65,838 | 174,710 | 9,492 | |||||||||||||||
Total
Other
|
$ | 26,939 | $ | (351 | ) | $ | 65,838 | $ | 173,276 | $ | 9,492 | |||||||||
Income
(Loss) Before Taxes
|
$ | (378,697 | ) | $ | (193,580 | ) | $ | (364,036 | ) | $ | (263,293 | ) | $ | 65,332 | ||||||
Income
Taxes (Benefit)
|
(168,883 | ) | 114,973 | (242,739 | ) | 465,291 | - | |||||||||||||
Net
Income (Loss) After Taxes
|
$ | (209,814 | ) | $ | (308,553 | ) | $ | (121,297 | ) | $ | (728,584 | ) | $ | 65,332 | ||||||
Less
preferred stock dividend
|
$ | (98,102 | ) | $ | - | $ | (289,978 | ) | $ | - | $ | - | ||||||||
Net
loss applicable to common shareholders
|
$ | (307,916 | ) | $ | (308,553 | ) | $ | (411,275 | ) | $ | (728,584 | ) | $ | 65,332 | ||||||
Basic
and diluted loss per share
|
$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | 6.53 | ||||||
Weighted
Average Common Shares Outstanding
|
139,444,940 | 138,914,940 | 139,444,940 | 121,891,852 | 10,000 |
The accompanying notes are an
integral part of these financial statements
F-3
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Statements of Cash Flows (Unaudited)
Successor
Nine months ended June
27, 2010
|
Successor
For the period October 15,
2008 through June 28, 2009
|
Predecessor
For the period
September 29, 2008
through October 14,
2008
|
||||||||||
Cash
Flows from Operating Activities:
|
||||||||||||
Net
Income (Loss)
|
$ | (121,297 | ) | $ | (728,584 | ) | $ | 65,332 | ||||
Adjustments
to Reconcile Net Loss to Net Cash Used in Operating
Activities:
|
||||||||||||
Depreciation
and Amortization
|
826,156 | 1,622,907 | 9,691 | |||||||||
Provision
for Allowance for Inventory Valuation
|
(106,933 | ) | 158,273 | 27,363 | ||||||||
Noncash
Interest Expense
|
16,359 | 170,882 | 9,500 | |||||||||
Stock
Option Compensation Expense
|
72,374 | 15,174 | - | |||||||||
(Increase)
Decrease in Accounts Receivable
|
(912,742 | ) | (1,823,665 | ) | 1,049,802 | |||||||
(Increase)
Decrease in Inventory (Net of Progress Billed)
|
1,145,333 | (1,617,361 | ) | (863,566 | ) | |||||||
(Increase)
Decrease in Other Current Assets
|
118,202 | 317,669 | 18,541 | |||||||||
(Increase)
Decrease in Deferred Tax Asset
|
(242,739 | ) | - | - | ||||||||
Increase
(Decrease) in Accounts Payable and Accrued Expenses
|
(1,805,534 | ) | 1,416,854 | (186,051 | ) | |||||||
Increase
(Decrease) in Accrued Warranty Costs
|
(56,530 | ) | 87,446 | - | ||||||||
Increase
(Decrease) in Due to Parent
|
- | - | 1,428 | |||||||||
Increase
(Decrease) in Accrued Estimated Loss on Contracts
|
(17,053 | ) | (119,470 | ) | (15,304 | ) | ||||||
Increase
(Decrease) in Income Taxes Payable
|
- | 85,179 | - | |||||||||
Total
Adjustments
|
$ | (963,107 | ) | $ | 313,888 | $ | 51,404 | |||||
Net
Cash (Used)/Provided by Operating Activities
|
$ | (1,084,404 | ) | $ | (414,696 | ) | $ | 116,736 | ||||
Cash
Flows from Investing Activities:
|
||||||||||||
Cash
Received through Optex Texas Acquisition
|
$ | - | $ | 253,581 | $ | - | ||||||
Purchase
of Property and Equipment
|
(7,661 | ) | (13,824 | ) | (13,338 | ) | ||||||
Net
Cash Used in Investing Activities
|
$ | (7,661 | ) | $ | 239,757 | $ | (13,338 | ) | ||||
Cash
Flows from Financing Activities:
|
||||||||||||
Private
Placement Net of Stock Issuance Cost
|
- | 874,529 | - | |||||||||
Proceeds
(to) from Credit Facility (net)
|
959,061 | - | - | |||||||||
Proceeds
from Loans Payable
|
250,000 | (207,265 | ) | (20,000 | ) | |||||||
Repayments
of Loans Payable
|
(250,000 | ) | - | - | ||||||||
Net
Cash (Used In) Provided by Financing Activities
|
$ | 959,061 | $ | 667,264 | $ | (20,000 | ) | |||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
$ | (133,004 | ) | $ | 492,325 | $ | 83,398 | |||||
Cash
and Cash Equivalents at Beginning of Period
|
915,298 | - | 170,183 | |||||||||
Cash
and Cash Equivalents at End of Period
|
$ | 782,294 | $ | 492,325 | $ | 253,581 |
The
accompanying notes are an integral part of these financial
statements
F-4
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Statements of Cash Flows - continued (Unaudited)
Successor
Nine months ended June
27, 2010
|
Successor
For the period October 15,
2008 through June
28, 2009
|
Predecessor
For the period
September 29, 2008
through October 14,
2008
|
||||||||||
Noncash
Investing and Financing Activities:
|
||||||||||||
Optex
Delaware (Successor) Purchase of Optex Texas (Predecessor)
|
||||||||||||
Cash
Received
|
- | 253,581 | - | |||||||||
Accounts
Receivable
|
- | 1,404,434 | - | |||||||||
Inventory
|
- | 5,383,929 | - | |||||||||
Intangibles
|
- | 4,036,790 | - | |||||||||
Other
Assets
|
- | 632,864 | - | |||||||||
Accounts
Payable
|
- | (1,953,833 | ) | - | ||||||||
Other
Liabilities
|
- | (1,868,180 | ) | - | ||||||||
Debt
|
- | (6,000,000 | ) | - | ||||||||
Goodwill
|
- | 7,110,415 | - | |||||||||
Issuance
of Stock
|
$ | - | $ | 9,000,000 | $ | - | ||||||
Conversion
of Debt to Series A Preferred Stock
|
||||||||||||
Additonal
Paid in Capital ($6,000,000 Debt Retirement plus Accrued Interest of
$159,780)
|
$ | - | $ | 6,159,780 | $ | - | ||||||
Issuance
of Common shares in Exchange for Investor Relations
Services
|
||||||||||||
Additonal
Paid in Capital (1,250,000 shares issued at $0.001 par)
|
$ | - | $ | 187,500 | $ | - | ||||||
Issuance
of Warrants as Debt Issuance Cost
|
||||||||||||
Additonal
Paid in Capital (warrants to purchase 1,100,000 shares)
|
$ | 32,000 | $ | - | $ | - | ||||||
Supplemental
cash flow information:
|
||||||||||||
Cash
Paid for Interest
|
$ | 49,479 | 3,817 | $ | - | |||||||
Cash
Paid for Taxes
|
$ | 119,847 | 380,112 | $ | - |
The
accompanying notes are an integral part of these financial
statements
F-5
Note 1 - Organization and
Operations
On March
30, 2009, Optex Systems Holdings, Inc. (formerly known as Sustut Exploration,
Inc.), a Delaware corporation (“Optex Systems Holdings” or “Successor”), along
with Optex Systems, Inc., a privately held Delaware corporation (“Optex Systems,
Inc. (Delaware)”), which is a wholly-owned subsidiary of Optex
Systems Holdings, entered into a reorganization agreement, pursuant to
which Optex Systems, Inc. (Delaware) was acquired by Optex Systems Holdings in a
share exchange transaction. Optex Systems Holdings became the surviving
corporation. At the closing, there was a name change from Sustut Exploration
Inc. to Optex Systems Holdings, Inc., and its year end changed from
December 31 to a fiscal year ending on the Sunday nearest September
30.
On
October 14, 2008, certain senior secured creditors of Irvine Sensors
Corporation, Longview Fund, L.P. and Alpha Capital Anstalt formed Optex Systems,
Inc. (Delaware), which acquired all of the assets and assumed certain
liabilities of Optex Systems, Inc., a Texas corporation (“Optex Systems, Inc.
(Texas)” or “Predecessor), and a wholly-owned subsidiary of Irvine Sensors
Corporation, in a transaction that was consummated via purchase at a public
auction. Following this asset purchase, Optex Systems, Inc. (Texas)
remained a wholly-owned subsidiary of Irvine Sensors
Corporation.
In
accordance with FASB ASC 805 (Prior authoritative literature: SFAS No.
