Attached files
file | filename |
---|---|
EX-32.2 - Optex Systems Holdings Inc | v199093_ex32-2.htm |
EX-32.1 - Optex Systems Holdings Inc | v199093_ex32-1.htm |
EX-31.2 - Optex Systems Holdings Inc | v199093_ex31-2.htm |
EX-31.1 - Optex Systems Holdings Inc | v199093_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 1 TO FORM 10-K
x ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended September 27, 2009
o TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ___
until ___
Commission
File Number 000-22573
OPTEX
SYSTEMS HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
33-
143215
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
organization)
|
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
|
Securities
Registered under Section 12(b) of the Act
None
Securities
Registered under Section 12(g) of the Act
Common
Stock, par value $.001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 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. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
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
The
aggregate market value of the 26,111,658 shares of voting stock held by
non-affiliates of the registrant based on the closing price on the
Over the Counter Bulletin Board on March 29, 2009 was $6,789,031.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
Shares
Outstanding
|
||
Title of Class
|
September 20,
2010
|
|
Common
Stock
|
139,444,940
|
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE
OF CONTENTS
PART
I
|
|||
Item
1.
|
Description
of Business.
|
4
|
|
Item
1A.
|
Risk
Factors.
|
16
|
|
Item
2.
|
Properties.
|
25
|
|
Item
3.
|
Legal
Proceedings.
|
25
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
25
|
|
PART
II
|
|||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Securities.
|
25
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations.
|
26
|
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
45
|
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
|
74
|
|
Item
9A.
|
Controls
and Procedures.
|
74
|
|
PART
III
|
|||
Item
10.
|
Directors,
Executive Officers and Corporate Governance.
|
75
|
|
Item
11.
|
Executive
Compensation.
|
78
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
82
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
84
|
|
Item
14.
|
Principal
Accounting Fees and Services.
|
87
|
|
PART
IV
|
|||
Item
15.
|
Exhibits.
|
87
|
2
Cautionary
Note Regarding Forward-Looking Information
This
Report on Form 10-K, in particular Part II Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” 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”). These
forward-looking statements represent our expectations, beliefs, intentions or
strategies concerning future events, including, but not limited to, any
statements regarding our assumptions about financial performance; 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, all of which were subject to
various risks and uncertainties.
When used
in this Report on Form 10- K 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, 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. However, any statements contained in this Report on
Form 10-K that are not statements of historical fact may be deemed to be
forward-looking statements. 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.
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
prospectus. In this Form 10-K, Optex Systems Holdings, Inc. (“Optex Systems
Holdings”) has identified important factors that could cause actual results to
differ from expected or historic results. You should understand that it is not
possible to predict or identify all such factors. Consequently, you should not
consider any such list to be a complete list of all potential risks or
uncertainties.
3
PART
I
Item
1 Description of Business
Background
Prior
History - Sustut Exploration, Inc.
Sustut
was a Delaware corporation formed on April 11, 2006 to search for available
properties in North Central British Columbia. In May 2006, Sustut entered into
an agreement which was negotiated at arms length with Richard Simpson to acquire
a 100% interest in the WILLOW claim purported to be located in the Omineca
Mining Division, NTS map sheet 94D/10E. The property could have been acquired
from Simpson by paying a total of $75,000 in two option payments with the last
option payment being due on May 15, 2008, however, Sustut did not make the
required payments and did not acquire title to those property
rights.
The
mineral claim which was to be Sustut’s primary business expired on May 15, 2008
leaving Sustut with no operating business of which to dispose. Optex
Systems Holdings does not believe it presently maintains any rights related to
the Willowvale project and does not intend to pursue a mining or mineral
business. In the event that Mr. Simpson seeks payment of any amount Optex
Systems Holdings does not intend to make any payment to exercise any option or
extend the term of the rights, if any continue to exist.
Reorganization
On
March 30, 2009, a reorganization occurred whereby the then existing shareholders
of Optex Systems, Inc., a private Delaware corporation (“Optex Systems, Inc.
(Delaware)”) exchanged their shares of Optex Systems, Inc. (Delaware) 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 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 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 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, and the Optex Systems, Inc. (Delaware)
shareholders are now shareholders of Optex Systems Holdings. As a result
of the reorganization, Sileas Corporation, a former shareholder of Optex
Systems, Inc. (Delaware), beneficially owns approximately 73.52% of the issued
and outstanding common stock of Optex Systems Holdings and Arland Holdings,
Ltd., a former shareholder of Optex Systems, Inc. (Delaware) owns 5.89% of the
issued and outstanding common stock of Optex Systems Holdings.