141(R), “Business
Combinations” and EITF 98-3 “Determining Whether a Non-monetary
Transaction Involves Receipt of Productive Assets or of a Business”), Optex
Systems, Inc. (Delaware)’s purchase of substantially all of the assets and
assumption of certain liabilities represented the acquisition of a
business. FASB ASC 805 outlines the guidance in determining whether a
“business” has been acquired in a transaction. For a transferred set of
activities and assets to be a business, it must contain all of the inputs and
processes necessary for it to continue to conduct normal operations after the
transferred set of assets is separated from the transferor, which include the
ability to sustain a revenue stream by providing its outputs to customers. Optex
Systems, Inc. (Delaware) obtained the inputs and processes necessary for normal
operations.
On
February 20, 2009, Sileas Corporation, a newly-formed Delaware corporation,
owned by present members of Optex Systems Holdings’ management, purchased 100%
of Longview's equity and debt interest in Optex Systems, Inc. (Delaware)
(Longview’s interest in Optex Systems, Inc. (Delaware) then representing 90% of
the issued and outstanding common equity interests in Optex Systems, Inc.
(Delaware)), in a private transaction . See Note 4 for additional
details regarding the Sileas transaction.
Optex
Systems, Inc. (Delaware) operated as a privately-held Delaware corporation until
March 30, 2009, when, as a result of the reorganization agreement (described
above and also in Note 5), it became a wholly-owned subsidiary of Optex Systems
Holdings. Sileas is the majority owner (parent) of Optex Systems Holdings,
owning approximately 73.5% of the issued and outstanding equity interests in
Optex Systems Holdings. Optex Systems Holdings plans to carry on the
business of Optex Systems, Inc. (Delaware) as its sole line of business, and all
of Optex Systems Holdings’ operations are conducted by and through its
wholly-owned subsidiary, Optex Systems, Inc. (Delaware). Accordingly, in
subsequent periods the financial statements presented are those of the
accounting acquirer. The financial statements of Optex Systems Holdings
represent subsidiary statements and do not include the accounts of its majority
owner.
The
Company’s operations are based in Richardson, Texas in a leased facility
comprising 49,100 square feet. As of June 27, 2010, Optex Systems Holdings
operated with 84 full-time equivalent employees.
Optex
Systems Holdings manufactures optical sighting systems and assemblies, primarily
for Department of Defense applications. Its products are installed on a
variety of U.S. military land vehicles, such as the Abrams and Bradley fighting
vehicles, light armored and advanced security vehicles, and have been selected
for installation on the Stryker family of vehicles. Optex Systems Holdings also
manufactures and delivers numerous periscope configurations, rifle and
surveillance sights and night vision optical assemblies. Optex Systems Holdings’
products consist primarily of build to customer print products that are
delivered both directly to the military and to other defense prime
contractors.
In
February 2009, Optex Systems Holdings’ ISO certification status was
upgraded from 9001:2000 to 9001:2008, bringing Optex Systems Holdings into
compliance with the new ISO standards rewritten to align with ISO
14001.
F-6
Note
2 - Accounting Policies
Basis
of Presentation
Principles of
Consolidation: The consolidated financial statements include the
accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex
Systems, Inc. (Delaware). All significant inter-company balances and
transactions have been eliminated in consolidation.
The
accompanying financial statements include the results of operations and cash
flows of Optex Systems, Inc. (Delaware), the accounting acquirer in the Sustut
reorganization and the successor in the October 14, 2008 Optex Systems, Inc.
(Texas) asset purchase transaction, for the three and nine months ending June
27, 2010, the three months ended June 28, 2009 and the period from October 15,
2008 through June 28, 2009 and the results of operations and cash flows for the
period from September 29, 2008 through October 14, 2008 of Optex Systems, Inc.
(Texas), Predecessor. The accompanying financial statements include the
balance sheets at June 27, 2010 and September 27, 2009 for Optex Systems, Inc.
(Delaware), the accounting acquirer.
These
financial statements have been presented as subsidiary-only financial
statements, reflecting the statements of operations and cash flows of the
subsidiary as a stand-alone entity.
Although,
Optex Systems, Inc. (Texas) (Predecessor) has been majority owned by various
parent companies described in the preceding paragraphs, no accounts of the
parent companies or the effects of consolidation with any parent companies have
been included in the accompanying financial statements. The Optex Systems,
Inc. (Texas) accounts have been presented on the basis of push down accounting
in accordance with FASB ASC 805-50-S99 (Prior authoritative literature:
Staff Accounting Bulletin No. 54 Application of “Push Down” Basis of
Accounting in Financial Statements of Subsidiaries Acquired by Purchase).
FASB ASC 805-50-S99 states that the push down basis of accounting should be used
in a purchase transaction in which the entity becomes wholly-owned by another
entity. Under the push down basis of accounting certain transactions incurred by
the parent company, which would otherwise be accounted for in the accounts of
the parent, are “pushed down” and recorded on the financial statements of the
subsidiary. Accordingly, items resulting from the Optex Systems, Inc. (Texas)
purchase transaction, such as goodwill, debt incurred by the parent to acquire
the subsidiary and other costs related to the purchase have been recorded on the
financial statements of Optex Systems Holdings.
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 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 Optex Systems Holdings 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 financial statements and the notes thereto
included in the Optex Systems Holdings’ Form 10-K and other reports filed
with the SEC.
The
accompanying unaudited interim 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.
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.
Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted, as
necessary, for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. Cost is determined using the first-in
first-out method. Under arrangements by which progress payments are received
against certain contracts, the customer retains a security interest in the
undelivered inventory identified with these contracts. Payments received
for such undelivered inventory are classified as unliquidated progress payments
and deducted from the gross inventory balance. As of June 27, 2010 and September
27, 2009, inventory included:
F-7
|
As of
June 27, 2010
|
As of
September 27, 2009
|
||||||
(unaudited)
|
||||||||
Raw
Materials
|
$
|
4,986,965
|
$
|
7,161,241
|
||||
Work
in Process
|
4,307,016
|
4,043,308
|
||||||
Finished
Goods
|
231,851
|
245,056
|
||||||
Gross
Inventory
|
$
|
9,525,832
|
$
|
11,449,605
|
||||
Less:
|
||||||||
Unliquidated
Progress Payments
|
(2,102,458
|
)
|
(2,880,898
|
)
|
||||
Inventory
Reserves
|
(447,893
|
)
|
(554,826
|
)
|
||||
Net
Inventory
|
$
|
6,975,481
|
$
|
8,013,881
|
Stock-Based
Compensation: In December 2004, FASB issued FASB ASC 718 (Prior
authoritative literature: SFAS No. 123R, “Share-Based
Payment”). FASB ASC 718 establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services, but primarily focuses on transactions whereby an entity obtains
employee services for share-based payments. FASB ASC 718 requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity
instruments.
The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of FASB ASC
505-50 (Prior authoritative literature: EITF 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for
Certain Transactions Involving Equity Instruments Granted to Other Than
Employees”). The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting agreement.
Stock-based compensation related to non-employees is accounted for based on the
fair value of the related stock or options or the fair value of the services,
whichever is more readily determinable in accordance with FASB ASC
718.
Income
Tax/Deferred Tax: FASB ASC 740 (Prior Authoritative Literature:
SFAS No. 109, “Accounting for
Income Taxes”), requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on differing treatment of items
for financial reporting and income tax reporting purposes. The deferred
tax balances are adjusted to reflect tax rates by tax jurisdiction, based on
currently enacted tax laws, which will be in effect in the years in which the
temporary differences are expected to reverse. Under FASB ASC 740, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future
operations. Optex Systems Holdings has recognized deferred income tax
benefits on net operating loss carry-forwards to the extent Optex Systems
Holdings believes it will be able to utilize them in future tax filings.
The difference between the income tax expense and pretax accounting income is
primarily attributable to $118,017 and $349,900 of deductible expenses
representing permanent timing differences between book income and taxable income
for the amortization of goodwill during the three and nine months ending June
27, 2010, respectively. This expense is deductible over 15 years for
income tax purposes but is not amortized for accounting purposes. The tax
effect of this permanent timing difference is a reduction in income tax expense
of $40,126 and $118,966 for the three and nine months ended June 27, 2010,
respectively.
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 reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
The
potentially dilutive securities that Optex Systems Holdings has outstanding are
convertible preferred stock, stock options and warrants. In computing the
dilutive effect of convertible preferred stock, the numerator is adjusted to add
back any convertible preferred dividends, and the denominator is increased to
assume the conversion of the number of additional common shares. Optex Systems
Holdings uses the Treasury Stock Method to compute the diluted effect of stock
options and warrants. Convertible preferred stocks, stock options and warrants
that are antidilutive are excluded from the calculation of diluted earnings per
common share.
F-8
For the
three and nine months ended June 27, 2010, 1,027 shares of Series A preferred
stock, 2,655,649 stock options and 9,948,667 warrants were excluded as
antidilutive. For the period October 15, 2008 through June 28, 2009 (Successor)
there were 2,681,649 stock options issued and outstanding that could dilute
future earnings. There were no dilutive convertible securities issued and
outstanding for the period September 29, 2008 through October 14, 2008
(Predecessor).
Reclassification:
Certain expenses reflected in the financial statements for the three and nine
months ended June 28, 2009 have been reclassified to conform with the current
year presentation.
Note
3 - Recent Accounting Pronouncements
In
February 2010, FASB issued ASU 2010-09 “Subsequent Event (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements”. ASU 2010-09
removes the requirement for an SEC filer to disclose a date in both issued and
revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of GAAP. All of the amendments in ASU 2010-09 are
effective upon issuance of the final ASU, except for the use of the issued date
for conduit debt obligors, which is effective for interim or annual periods
ending after June 15, 2010. The Company adopted ASU
2010-09 in February 2010 and therefore omitted the
disclosure previously required as referenced above.
Note
4 — Acquisition of Substantially All of the Assets of Optex Systems, Inc.
(Texas)
Acquisition
of Assets of Optex Systems, Inc. (Texas) by Optex Systems, Inc. (Delaware) on
October 14, 2008
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation indebtedness owned by it and the assumption of
approximately $3.8 million of certain Optex Systems, Inc. (Texas) liabilities.
The $15 million of Irvine Sensors Corporation indebtedness was contributed by
Longview and Alpha to Optex Systems, Inc. (Delaware), in exchange for a $6
million note payable from Optex Systems, Inc. (Delaware) and a $9 million equity
interest in Optex Systems, Inc. (Delaware) (which consisted of the issuance by
Optex Systems, Inc. (Delaware) of 45,081,350 and 4,918,650 shares of its common
stock to each of Longview Fund and Alpha, respectively). On October 30, 2008,
Alpha sold its Optex Systems, Inc. (Delaware) common stock to Arland Holdings,
Ltd. There was no contingent consideration associated with the purchase.
Longview and Arland Holdings, Ltd. owned Optex Systems, Inc. (Delaware) together
until February 20, 2009, when Longview sold 100% of its equity and debt
interests in Optex Systems, Inc. (Delaware) to Sileas, as discussed
below.
Optex
Systems, Inc. (Delaware) purchased all of the assets of Optex Systems, Inc.
(Texas), including: intellectual property, production processes and know-how,
and outstanding contracts and customer relationships. Optex Systems, Inc.
(Delaware) also assumed certain liabilities of Optex Systems, Inc. (Texas)
consisting of accounts payable and accrued liabilities. Optex Systems Holdings’
management intends to improve the business’s ability to serve its existing
customers and to attract new customers by providing quality products and
superior service.
Pro forma
revenue and earnings per share information is presented cumulatively in Note
5.
Secured
Promissory Note Issued in Connection with Purchase by Optex Systems, Inc.
(Delaware) (Successor)
In
connection with the public sale of the Optex Systems, Inc. (Texas) (Predecessor)
assets to Optex Systems, Inc. (Delaware) (Successor), Optex Systems, Inc.
(Delaware) issued to Longview and Alpha secured promissory notes, due September
19, 2011, in the principal amounts of $5,409,762 and $540,976, respectively. On
February 20, 2009, Longview sold its Optex Systems, Inc. (Delaware) secured
promissory note to Sileas, as described below. On March 27, 2009, Sileas and
Alpha exchanged these secured promissory notes plus accrued and unpaid interest
of $159,780 for 1,027 shares of Optex Systems, Inc. (Delaware) Series A
preferred stock.
F-9
Acquisition
by Sileas on February 20, 2009
On
February 20, 2009, Sileas purchased 100% of the equity (which at the time
represented 90% of the issued and outstanding equity interests of Optex Systems,
Inc. (Delaware)) and debt interest in Optex Systems, Inc. (Delaware) held by
Longview. As of the date of this transaction, Sileas became the majority
owner of Optex Systems, Inc. (Delaware).
Secured
Promissory Note Due February 20, 2012/Longview Fund, LP
As a
result of the transaction between Sileas and Longview, on February 20, 2009,
Sileas (which is currently majority owner of Optex Systems Holdings) executed
and delivered to Longview, a secured promissory note due February 20, 2012 in
the principal amount of $13,524,405. This secured promissory note bears simple
interest at the rate of 4% per annum, and the interest rate increases to 10% per
annum upon the occurrence of an event of default thereunder. In the event
Optex Systems Holdings sells or conveys all or substantially all its assets to a
third party entity for more than nominal consideration, other than due to a
reorganization into Sileas or reincorporation in another jurisdiction, then this
secured promissory note shall be immediately due and owing without demand. In
the event that such a major transaction occurs prior to the maturity date
resulting in Sileas receiving net consideration with a fair market value in
excess of the principal and interest due under the terms of this secured
promissory note (the “Optex Consideration”), then in addition to paying the
principal and interest due, Sileas shall also pay to Longview an amount equal to
90% of the Optex Consideration. The obligations of Sileas under this secured
promissory note are secured by a security interest in Optex
Systems Holdings’ common and preferred stock owned by Sileas that was
granted to Longview and also by a lien on all of the assets of Sileas (which
consist solely of the Optex Systems Holdings common and preferred stock held by
Sileas).
Optex
Systems Holdings has not guaranteed the note, and Longview does not have legal
remedies that it can exercise against Optex Systems Holdings in the event of a
default by Sileas. Therefore, there are no actual or potential cash flow
commitments from Optex Systems Holdings. In the event of default by Sileas on
its obligations under the note, Longview would only be entitled to receive the
Optex Systems Holdings common and preferred stock held by Sileas.
Note
5 –Reorganization Plan and Private Placement
Reorganization/Share
Exchange
On March
30, 2009, a reorganization occurred whereby the then existing shareholders of
Optex Systems, Inc. (Delaware) exchanged their shares of common stock with the
shares of common stock of Optex Systems Holdings as follows: (i) the outstanding
85,000,000 shares of Optex Systems, Inc. (Delaware) common stock were exchanged
by Optex Systems Holdings for 113,333,282 shares of Optex Systems Holdings
common stock, (ii) the outstanding 1,027 shares of Optex Systems, Inc.
(Delaware) Series A preferred stock were exchanged by Optex Systems Holdings for
1,027 shares of Optex Systems Holdings Series A preferred stock and (iii) the
8,131,667 shares of Optex Systems, Inc. (Delaware) common stock purchased in the
private placement were exchanged by Optex Systems Holdings for 8,131,667 shares
of Optex Systems Holdings common stock. Following the reorganization, Optex
Systems, Inc. (Delaware) remained a wholly-owned subsidiary of Optex Systems
Holdings.
Shares
outstanding of Optex Systems Holdings common stock just prior to the closing of
the reorganization consisted of 17,449,991 shares which included 1,250,000
shares issued on March 27, 2009 as payment for investor relations
services. On June 29, 2009, 700,000 of the issued investor relations
shares were surrendered to Optex Systems Holdings and cancelled upon termination
of one of the investor relations contracts.
Private
Placement
Prior to
the closing of the reorganization, as of March 30, 2009, Optex Systems, Inc.
(Delaware) accepted subscriptions from accredited investors for a total of 27.1
units, for $45,000 per unit, with each unit consisting of 300,000 shares of
common stock, of Optex Systems, Inc. (Delaware) and warrants to purchase 300,000
shares of common stock for $0.45 per share for a period of five years from the
initial closing, which were issued by Optex Systems, Inc. (Delaware) after the
closing referenced above. Gross proceeds to Optex Systems, Inc. (Delaware) were
$1,219,750, and after deducting (i) a cash finder’s fee of $139,555, (ii)
non-cash consideration of indebtedness owed to an investor of $146,250, and
(iii) stock issuance costs of $59,416, net proceeds were $874,529. The finder
also received five year warrants to purchase 2.39 units, at an exercise price of
$49,500 per unit.
The
following table represents the reorganization and private placement transactions
which occurred on March 30, 2009 reflected in June 28, 2009 statements due to
the election to report as of the accounting acquirer’s period end:
F-10
Optex
Systems Holdings, Inc.