Furthermore, at the time of the reorganization, Andrey Oks resigned as the sole
officer and director of Optex Systems Holdings. Additionally, Stanley
Hirschman, Ronald Richards and Merrick Okamoto were appointed as its directors,
and Stanley Hirschman, Danny Schoening and Karen Hawkins were appointed as its
President, COO and V.P. of Finance/Controller, respectively.
Prior to
the closing under the reorganization agreement, Optex Systems, Inc. (Delaware)
accepted subscriptions from accredited investors for a total 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, 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.
4
Contracts
Each
contract with Optex Systems Holdings’ customers has specific quantities of
material that need to be purchased, assembled, and finally shipped. Prior
to bidding a contract, Optex Systems Holdings contacts potential sources of
material and receives qualified quotations for this material. In some
cases, the entire volume is given to a single supplier and in other cases, the
volume might be split between several suppliers. If a contract has a
single source supplier and that supplier fails to meet their obligations (e.g.,
quality, delivery), then Optex Systems Holdings would attempt to find an
acceptable alternate supplier, and if successful, it would then renegotiate
contractual deliverables (e.g., specifications, delivery, price.).
Currently, approximately 15% of our total material requirements are single
sourced across 14 suppliers representing approximately 17% of our active
supplier base. Single sourced component requirements span across all of
our major product lines. Of these single sourced components, we have
material contracts (purchase orders) with firm pricing and delivery schedules in
place with each of the suppliers to supply the parts necessary to satisfy our
current contractual needs.
We are
subject to, and must comply with various governmental regulations that impact,
among other things, our revenue, operating costs, profit margins and the
internal organization and operation of our business. The material regulations
affecting our U.S. government business are summarized in the table
below.
Regulation
|
Summary
|
|
Federal
Acquisition Regulation
|
The
principal set of rules in the Federal Acquisition Regulation System. This
system consists of sets of regulations issued by agencies of the federal
government of the United States to govern what is called the "acquisition
process," which is the process through which the government purchases
("acquires") goods and services. That process consists of three phases:
(1) need recognition and acquisition planning, (2) contract formation, and
(3) contract administration. The FAR System regulates the activities of
government personnel in carrying out that process. It does not regulate
the purchasing activities of private sector firms, except to the extent
that parts of it are incorporated into government solicitations and
contracts by reference.
|
|
International
Traffic in Arms Regulations
|
United
States government regulations that control the export and import of
defense-related articles and services on the United States Munitions
List. These regulations implement the provisions of the Arms Export
Control Act.
|
|
Truth
in Negotiations Act
|
A
public law enacted for the purpose of providing for full and fair
disclosure by contractors in the conduct of negotiations with the
government. The most significant provision included is the requirement
that contractors submit certified cost and pricing data for negotiated
procurements above a defined threshold, currently $650,000. It
requires contractors to provide the government with an extremely broad
range of cost or pricing information relevant to the expected costs of
contract performance, and it requires contractors and subcontractors to
submit cost or pricing data to government and to certify that,
to the best of their knowledge and belief, the data are current, accurate,
and complete.
|
Optex
Systems Holdings is responsible for full compliance with the Federal Acquisition
Regulation. Upon award, the contract may identify certain regulations that
Optex Systems Holdings needs to meet. For example, a contract may allow
progress billing pursuant to specific Federal Acquisition Regulation clauses
incorporated into the contract. Other contracts may call for specific
first article acceptance and testing requirements. The Federal Acquisition
Regulation will identify the specific regulations that Optex Systems Holdings
must follow based on the type of contract awarded. The Federal Acquisition
Regulation also contains guidelines and regulations for managing a contract
after award, including conditions under which contracts may be terminated, in
whole or in part, at the government’s convenience or for default. These
regulations also subject us to financial audits and other reviews by the
government of our costs, performance, accounting and general business practices
relating to our government contracts, which may result in adjustment of our
contract-related costs and fees and, among other things and impose accounting
rules that define allowable and unallowable costs governing our right to
reimbursement under certain contracts.
5
First
Article Testing and Acceptance requirements consist of specific steps. For
example, first article testing on a Howitzer type product is very comprehensive
and very time consuming. Each piece that is part of the assembly requires
each dimension and material specification to be verified, and each product has
in excess of 100 piece parts. Once the individual piece parts are verified
to be compliant to the specification, the assembly processes are documented and
verified. A sample of the production (typically 3 units) is verified to
meet final performance specifications. Once the units meet the final
performance specification, they are then exposed to a series of tests which
simulate the lifetime use of the product in the field. This consists of
exposing the units to thermal extremes, humidity, mechanical shock, vibration,
and other physical exposure tests. Once completed, the units undergo a
final verification that no damage has occurred as a result of the testing and
that they continue to meet the performance specification. All of the
information and data is recorded into a final first article inspection and test
report and submitted to the customer along with the test units for final
approval. First Article Acceptance and Testing is generally required on
new contracts/product awards but may also be required on existing products or
contracts where there has been a significant gap in production, or where the
product has undergone significant manufacturing process, material, tooling,
equipment or product configuration changes.
Optex
Systems Holdings, Inc. is also subject to laws, regulations and executive orders
restricting the use and dissemination of information classified for national
security purposes and the exportation of certain products and technical data as
covered by the International Traffic in Arms Regulation. In order to
import or export items listed on the U.S. Munitions List, we are required to be
registered with the Directorate of Defense Trade Controls office. The
registration is valid for 1 year, and the registration fees are established
based on the number of license applications submitted the previous year.
Optex Systems Holdings currently has an approved and current registration on
file with the Directorate of Defense Trade Controls office. Once the
registration is approved, each import/export license must be filed
separately. License approval requires the company to provide proof of
need, such as a valid contract or purchase order requirement for the specific
product or technical data requested on the license and requires a detailed
listing of the items requested for export/import, the end-user, the end-user
statement, the value of the items, consignees/freight forwarders and a copy of a
valid contract or purchase order from the end-user. The approval process
for the license can vary from several weeks to six months or more. The
licenses Optex Systems Holdings currently uses are the DSP-5 (permanent export)
and DSP-73 (temporary export).
The
aforementioned licenses are valid for 48 months from date that each such license
is issued as
set forth on the table below.
DSP-5 Licenses
|
|
Issue Date
|
|
Expiration Date
(48 months from date of issue)
|
050137740
|
01/05/2009
|
01/04/2013
|
||
050146207
|
03/13/2009
|
03/12/2013
|
||
050137823
|
01/05/2009
|
01/04/2013
|
||
050128943
|
11/24/2008
|
11/23/2012
|
||
050169739
|
06/04/2009
|
06/03/2013
|
||
050185923
|
08/28/2009
|
08/27/2013
|
||
050187735
|
03/19/2010
|
03/18/2014
|
||
050220671
|
10/01/2009
|
09/30/2013
|
||
050233257
|
06/10/2010
|
06/10/2014
|
||
050221743
|
04/01/2010
|
04/01/2014
|
||
050209709
|
02/23/2010
|
02/23/2010
|
DSP-73 Licenses
|
|
Issue Date
|
|
Expiration Date
(48 months from date of issue)
|
730024737
|
02/16/2010
|
02/15/2014
|
||
730007737
|
08/13/2008
|
08/12/2012
|
||
730008340
|
09/26/2008
|
09/25/2012
|
||
730008736
|
11/18/2008
|
11/17/2012
|
||
730010051
|
02/27/2009
|
02/26/2013
|
||
730026913
|
06/15/2010
|
06/15/2014
|
Licenses
are subject to termination if a licensee is found to be in violation of the Arms
Export Control Act or the International Traffic in Arms Regulations
requirements. If a licensee is found to be in violation, in addition to a
termination of its licenses, it can be subject to fines and penalties by the
government.
6
Optex
Systems Holdings’ contracts may also be governed by the Truth in Negotiation Act
requirements where certain of our contracts or proposals exceed the $650,000
threshold and/or are deemed as sole source, or non competitive awards, covered
under this Act. These contracts require that Optex Systems Holdings
provide a vast array of cost and pricing data in addition to certification that
our pricing data and disclosure materials are current, accurate and complete
upon conclusion of the negotiation. Due to the additional disclosure and
certification requirements, if a post contract award audit were to uncover that
the pricing data provided was in any way not current accurate or complete as of
the certification date, Optex Systems Holdings could be subjected to a defective
pricing claim adjustment with accrued interest. Currently, Optex Systems
Holdings does not have any pending claims as a result of defective pricing as a
result of these covered contracts. Additionally, as a result of this
requirement, contract price negotiations may span from two to six months and
will often result in undefinitized or not to exceed ceiling priced contracts
subject to future downward negotiations and price adjustments. Currently,
Optex Systems Holdings does not have any undefinitized contracts subject to
further price negotiation.