Balance
Sheet Adjusted for Reorganization and Private Placement
|
Unaudited
Quarter
Ended March 29,
2009
|
Reorganization
Adjustments
(1)
|
Private
Placement
Adjustments
|
Unaudited Quarter
Ended March 29,
2009
|
||||||||||||
Assets
|
||||||||||||||||
Current
Assets
|
$
|
8,880,436
|
$
|
187,500
|
$
|
929,738
|
$
|
9,997,674
|
||||||||
Non
current Assets
|
10,422,425
|
-
|
-
|
10,422,425
|
||||||||||||
Total
Assets
|
$
|
19,302,861
|
$
|
187,500
|
$
|
929,738
|
$
|
20,420,099
|
||||||||
Liabilities
|
||||||||||||||||
Loans
Payable
|
146,709
|
(146,250
|
)
|
459
|
||||||||||||
Other
Current Liabilities
|
4,416,403
|
-
|
55,209
|
4,471,612
|
||||||||||||
Total
Liabilities
|
$
|
4,563,112
|
$
|
-
|
$
|
(91,041
|
)
|
$
|
4,472,071
|
|||||||
Equity
|
||||||||||||||||
Optex
Systems Holdings, Inc. – (par $0.001per share, 200,000,000 shares
authorized, 138,914,940 shares issued and outstanding as of June 28,
2009)
|
113,333
|
17,450
|
8,132
|
138,915
|
||||||||||||
Optex
Systems Holdings, Inc. preferred stock (par value $0.001 per
share, 5,000 shares authorized, 1027 shares of Series A Preferred
issued and outstanding)
|
1
|
1
|
||||||||||||||
Additional
Paid in Capital
|
15,046,446
|
170,050
|
1,012,647
|
16,229,143
|
||||||||||||
Retained
Earnings
|
(420,031
|
)
|
(420,031
|
)
|
||||||||||||
Total
Stockholders Equity
|
$
|
14,739,749
|
$
|
187,500
|
$
|
1,020,779
|
$
|
15,948,028
|
||||||||
Total
Liabilities and Stockholders Equity
|
$
|
19,302,861
|
$
|
187,500
|
$
|
929,738
|
$
|
20,420,099
|
(1) Sustut
Exploration, Inc. Balance Sheet as of the March 30, 2009 reorganization. Other
assets include $187,500 in prepaid expenses for investor relation services to be
realized over the next 12 months. The services were prepaid by the issuance of
1,250,000 Sustut shares by Sustut prior to March 30, 2009. The original prepaid
expense covered April 2009 through April 2010. On June 29, 2009 700,000 of
these shares were returned to Optex Systems Holdings due to the cancellation of
one of the investor relations agreements. The amortized expense related to
the remaining 550,000 shares has been reflected on the Consolidated Statement of
Operations for Optex Systems Holdings as expensed.
The
unaudited pro forma financial information for the consolidated successor nine
months ended June 28, 2009 (Combined Successor and Predecessor) below present
the historical financial information of the accounting acquirer. The pro forma
financial information is presented for informational purposes only. Such
information is based upon the stand-alone historical results of each entity and
does not reflect the actual results that would have been reported had the
acquisition been completed when assumed, nor is it indicative of the future
results of operations for the combined enterprise.
The
following represents condensed pro forma revenue and earnings information for
the nine months ended June 28, 2009 as if the acquisition of Optex Systems, Inc.
(Texas) and reorganization plan had occurred on the first day of the
year.
F-11
|
Unaudited
|
|||
|
Nine Months Ended
|
|||
|
June 28, 2009
|
|||
Revenues
|
20,956,300
|
|||
Net
Income (Loss) attributable to common shareholders
|
(653,750
|
)
|
||
Diluted
earnings per share
|
$
|
(0.00
|
)
|
|
Weighted
Average Shares Outstanding
|
138,914,940
|
The pro
forma information depicted above reflect the impacts of reduced interest
expense, increased intangible amortization expenses, the elimination of
corporate allocation costs from Irvine Sensors Corporation and the elimination
of employee stock bonus compensation previously allocated from Irvine Sensors
Corporation to reflect the costs of the ongoing entity.
Note
6 - Commitments and Contingencies
Leases
Pursuant
to a lease amendment effective January 4, 2010, Optex Systems Holdings leases
its office and manufacturing facilities under a non-cancellable operating lease
expiring July 31, 2015 in addition to maintaining several non-cancellable
operating leases for office and manufacturing equipment. Total
expense under facility lease agreements as of the three and nine months ended
June 27, 2010 was $43,336 and $185,674, respectively, and total expense for
manufacturing and office equipment was $7,105 and 22,433,
respectively. Total expense under facility lease agreements for the three
and nine months ended June 28, 2009 was $77,350 and $232,343,
respectively. Total expense for manufacturing and office equipment for the
three and nine months ended June 28, 2009 was $796 and $2,464,
respectively.
As of
June 27, 2010, the remaining minimum lease payments under the non-cancelable
operating leases for equipment, office and facility space are as
follows:
|
Operating
|
|||
|
Leases
|
|||
Fiscal
Year
|
||||
2010
|
$
|
43,659
|
||
2011
|
251,152
|
|||
2012
|
236,112
|
|||
2013
|
231,574
|
|||
2014
|
241,748
|
|||
2015
|
201,457
|
|||
Total
minimum lease payments
|
$
|
1,205,702
|
Pursuant
to the terms of the amendment to the facilities lease, there is no base rent
payment due from January 1, 2010 through July 31, 2010, and the total value of
this rent abatement is $133,898. The value of the deferred rent expense
will be amortized monthly at a rate of $1,998 per month over the life of the
lease. The total unamortized deferred rent as of June 27, 2010 was
$102,780. Commencing on August 1, 2010, the base rent payment is
$19,128 per month.
F-12
Note
7 - Debt Financing
Short Term Note Payable/Longview
Fund (Related Party) -
On October 27, 2009, Optex Systems Holdings borrowed $250,000 from the
Longview Fund, a related party, pursuant to a promissory note, with an original
maturity date of December 1, 2009, which was extended to July 15, 2010 pursuant
to an allonge dated January 5, 2010. The note carried an interest rate of
10% per annum, and all accrued and unpaid interest thereon was due upon
maturity. The note required Optex Systems Holdings to make a prepayment
equal to 50% of the then outstanding principal amount plus accrued and unpaid
interest thereon upon the closing of a credit facility or other equity or debt
financing from which the net proceeds to Optex Systems Holdings were at least
$900,000, with any remaining unpaid balance due on July 15, 2010. In
exchange for the allonge, Optex Systems Holdings granted Longview a warrant to
purchase 100,000 shares of its restricted common stock with an exercise price of
$0.15 per share and with a term of three years. In conjunction with the
Peninsula Bank financing (below) on March 22, 2010, Optex Systems Holdings paid
to Longview a principal prepayment of $125,000 and $10,000 in accrued
interest. The remaining principal amount of the note of $125,000 plus all
accrued and unpaid interest thereon was paid in full on June 4,
2010.
Credit
Facility - Peninsula Bank Business Funding
Effective
March 4, 2010, Optex Systems, Inc. (Delaware) entered into a Loan and Security
Agreement (“Agreement”) with Peninsula Bank Business Funding, a division of the
Private Bank of the Peninsula (“Lender”).
The
Agreement provides for a revolving line of credit of up to $2,000,000, based
upon advances to be made against percentages of eligible receivables as set
forth in the Agreement. The material terms of the Agreement are as
follows:
·
|
The interest rate for all
advances shall be the greater of 8.5% and the then in effect prime rate
plus 3.5% and subject to a minimum quarterly interest payment of
$16,000.
|
·
|
Interest shall be paid monthly in
arrears.
|
·
|
The expiration date of the
Agreement is March 4, 2011, at which time any outstanding advances, and
accrued and unpaid interest thereon, will be due and
payable.
|
·
|
In connection with the entry into
the Agreement by the Lender, Optex Systems, Inc.(Delaware) paid the Lender
a facility fee of $20,000 and issued a warrant to Lender to purchase
1,000,000 shares of its common stock. The warrant bears an exercise price
of $0.10 per share and expires on March 3,
2016.
|
·
|
The obligations of Optex Systems,
Inc. (Delaware) to the Lender are secured by a first lien on all of its
assets (including intellectual property assets should it have any in the
future) in favor of the
Lender.
|
·
|
The Agreement contains
affirmative and negative covenants that require Optex Systems, Inc.
(Delaware) to maintain certain minimum cash and EBITDA levels on a
quarterly basis and contains other customary covenants. The
Agreement also contains customary events of default. Upon the
occurrence of an event of default that remains uncured after any
applicable cure period, the Lender’s commitment to make further advances
may terminate, and the Lender would also be entitled to pursue other
remedies against Optex Systems, Inc. (Delaware) and the pledged
collateral.
|
·
|
Pursuant
to a guaranty executed by Optex Systems Holdings in favor of Lender, Optex
Systems Holdings has guaranteed all obligations of Optex Systems, Inc.
(Delaware) to Lender.
|
During
the three months ending June 27, 2010, Optex Systems, Inc. realized negative
EBITDA of ($0.08) as compared to a loan covenant requirement of $0.35 and as
such did not meet the EBITDA covenant of the Loan Security Agreement for
the third fiscal quarter of 2010. On August 3, 2010, Peninsula Bank
Business Funding waived the Company’s requirement to meet the EBITDA requirement
set forth in Section 6.8 of the Agreement for the quarter ended June 27,
2010. In addition, Peninsula Bank Business Funding agreed to amend
Sections 6.8(c) and (d) of the Agreement to adjust the minimum EBITDA covenant
for the fiscal quarter ending October 2, 2010 to $20,000, and for the fiscal
quarter ending January 2, 2011 to $200,000. As of
June 27, 2010, the outstanding balance on the line of credit is
$959,061.
Note
8 – Intangible Assets and Goodwill
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities (see Note 4).
Optex Systems, Inc. (Delaware) has allocated the consideration for its
acquisition of the Purchased Assets among tangible and intangible assets
acquired and liabilities assumed based upon their fair values. Assets that met
the criteria for recognition as intangible assets apart from goodwill were also
valued at their fair values.