Our
failure to comply with applicable regulations, rules and approvals or misconduct
by any of our employees could result in the imposition of fines and penalties,
the loss of security clearances, the loss of our U.S. government contracts or
our suspension or debarment from contracting with the U.S. government generally,
any of which could have a material adverse effect our business, financial
condition, results of operations and cash flows. We are currently in compliance
with all applicable regulations and do not have any pending claims as a result
of non compliance.
The
material terms of our five largest contracts are as follows:
Progress
|
Remaining
|
|||||||||||||||||||
Customer
|
Contract Quantities
|
Total Award
|
Billable
|
Order Period
|
Value
|
|||||||||||||||
Customer
|
PO/Contract
|
Contract Type
|
Min Qty
|
Max Qty
|
Value (4)
|
(1)
|
Expiration
|
(5)
|
Delivery Period
|
|||||||||||
General
Dynamics
Land
Systems
|
PCL860000
thru PCL860005 (MultiplePrime Contracts)
|
1
year blanket order with Fixed Qty Contract release which includes ability
to increase or decrease quantity on each release up to 20% from PO release
quantity.
|
N/A
|
N/A
|
$
|
14,813,100
|
Yes
|
Expired
|
$
|
1,401,924
|
Dec
2007 - Jan
2011
|
|||||||||
Tank-automotive
and Armaments Command - Rock Island
|
W52H09-05-D-
0260
|
5
Year Firm Fixed Price (3)
|
138
|
2,100
|
$
|
9,762,286
|
Yes
|
30-Jun-10
|
$
|
4,300,662
|
Oct
2007-May 2011
|
|||||||||
Tank-automotive
and Armaments Command - Rock Island
|
W52H09-05-D-
0248
|
5
Year Firm Fixed Price (3)
|
138
|
1,250
|
$
|
5,006,119
|
Yes
|
30-Jun-10
|
$
|
1,454,136
|
Apr
2007- August 1710
|
|||||||||
Tank-automotive
and Armaments Command - Rock Island (2)
|
W52H09-09-D-0128
|
3
Yr – Evaluated Pricing (3). Restricted Procurement between Optex Systems
& Miller Holzwarth
|
250
each supplier
|
250
each supplier
|
$
|
118,250
|
Yes
|
31-Dec-11
|
$
|
0
|
Initial
award deliverable Aug - Sept 2009. Additional awards not to exceed
aggregate 2000 units per month total units.
|
|||||||||
General
Dynamics Land Systems
|
40050551
(Multiple Prime Contracts)
|
Firm
Fixed Price and Fixed Quantity Purchase Order
|
N/A
|
N/A
|
$
|
6,330,336
|
Yes
|
N/A
|
$
|
6,330,336
|
Jan
2011 - Feb
2013
|
7
(1)
Payment terms on shipments are net 30 days.
(2)
We received one of the three awarded delivery orders against this contract as of
August 30, 2010. TACOM is currently analyzing the requests for proposals
for the subsequent award of the fourth delivery order.. The maximum order
value potential of the contract was up to $22 million. We estimate the
maximum order potential at $22 million based on the government’s estimated
maximum order quantity for each periscope type times the Optex not to exceed
price per unit for each of the solicited periscope assemblies.. We
anticipate participation in future delivery orders up to $7.5 million
although not in excess thereof.
(3)
Indefinite Delivery/Indefinite Quantity type contract.
(4)
“Total Award Value” as included in the table represents the total value of all
delivery orders against the prime contract that have already been awarded to
Optex. As the total award value represents already awarded delivery order
contracts, there are no material reasons why that amount would not be
received. Based on Optex's historical experience with these contracts and
other like contracts, the amount awarded has directly correlated to the amount
received.
(5)
The “Remaining Value” depicts the open undelivered values remaining to be
delivered against the contract awards. Only these undelivered values of
the contracts may be subject to the contract termination clause. It has
been the experience of Optex Systems that these clauses are rarely
invoked.
Organizational
History
On
October 14, 2008, in a transaction that was consummated via public auction,
Optex Systems, Inc. (Delaware) purchased all of the assets of Optex Systems,
Inc. (Texas) in exchange for $15 million of Irvine Sensors Corporation debt and
the assumption of approximately $3.8 million of certain liabilities of Optex
Systems, Inc. (Texas). Optex Systems, Inc. (Delaware) was formed by the
Longview Fund, LP and Alpha Capital Antstalt, former secured creditors of Irvine
Sensors Corporation, to consummate the transaction with Optex Systems Holdings,
and subsequently, on February 20, 2009, Longview Fund conveyed its ownership
interest in Optex Systems Holdings to Sileas Corporation, an entity owned by
three of Optex Systems Holdings’ officers (one of whom is also one of Optex
Systems Holdings’ three directors). On March 30, 2009, a reorganization
occurred whereby Optex Systems, Inc. (Delaware) became a wholly-owned subsidiary
of Optex Systems Holdings.