The
purchase price was assigned to the acquired interest in the assets and
liabilities of Optex Systems Holdings as of October 14, 2008 as
follows:
Assets:
|
||||
Current
assets, consisting primarily of inventory of $5,383,929 and accounts
receivable of $1,404,434
|
$
|
7,330,910
|
||
Identifiable
intangible assets
|
4,036,789
|
|||
Purchased
goodwill
|
7,110,416
|
|||
Other
non-current assets, principally property and equipment
|
343,898
|
|||
Total
assets
|
$
|
18,822,013
|
||
Liabilities:
|
||||
Current
liabilities, consisting of accounts payable of $1,953,833 and accrued
liabilities of $1,868,180
|
3,822,013
|
|||
Acquired
net assets
|
$
|
15,000,000
|
F-13
Goodwill
is tested annually for impairment during the fourth fiscal quarter and, if
circumstances warrant, between annual testing periods. Due to reductions
in the expected value of future contract awards during the second fiscal quarter
of 2010, goodwill was tested for impairment as of March 28, 2010 using a fair
value approach and based on the review, no additional impairment was
noted. There have been no changes subsequent to March 28, 2010 that would
suggest impairment has occurred subsequent to the previous review.
The
following table summarizes the estimate of the fair values of the intangible
assets as of the asset transfer date:
Total
|
||||
Contracted
Backlog - Existing Orders
|
$
|
2,763,567
|
||
Program
Backlog - Forecasted Indefinite Delivery/Indefinite Quantity
awards
|
1,273,222
|
|||
Total
Intangible Asset to be amortized
|
$
|
4,036,789
|
The
amortization of identifiable intangible assets associated with the Optex Systems
Inc. (Texas) acquisition on October 14, 2008 expensed for the three and nine
months ended June 27, 2010 was $259,395 and $778,185, respectively. The
intangible amortization allocable to manufacturing cost of sales was $179,572
and $538,716 for the three and nine months ending June 27, 2010, respectively,
and the intangible amortization allocable to general and administrative was
$79,821 and 239,463 for the three and nine months ending June 27, 2010,
respectively. The amortization of identifiable intangible assets expensed for
the three and nine months ended June 28, 2009 was $517,798 and $1,553,394,
respectively. The intangible amortization allocable to manufacturing cost
of sales for the three and nine months ended June 27, 2010 was $416,640 and
$1,249,920, respectively, and the intangible amortization allocable to general
and administrative was $101,159 and $303,475 for the three and nine months
ending June 28, 2009, respectively. The identifiable intangible assets and
recorded goodwill are amortized over five years for book purposes and over 15
years for income tax purposes. As of the June 27, 2010, the total
unamortized balance of intangible assets was $1,187,411. The amortizable
intangible assets were tested for impairment as of September 27, 2009 utilizing
undiscounted, projected cash flows and based upon this analysis, no impairment
was noted. Subsequent to the review, there have been no material changes to our
assumptions or estimates that would result in impairment. However, we
intend to continue to monitor the value of our intangible assets and goodwill in
order to identify any impairment that may occur in the future.
Identifiable
intangible assets primarily consist of customer and program backlog. The
remaining unamortized balance of intangible assets will be amortized between
general and administrative expenses and costs of sales over their remaining
respective estimated useful lives as follows:
2010
|
2011
|
2012
|
2013
|
||||||||||||||
Customer
backlog amortized by delivery schedule
|
COS
|
$
|
179,572
|
$
|
126,158
|
$
|
19,614
|
$
|
4,762
|
||||||||
Customer
backlog amortized by delivery schedule
|
G&A
|
16,162
|
11,354
|
1,765
|
427
|
||||||||||||
Program
backlog amortized straight line across 5 years
|
G&A
|
63,662
|
254,645
|
254,645
|
254,645
|
||||||||||||
Total
Amortization by Year
|
$
|
259,396
|
$
|
392,157
|
$
|
276,024
|
$
|
259,834
|
Note
9-Stock Based Compensation
Option
Agreements:
On March
26, 2009, the Board of Directors of Optex Systems Holdings adopted the 2009
Stock Option Plan providing for the issuance of up to 6,000,000 shares to Optex
Systems Holdings officers, directors, employees and to independent contractors
who provide services to Optex Systems Holdings.
F-14
Options
granted under the 2009 Stock Option Plan vest as determined by the Board of
Directors of Optex Systems Holdings or any committee set up to act as a
compensation committee of the Board of Directors and terminate after the
earliest of the following events: (i) expiration of the option as provided in
the option agreement, (ii) 90 days following the date of termination of the
employee, or (iii) ten years from the date of grant (five years from the date of
grant for incentive options granted to an employee who owns more than 10% of the
total combined voting power of all classes of Optex Systems Holdings stock at
the date of grant). In some instances, granted stock options are
immediately exercisable into restricted shares of common stock, which vest in
accordance with the original terms of the related options. Optex Systems
Holdings recognizes compensation expense ratably over the requisite service
period.
The
option price of each share of common stock is determined by the Board of
Directors or compensation committee (when one is established), provided that
with respect to incentive stock options, the option price per share will in all
cases be equal to or greater than 100% of the fair value of a share of common
stock on the date of the grant, except an incentive stock option granted under
the 2009 Stock Option Plan to a shareholder that owns more than 10% of the total
combined voting power of all classes of Optex Systems Holdings’ stock, will have
an exercise price of not less than 110% of the fair value of a share of common
stock on the date of grant. No participant may be granted incentive stock
options, which would result in shares with an aggregate fair value of more than
$100,000 first becoming exercisable in one calendar year.
On March
30, 2009, 1,414,649 stock options with an exercise price of $0.15 per share were
granted to an officer of Optex Systems Holdings. These options vest as
follows: 34% after the first year, and 33% each after the second and third
years. These options have a seven year term from the date of
issuance. On May 14, 2009, 1,267,000 stock options were issued to other
Optex Systems Holdings employees, including options to purchase 250,000 shares
to one executive officer. These stock options vest 25% per year after
each year of employment and have a seven year term from the date of
issuance. For shares granted as of May 14, 2009, Optex Systems Holdings
anticipates an annualized employee turnover rate of 3% per year, and as such
anticipates that only 1,174,786 of the 1,267,000 shares will vest by the end of
the end of the contract term. As of June 27, 2010, 787,731 of the awarded
stock options had vested and 40,000 shares had been forfeited due to employee
turnover.
Optex
Systems Holdings recorded compensation costs for options and shares granted
under the plan amounting to $24,937 and $72,374 for the three and nine months
ended June 27, 2010, respectively as compared to $15,174 for the three and nine
months ended June 28, 2009. The impact of these expenses are immaterial to
the basic and diluted net loss per share for the three and nine months ended
June 27, 2010 and June 28, 2009. A deduction is not allowed for income tax
purposes until nonqualified options are exercised. The amount of this deduction
will be the difference between the fair value of Optex Systems Holdings’
common stock and the exercise price at the date of exercise. For the nine months
ended June 27, 2010, estimated deferred tax assets related to option
compensation costs were $24,607 and have been recorded to reflect the tax effect
of the financial statement expense. There was no similar tax effect
related to option compensation costs for the nine months ended June 28, 2009
related to these stock options. No tax deduction is allowed for incentive
stock options. Accordingly, no deferred tax asset is recorded for GAAP expense
related to these options.
Management
has valued the options at their date of grant utilizing the Black-Scholes-Merton
option pricing model. The fair value of the underlying shares was
determined based on the closing price of Optex Systems Holdings’
publicly-traded shares on the grant date. Further, the expected volatility
was calculated using the historical volatility of a diversified index of
companies in the defense, homeland security, and space industry in
accordance with FASB ASC 718-10-S99-1 (Prior authoritative literature:
Question 6 of SAB Topic 14.D.1). In making this determination and trying
to find another comparable company, Optex Systems Holdings considered the
industry, stage of life cycle, size and financial leverage of such other
entities. Based on the development stage of Optex Systems Holdings,
similar companies with sufficient historical data were not available.
Optex Systems Holdings utilized the three year volatility of the SPADE
Defense Index, which is a diversified index of 58 companies in the same industry
as Optex Systems Holdings. The risk-free interest rate is based on the
implied yield available on U.S. Treasury issues with an equivalent term
approximating the expected life of the options depending on the date of the
grant and expected life of the options. The expected life of options used
was based on the contractual life of the option grant. Optex Systems
Holdings determined the expected dividend rate based on the assumption and
expectation that earnings generated from operations are not expected to be
adequate to allow for the payment of dividends in the near future and the
assumption that the company does not presently have any intention of paying cash
dividends on its common stock. The following weighted-average assumptions were
utilized in the fair value calculations for options granted:
F-15
|
|
Year ended
|
|
|
September 27, 2009
|
Expected
dividend yield
|
0
%
|
|
Expected
stock price volatility
|
23.6
%
|
|
Risk-free
interest rate (1)(2)
|
2.8%-4.07
%
|
|
Expected
life of options
|
4.5
to 7 Years
|
(1)
2.8% for grant expected life less than 7 years
(2)
4.07% for grant expected life of 7 years.