Products
Optex
Systems Holdings’ products are installed on various types 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 Future
Combat Systems Stryker vehicle. Optex Systems Holdings also manufactures and
delivers numerous periscope configurations, rifle and surveillance sights and
night vision optical assemblies. Optex Systems Holdings delivers its products
both directly to the military services and to prime
contractors.
Optex
Systems Holdings delivers high volume products, under multi-year contracts, to
large defense contractors and government customers. Optex Systems Holdings has a
reputation for quality and credibility with its customers as a strategic
supplier. Optex Systems Holdings also anticipates the opportunity to integrate
some of its night vision and optical sights products into commercial
applications.
Specific
product lines include:
|
¨
|
Electronic sighting
systems
|
|
¨
|
Mechanical sighting
systems
|
|
¨
|
Laser protected glass
periscopes
|
|
¨
|
Laser protected plastic
periscopes
|
8
|
¨
|
Non-laser protected plastic
periscopes
|
|
¨
|
Howitzer sighting
systems
|
|
¨
|
Ship
binoculars
|
|
¨
|
Replacement optics (e.g. filters,
mirrors)
|
Location and
Facility
We are
located in Richardson, TX in a 49,000 square foot facility, and as of August 30,
2010, we had 88 full time equivalent employees. We operate with a single shift,
and capacity could be expanded by adding a second shift. Our proprietary
processes and methodologies provide barriers to entry by other competing
suppliers. In many cases, we are the sole source provider or one of only two
providers of a product. We have capabilities which include machining,
bonding, painting, tracking, engraving and assembly and can perform both optical
and environmental testing in-house.
We lease
our facility. Effective as of January 4, 2010, Optex Systems Holdings,
Inc. renewed its Richardson, TX lease. Under the terms of the
amendment:
|
¨
|
The lease term is extended until
July 31, 2015.
|
|
¨
|
The base rent is as follows:
until 7/31/2010, $0.00 per square foot, from 8/1/2010 – 7/31/2013, $4.70
per square foot and from 8/1/2013 – 7/31/2015, $4.95 per square
foot.
|
|
¨
|
A $195,352.00 improvement
allowance is included.
|
|
¨
|
For the first two years of the
extended term, the landlord has granted the option to take over additional
space at similar terms as in the
amendment.
|
Prior Operational/Financial
Challenges; Recovery; and Future Growth Potential
While
Optex Systems, Inc. (Texas) was a wholly-owned subsidiary of Irvine Sensors
Corporation, Irvine Sensors Corporation faced certain business challenges and
utilized the cash flow from Optex Systems, Inc. (Texas) to meet its own funding
needs. Accordingly, the diversion of its cash flow to Irvine Sensors
Corporation left Optex Systems, Inc. (Texas) with limited working capital to
satisfy its own operating needs.
As of
the year ended 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”.
These costs were for expenses allocated by Irvine Sensors Corporation to Optex
Systems, Inc. (Texas), including legal, audit, and consulting fees; insurance
costs; and significant amounts of Irvine Sensors Corporation general overhead
allocated to Optex Systems, Inc. (Texas). The outstanding “Due to Parent”
balance was not acquired as part of the October 14, 2008 transaction. Therefore,
this balance will have no impact on future operating results or
liquidity.
The
estimated total General and Administrative expenses assuming Optex Systems, Inc.
(Texas) was operated on a stand-alone basis during the 2008 fiscal year
are:
|
|
Year- Ended
|
|
|
|
|
September 28,
2008
|
|
|
Accounting
& Auditing Fees
|
$
|
250,000
|
||
Legal
Fees
|
60,000
|
|||
Consulting
Fees
|
60,000
|
|||
Workers
Comp & General Insurance
|
70,000
|
|||
Total
|
$
|
440,000
|
9
As a
result of the Optex Systems, Inc. (Texas) purchase on October 14, 2008, these
general and administrative costs were incurred and paid directly by Optex
Systems, Inc. (Delaware) for the 2009 fiscal year, and have been reflected in
the financial statements.