Optex
Systems Holdings has granted stock options to officers and employees as
follows:
Date of
|
Shares
|
Exercise
|
Shares Outstanding
|
Expiration
|
Vesting
|
||||||||||
Grant
|
Granted
|
Price
|
As of 06/27/10
|
Date
|
Date
|
||||||||||
03/30/09
|
480,981
|
$
|
0.15
|
480,981
|
03/29/2016
|
03/30/2010
|
|||||||||
03/30/09
|
466,834
|
0.15
|
466,834
|
03/29/2016
|
03/30/2011
|
||||||||||
03/30/09
|
466,834
|
0.15
|
466,834
|
03/29/2016
|
03/30/2012
|
||||||||||
05/14/09
|
316,750
|
0.15
|
306,750
|
05/13/2016
|
05/14/2010
|
||||||||||
05/14/09
|
316,750
|
0.15
|
306,750
|
05/13/2016
|
05/14/2011
|
||||||||||
05/14/09
|
316,750
|
0.15
|
306,750
|
05/13/2016
|
05/14/2012
|
||||||||||
05/14/09
|
316,750
|
0.15
|
306,750
|
05/13/2016
|
05/14/2013
|
||||||||||
Total
|
2,681,649
|
2,641,649
|
The
following table summarizes the status of Optex Systems Holdings’ aggregate
stock options granted under the incentive stock option plan:
|
Number
|
Weighted
|
||||||||||||||
|
of Shares
|
Average
|
Weighted
|
|||||||||||||
|
Remaining
|
Intrinsic
|
Average
|
Aggregate
|
||||||||||||
Subject to Exercise
|
Options
|
Price
|
Life (Years)
|
Value
|
||||||||||||
Outstanding
as of September 27, 2009
|
2,667,649
|
$
|
0.21
|
5.14
|
$
|
560,206
|
||||||||||
Granted
– 2010
|
-
|
$
|
-
|
-
|
-
|
|||||||||||
Forfeited
– 2010
|
(26,000
|
)
|
$
|
-
|
-
|
-
|
||||||||||
Exercised
– 2010
|
-
|
$
|
-
|
-
|
-
|
|||||||||||
Outstanding
as of June 27, 2010
|
2,641,649
|
$
|
-
|
4.39
|
$
|
-
|
||||||||||
Exercisable
as of June 27, 2010
|
787,731
|
$
|
-
|
-
|
$
|
-
|
The
weighted-average grant date fair value of options granted during the nine months
ended June 27, 2010 was $0.14, and the total intrinsic value of options
exercised during the nine months ended June 27, 2010 was $0. As of June
27, 2010 the total intrinsic value of exercisable options was $0.
The
following table summarizes the status of Optex Systems Holdings’ aggregate
non-vested shares granted under the 2009 Stock Option Plan:
F-16
|
Number of
Non-
vested
Shares
Subject to
Options
|
Weighted-
Average
Grant-
Date
Fair Value
|
||||||
Non-vested
as of September 27, 2009
|
2,667,649
|
$
|
0.14
|
|||||
Non-vested
granted — nine months ended June 27, 2010
|
-
|
$
|
0.00
|
|||||
Vested —
nine months ended June 27, 2010
|
(787,731)
|
$
|
0.14
|
|||||
Forfeited — nine
months ended June 27, 2010
|
(26,000
|
)
|
$
|
0.14
|
||||
Non-vested
as of June 27, 2010
|
1,853,918
|
$
|
0.14
|
As of
June 27, 2010, the unrecognized compensation cost related to non-vested share
based compensation arrangements granted under the plan that was approximately
$251,916. These costs are expected to be recognized on a straight line
basis from March 30, 2009 through May 13, 2013. The total fair value of
options and shares vested during the nine months ended June 27, 2010 was
$77,381.
During
the fiscal year ended September 27, 2009, Optex Systems Holdings issued 480,000
shares of common stock at a market value of $0.30 per share for a total $144,000
and paid $150,000 cash to a vendor in support of an investor relations agreement
executed on June 29, 2009. Pursuant to the agreement, the shares are earned over
the life of the contract at the rate of 40,000 shares per month through June
2010. During the three and nine months ended June 27, 2010, Optex Systems
Holdings expensed $36,000 and $108,000, respectively, for shares earned.
As of June 27, 2010 there was no remaining unamortized balance for shares issued
against the contract. The contract was complete as of June 30,
2010.
Warrant
Agreements:
Optex
Systems Holdings calculates the fair value of warrants issued with debt or
preferred stock using the Black-Scholes-Merton valuation method. The total
proceeds received in the sale of debt or preferred stock and related warrants
are allocated among these financial instruments based on their relative fair
values. The discount arising from assigning a portion of the total proceeds to
the warrants issued is recognized as interest expense for debt from the date of
issuance to the earlier of the maturity date of the debt or the conversion dates
using the effective yield method.
As of
June 27, 2010, Optex Systems Holdings had the following warrants
outstanding:
|
Grant Date
|
Warrants
Granted
|
Exercise
Price
|
Outstanding as of
06/27/10
|
Expiration
Date
|
Term
|
||||||||||
Private
Placement Stock Holders
|
3/30/2009
|
8,131,667
|
$
|
0.450
|
8,131,667
|
3/29/2014
|
5 years
|
|||||||||
Finder
Fee on Private Placement
|
3/30/2009
|
717,000
|
$
|
0.165
|
717,000
|
3/29/2014
|
5
years
|
|||||||||
Longview
Fund Allonge Agreement
|
1/5/2010
|
100,000
|
$
|
0.150
|
100,000
|
1/4/2013
|
3
years
|
|||||||||
Peninsula
Bank Business Funding - Line of Credit
|
3/4/2010
|
1,000,000
|
$
|
0.100
|
1,000,000
|
3/3/2016
|
6
years
|
|||||||||
Total
Warrants
|
9,948,667
|
9,948,667
|
During
the three and nine months ended June 27, 2010 Optex Systems Holdings recorded a
total of $8,605 and $12,000 in interest expense related to the outstanding
warrants and has an unamortized interest balance of $20,000. These
warrants are not included in the computation of weighted average of shares as it
would be anti-dilutive.
Note
10–Stockholders Equity
Common
stock:
Optex
Systems, Inc. (Texas) was authorized to issue 100,000 shares of no par common
stock. At September 28, 2008, there were 18,870 shares issued and 10,000
shares outstanding.
F-17
The
common stock, treasury stock and additional paid in capital accounts have been
presented to reflect the ownership structure of Optex Systems, Inc. (Texas) as
it existed prior to the acquisition by Irvine Sensors Corporation, since Optex
Systems, Inc. (Texas) is presenting its financial statements as a separate,
stand-alone entity.
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities. The $15 million
of Irvine Sensors Corporation debt was contributed by Longview and Alpha to
Optex Systems, Inc. (Delaware), in exchange for a $6 million note payable from
Optex Systems, Inc. (Delaware) and a $9 million equity interest in Optex
Systems, Inc. (Delaware) (which consisted of the issuance by Optex Systems, Inc.
(Delaware) of 45,081,350 and 4,918,650 shares of its common stock to each of
Longview Fund and Alpha, respectively). On October 30, 2008, Alpha sold its
Optex Systems, Inc. (Delaware) common stock to Arland Holdings, Ltd. There was
no contingent consideration associated with the purchase. In February 20, 2009,
Longview sold 100% of its equity and debt interests in Optex Systems, Inc.
(Delaware) to Sileas (representing 90% of the then outstanding equity interests
in Optex Systems, Inc. (Delaware)), and Sileas became the majority owner of
Optex Systems Holdings.
Stock
Split
On March
26, 2009, Optex Systems, Inc. (Delaware)’s Board of Directors effected a 1.7:1
forward split of its common stock to holders of record as of February 23,
2009. Accordingly, as a result of the forward split, the 45,081,350 shares
of common stock held by Sileas were split into 76,638,295 shares, and the
4,918,650 shares of common stock held by Arland Holdings, Ltd. were split into
8,361,705 shares.
As of
March 30, 2009, Optex Systems, Inc. (Delaware) was authorized to issue
200,000,000 shares of common stock, par value $0.001 per share, of which
85,000,000 shares were issued and outstanding as follows:
Sileas
Corporation
|
76,638,295
|
|||
Arland
Holdings, Ltd.
|
8,361,705
|
|||
Total
Outstanding
|
85,000,000
|
Reorganization
& Private Placement:
As a
result of the reorganization agreement and private placement, the 85,000,000
outstanding shares of common stock of Optex Systems, Inc. (Delaware) outstanding
as of March 30, 2009 were exchanged for 113,333,282 shares of common stock of
Optex Systems Holdings (formerly Sustut Exploration, Inc.). An additional
8,131,667 shares of Optex Systems Holdings common stock were issued in
connection with the private placement closed prior to the
reorganization.
On June
29, 2009, 750,000 shares of Optex Systems Holdings common stock were sold to in
a private transaction for gross proceeds of $150,000.
Each
share of common stock entitles the holder to one vote on matters brought to a
vote of the shareholders.
The
company granted an officer at the consummation of the reorganization options to
purchase 1,414,649 shares with an exercise price of $0.15 per share. The options
vest 34% one year following the date of grant, and 33% on each of the second and
third anniversaries following the date of grant. 480,981 of these options vested
on March 30, 2010, subsequent to the June 27, 2010 quarter end. See Note 9 -
Stock Based Compensation.
Series
A preferred stock
On March
24, 2009, Optex Systems Holdings filed a Certificate of Designation with the
Secretary of State of the State of Delaware authorizing a series of preferred
stock, under its articles of incorporation, known as “Series A preferred stock”.
This Certificate of Designation was approved by Optex Systems Holdings’ Board of
Directors and Shareholders at a Board Meeting and Shareholders Meeting held on
February 25, 2009. The Certificate of Designation sets forth the following terms
for the Series A preferred stock: (i) number of authorized shares: 1,027; (ii)
per share stated value: $6,000; (iii) liquidation preference per share: stated
value; (iv) conversion price: $0.15 per share as adjusted from time to time; and
(v) voting rights: votes along with the common stock on an as converted basis
with one vote per share.
The
Series A preferred stock entitles the holders to receive cumulative dividends at
the rate of 6% per annum, payable in cash at the discretion of Board of
Directors. Each share of preferred stock is immediately convertible into common
shares at the option of the holder which entitles the holder to receive the
equivalent number of common shares equal to the stated value of the preferred
shares divided by the conversion price, which was initially set at $0.15 per
share.
Holders
of preferred shares receive preferential rights in the event of liquidation.
Additionally the preferred stock shareholders are entitled to vote together with
the common stock on an “as-converted” basis.
On March
27, 2009, Sileas and Alpha exchanged their promissory notes in the total
principal amount of $6,000,000 plus accrued and unpaid interest thereon into
1,027 shares of Series A preferred stock. On March 30, 2009, shares of Optex
Systems, Inc. (Delaware) Series A preferred stock were exchanged on a 1:1 basis
for shares of Series A preferred stock of Optex Systems Holdings. As of
the three and nine months ended June 27, 2010, Optex Systems Holdings recorded
$98,102 and $289,978 of dividends payable on Series A preferred shares,
respectively.
Cancellation
of Common Stock
On June
29, 2009, Optex Systems Holdings cancelled an investor relations agreement
resulting in the return of 700,000 shares of common stock previously issued by
Sustut prior to the reverse merger on March 30, 2009. The shares were
valued at $105,000, returned to Optex System Holdings, and then cancelled (see
also Note 9 regarding new investor relations shares issued).
Note 11– Reduction in
Force
On April
1, 2010 and June 24, 2010, the Company reduced its workforce by approximately 9
and 15 full-time regular employees, respectively, who were solely or partially
dedicated to our periscope production line and supporting functions. The
Company also eliminated 2 full-time contract labor employees during April 2010.
These reductions in force were made in anticipation of decreased
production quantities on our periscope lines in the next fiscal quarter and are
intended to reduce the monthly cash burn while maintaining current profit
margins on the remaining periscope business. The Company recorded
approximately $0.03 million of severance related expenses, which are included in
cost of goods sold and general and administrative expenses in the consolidated
statement of operations for the fiscal quarter ended June 27, 2010. There were
no unpaid severance costs as of June 27, 2010.
Note
12 – Subsequent Events
On June
28, 2010, the Company received a $2.5 million purchase order under an existing
contract with TACOM-Warren. The purchase order calls for the delivery of
M137 panoramic telescopes, scheduled to begin in January 2011 and to
continue through August 2011.
On August
3, 2010, Peninsula Bank Business Funding waived the Company’s requirement to
meet the EBITDA requirement set forth in Section 6.8 of its agreement with the
Company for the quarter ended June 27, 2010. In addition, Peninsula Bank
Business Funding agreed to amend Sections 6.8(c) and (d) of the aforesaid
agreement to adjust the minimum EBITDA covenant for the fiscal quarter ending
October 2, 2010 to $20,000, and for the fiscal quarter ending January 2, 2011 to
$200,000.
F-18
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management’s
Discussion and Analysis or Plan of Operations
This
management's discussion and analysis reflects information known to management as
at June 27, 2010 and through the date of this filing. This MD&A is intended
to supplement and complement our audited financial statements and notes thereto
for the fiscal year ended September 27, 2009 and the quarter ended June 27,
2010, prepared in accordance with U.S. generally accepted accounting principles
(GAAP). You are encouraged to review our 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 non-GAAP measures are used in this MD&A, they are 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. This discussion contains
forward-looking statements. Please see “Special cautionary statement concerning
forward-looking statements” and “Risk factors” for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.
Background
On March
30, 2009, a reorganization was consummated pursuant to which the then existing
shareholders of Optex Systems, Inc. (Delaware) exchanged their shares of common
stock for shares of common stock of Optex Systems Holdings as follows: (i)
the outstanding 85,000,000 shares of Optex Systems, Inc. (Delaware) common stock
were exchanged by Optex Systems Holdings for 113,333,282 shares of Optex
Systems Holdings common stock, (ii) the outstanding 1,027 shares of Optex
Systems, Inc. (Delaware) Series A preferred stock were exchanged by Optex
Systems Holdings for 1,027 shares of Optex Systems Holdings Series A preferred
stock, and (iii) the 8,131,667 shares of Optex Systems, Inc. (Delaware)
common stock purchased in the private placement were exchanged by Optex Systems
Holdings for 8,131,667 shares of Optex Systems Holdings common stock.
Optex Systems, Inc. (Delaware) has remained a wholly-owned subsidiary of Optex
Systems Holdings.
4
As a
result of the reorganization, Optex Systems Holdings changed its name from
Sustut Exploration Inc. to Optex Systems Holdings, Inc., and its year end from
December 31 to a fiscal year ending on the Sunday nearest September
30.
Immediately
prior to the closing under the reorganization agreement (and the exchange of
shares referenced above), as of March 30, 2009, Optex Systems, Inc. (Delaware)
accepted subscriptions from accredited investors for a total 27.1 units, at a
purchase price of $45,000 per unit, with each unit consisting of 300,000 shares
of common stock, no par value, of Optex Systems, Inc. (Delaware) and warrants to
purchase 300,000 shares of common stock for $0.45 per share for a period of five
(5) years from the initial closing, which were issued by Optex Systems, Inc.
(Delaware) after the closing referenced above. Gross proceeds to Optex
Systems, Inc. (Delaware) were $1,219,750, and after deducting (i) a cash
finder’s fee of $139,555, (ii) non-cash consideration of indebtedness owed to an
investor of $146,250, and (iii) stock issuance costs of $59,416, the net
proceeds were $874,529. The finder also received five year warrants to
purchase 2.39 units, at an exercise price of $49,500 per unit.
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 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).
Many 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.
Optex
Systems Holdings also anticipates the opportunity to integrate some of its night
vision and optical sights products into commercial applications. Optex
Systems Holdings plans to carry on the business of Optex Systems, Inc.
(Delaware) as its sole line of business, and all of Optex Systems Holdings’
operations are expected to be conducted by and through Optex Systems, Inc.
(Delaware).
The
business which is now carried on through Optex Systems, Inc. (Delaware) differs
from the business of Irvine Sensors Corporation, which was the former owner of
the assets through its subsidiary, Optex Systems, Inc. (Texas).
Optex Systems, Inc. (Delaware) delivers high volume products, under
multi-year contracts, to large defense contractors. It has the reputation
and credibility with those customers as a strategic supplier. Irvine Sensors
Corporation is predominately a research and design company with capabilities
enabling only prototype or low quantity volumes. Optex Systems, Inc.
(Delaware) is predominately a high volume manufacturing company. Therefore
the systems and processes needed to meet customer’s needs are quite
different. While both companies serve the military market, the customers
within these markets are different. For example, two of the largest
customers for Optex are General Dynamics Land Systems and U.S. Army
Tank-armaments and Automotive Command. Irvine Sensors Corporation did not
have any contracts or business relations with either of these two
customers. Therefore, the separation has allowed Optex Systems, Inc.
(Delaware) to focus on high volume manufacturing and the use of the six
sigma manufacturing methodology. This shift in priorities has allowed
Optex Systems, Inc. (Delaware) to improve delivery performance and reduce
operational costs.
The
successful completion of the separation from Irvine Sensors
Corporation, which was accomplished by Optex Delaware’s acquisition of all
of the assets and assumption of certain liabilities of Optex Systems, Inc.
(Texas), eliminated the general and administrative costs allocated by Irvine
Sensors Corporation. These costs represented services paid by Irvine Sensors
Corporation for expenses incurred on Optex Texas’ behalf such as legal,
accounting and audit, consulting fees and insurance costs in addition to
significant amounts of Irvine Sensors Corporation’s general overhead allocated
to Optex Systems, Inc. (Texas).
The
estimated total General and Administrative expenses assuming Optex Systems, Inc
(Texas) was operated under a stand-alone basis during the 2008 fiscal year
are:
Accounting
and Auditing Fees
|
$
|
250,000
|
||
Legal
Fees
|
60,000
|
|||
Consulting
Fees
|
60,000
|
|||
Workers
Comp and General Insurance
|
70,000
|
|||
Total
|
$
|
440,000
|
5
As a
result of the purchase of Optex Systems, Inc. (Texas) on October 14, 2008,
these general and administrative costs are incurred and paid directly by Optex
Systems, Inc. (Delaware) and have been reflected in the 2009 and 2010 financial
results to the extent incurred for the periods presented herein.
The
liabilities of Optex Systems, Inc. (Texas) not assumed by Optex Systems, Inc.
(Delaware) relate to costs that would not have been incurred by Optex Systems,
Inc. (Texas) if they were operated on a stand alone basis. Among those
liabilities not assumed by Optex Systems, Inc. (Delaware) was a note due to Tim
Looney. The 2007 Looney promissory note had a principal amount of
$2,000,000 together with accrued interest unpaid aggregating to approximately
$2,300,000. The note was an amendment to Looney’s earn-out agreement which
was the consideration for Irvine Sensors Corporation’s purchase of Optex
Systems, Inc. (Texas).
The 2007
Looney promissory note was not assumed by Optex Systems, Inc. (Delaware) in the
October 2008 transaction. The note and accrued interest was reported on
Optex Systems, Inc. (Texas) financial statements as of September 28, 2008 as a
result of push down accounting for the acquisition of Optex Systems, Inc.
(Texas) by Irvine Sensors Corporation. These costs would not be incurred
by Optex Systems, Inc. (Texas) if operated as a stand alone entity because it
relates to Irvine Sensors Corporation’s consideration for their purchase of
Optex Systems, Inc. (Texas). Since this was not an operating cost associated
with Optex Systems, Inc. (Texas) and they would not incur these costs if
operating as a stand alone entity, we expect no impact to the future operating
results or liquidity of Optex Systems, Inc. (Delaware).
Additionally,
as of September 28, 2008, Optex Systems, Inc. (Texas) reported $4.3 million of
liabilities attributable to corporate expenses allocated to Optex Systems, Inc.
(Texas) through an intercompany payable account “Due to Parent”. The
outstanding “Due to Parent” balance was not acquired by Optex Systems, Inc.
(Delaware) in the acquisition from Irvine Sensors Corporation.
To the
extent that Optex Systems, Inc. (Delaware) has incurred these similar costs on
an ongoing basis, these amounts have been funded from the Optex Systems Inc.
(Delaware)’s own operating cash flow.
Plan
of Operation
Through a
private placement offering completed prior to the consummation of the
reorganization agreement, Optex Systems, Inc. (Delaware) raised $1,219,750
($874,529, net of finders fees, issuance costs and non cash consideration
resulting from satisfaction of indebtedness owed to an investor) to fund
operations. The proceeds of this placement have been used as
follows:
Description
|
Offering
|
|||
Additional
Personnel
|
$
|
150,000
|
||
Legal
and Accounting Fees
|
$
|
100,000
|
||
Investor
Relations Fees
|
96,000
|
|||
Working
Capital
|
$
|
528,529
|
||
Totals:
|
$
|
874,529
|
Results
of Operations
During
the quarter ended June 27, 2010, we experienced reductions in forecasted sales
volume due to changes in incremental funding commitments by federal agencies.
We are currently evaluating the impact that anticipated reductions in
government defense spending budgets will have on Optex Systems Holdings.
The 2011 Congressional budget has been delayed by Congress and is not expected
to be ratified until the December 2010 timeframe. Until the Congressional
budgets are approved, Optex and our major customers are unable to provide
updated volume expectations for the coming year. Due to new periscope
orders from non-traditional sources and an aggressive pursuit of increased
market share for all of our existing product lines, we expect to mitigate some
of the current decreased U.S. government requirements with other new
business.
The table
below summarizes our quarterly and year to date operating results in terms of
both a GAAP net income measure and a non GAAP EBITDA measure. We use EBITDA as
an additional measure for evaluating the performance of our business as “net
income” includes the significant impact of noncash intangible amortization on
our income performance. Consequently, in order to have a meaningful measure of
our operating performance on a continuing basis, we need to evaluate an income
measure which does not take into account this intangible amortization. We have
summarized the quarterly revenue and margin below along with a reconciliation of
the GAAP net loss to the non GAAP EBITDA calculation for comparative purposes
below. We believe that including both measures allows the reader to have a
“complete picture” of our overall performance.
Successor
Qtr
1
|
Successor
Qtr
2
|
Successor
Qtr
3
|
Successor
- Nine
months
ended June
27,
2010
|
Predecessor
- Qtr1
(September
29, 2008
through
October 14, 2008)
|
Successor
- Qtr1
(October
15, 2008 through
December
27, 2008)
|
Successor
Qtr2
|
Successor
Qtr3
|
Combined
- Six months
ended
March 29, 2009
|
||||||||||||||||||||||||||||
Net
Loss Applicable to Common Shareholders - GAAP
|
$ | - | $ | (0.1 | ) | $ | (0.3 | ) | $ | (0.4 | ) | $ | (0.1 | ) | $ | 0.1 | $ | (0.3 | ) | $ | (0.3 | ) | $ | (0.6 | ) | |||||||||||
Add:
|
||||||||||||||||||||||||||||||||||||
Interest
Expense
|
- | - | - | - | - | 0.1 | 0.1 | - | 0.2 | |||||||||||||||||||||||||||
Preferred
Stock Dividend
|
0.1 | 0.1 | 0.1 | 0.3 | - | - | - | - | - | |||||||||||||||||||||||||||
Federal
Income Taxes (Benefit)
|
- | (0.1 | ) | (0.2 | ) | (0.3 | ) | - | 0.2 | 0.1 | 0.1 | 0.4 | ||||||||||||||||||||||||
Depreciation
& Amortization
|
0.3 | 0.3 | 0.3 | 0.9 | - | 0.6 | 0.5 | 0.5 | 1.6 | |||||||||||||||||||||||||||
EBITDA
- Non GAAP
|
$ | 0.4 | $ | 0.2 | $ | (0.1 | ) | $ | 0.5 | $ | (0.1 | ) | $ | 1.0 | $ | 0.4 | $ | 0.3 | $ | 1.6 |
Our
EBITDA declined by $1.1 million in the nine months ended June 27, 2010 as
compared to the prior year performance for the same period. The EBITDA
reduction for the period was primarily attributable to the lower sales revenue
of $2.8 million, lower product margins related to the mix of product lines
shipped, and higher general and administrative spending of $0.1 million.
We continue to pursue cost efficiencies in our production and general and
administrative areas.
Product
mix is dictated by customer contracted delivery dates and volume of each product
to be delivered on such delivery dates. Shifts in gross margin from
quarter to quarter are primarily attributable to the differing product mix
recognized as revenues during each respective period. Certain periscope
contracts were awarded January 2003, and due to significant material price
increases subsequent to the contract award date, we are experiencing a loss on
these contracts. We have fully reserved for future contract losses on this
program, thus deliveries against these programs yield a product margin of
zero. During the three and nine months ended June 27, 2010, we recognized
revenue of $0.1 and $1.2 million, respectively, from these legacy periscope
programs, with a remaining backlog of $0. We expect our product margins on
periscopes to continue improve in future quarters as the legacy loss or low
margin programs have completed and will be replaced with new
awards.
We
are aggressively pursuing additional, potentially higher margin periscope
business, and in May 2009, Optex Systems Holdings was awarded a multi-year
Indefinite Delivery/Indefinite Quantity type contract accompanied
by the first delivery order from U.S. Army Tank-armaments and Automotive
Command. In June 2009, we received an additional $3.4 million dollar award
from General Dynamics Land Systems and in September 2009, we received an
additional $1.9 million award to provide product beginning with delivery
starting in 2011 at the completion of our current production contract. The
total orders recorded for all product lines in the nine months ended June 27,
2010 was $9.8 million of which $8.6 million related to periscope business from
several customers. In July 2010, Optex received new orders totaling $4.5
million of which $2.5 consisted of an additional delivery order against our M137
Howitzer contract.
As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), Optex Systems, Inc. (Delaware)’s amortizable intangible
assets increased significantly in 2009 over prior years. We expect the
intangible amortization expense to decline $1.0 million in the year ended
September 27, 2010 from $2.0 million in the year ended September 27,
2009.
6
Backlog
as of June 27, 2010 was $18.1 million as compared to a backlog of $31.7 million
as of June 28, 2009. The following table depicts the current expected
delivery by quarter of all contracts awarded as of June 27, 2010.
FY2010
|
FY2011
|