Since
the acquisition, the business outlook for the operating business formerly owned
by Optex Systems, Inc. (Texas) has changed dramatically. Management has
strengthened Optex Systems Holdings’ balance sheet and has increased
operational efficiencies and productivity, as demonstrated by the significant
$4.5 million reduction in operating loss to $(129,248) versus $(4,654,251) for
(i) the total for the periods September 29, 2008 through October 14, 2008
(Predecessor) and October 15, 2008 through September 27, 2009
(Successor) and (ii) the year ended September 28, 2008 (Predecessor),
respectively. Management expects to deliver additional improvement in
operations over time.
In
some cases, we may receive orders subject to subsequent price negotiation on
contracts exceeding the $650,000 federal government simplified acquisition
threshold. These “undefinitized” contracts are considered firm contracts,
but as Cost Accounting Standards Board covered contracts, they are subject to
the Truth in Negotiations Act disclosure requirements and downward-only price
negotiation. As of September 28, 2008, $4.0 million of booked orders was
subject to this criteria. As of June 27, 2010, there were no booked orders
subject to this criteria. Our experience has been that the historically
negotiated price differentials have been immaterial and we do not anticipate any
significant downward adjustments on these booked orders.
We are
currently bidding on several substantial government contracts to expand sales
and production beyond the current production and backlog. We are also
exploring possibilities to adapt some of our products for commercial use in
those markets that demonstrate potential for solid revenue
growth.
Market Opportunity – U.S.
Military
Our
products are currently marketed to the military and related government
markets. Since 1998, annual U.S. military spending has increased over 225%
to over $600 billion. The trend of significant growth in government
spending on the military and defense is very positive for Optex Systems Holdings
and others in the defense industry sector. The data suggests that the
market continues to be robust and Optex Systems Holdings believes the markets
for new and replacement parts, such as those manufactured by Optex Systems
Holdings, are significant.
The
chart below was derived from public government spending sources and depicts
total U.S. Military Spending from 1998 through 2008. Total military
spending increased from $268.2 billion in 1998 to $607.3 billion in 2008
representing a total increase in military spending of 226% in the last 10
years. It is difficult to directly tie this spending to any specific
military vehicles; however, Optex Systems Holdings serves the U.S. armed forces
and various state national guards. The purpose of including this chart is
to provide the reader with trend data showing increased military spending by the
government since 1998, which is favorable for Optex Systems Holdings’ overall
business.
10
Source:
Government Printing Office, U.S. Budget Historical Tables, FY 2008, Table 3.2
Outlays by function and subfunction, 1962-2012
The
following factors are important to the U.S. military:
|
¨
|
Reliability – failure can cost
lives
|
|
¨
|
Time delivery to
schedule
|
|
¨
|
Cost
effectiveness
|
|
¨
|
Armed forces need to be able to
see to perform
|
|
¨
|
Mission critical
products.
|
Optex
Systems Holdings focuses on delivering products that satisfy these factors and
believes it is well positioned to continue to service U.S. military
needs.
Market Opportunity –
Commercial
Optex
Systems Holdings’ products are currently sold to military and related government
markets. We believe there may be opportunities to commercialize various products
we presently manufacture to address other markets. Our initial focus will be
directed in three product areas.
|
¨
|
Big Eye Binoculars – While the
military application we produce is based on mature military designs, Optex
Systems Holdings owns all castings, tooling and glass technology. These
large fixed mount binoculars could be sold to cruise ships, personal
yachts and
cities/municipalities.
|
|
¨
|
Night Vision Sight – Optex
Systems Holdings has manufactured the optical system for the NL-61 Night
Vision Sight for the Ministry of Defense of Israel. This technology could
be implemented for commercial
applications.
|
11
|
¨
|
Infrared Imaging Equipment –
Optex Systems Holdings manufactures and assembles infrared imaging
equipment and components for Raytheon’s Thermal Imaging M36 Mount product.
This equipment and technology has potential to be assembled for border
patrol, police and governmental security
agencies.
|
Customer
Base
Optex
Systems Holdings serves customers in three primary categories: as prime
contractor (Tank-automotive and Armaments Command, U.S. Army, Navy and Marine
Corps), as subcontractor (General Dynamics, BAE, Raytheon and Northrop) and also
as a supplier to foreign governments (Israel, Australia and NAMSA).
Although we do serve all three of these categories, for the nine months ended
June 27, 2010, we derived approximately 90% of the gross business revenue from
three customers, with 50% from General Dynamics Land Systems Divisions, 32% from
Tank-automotive and Armaments Command and 8% from NorcaTec LLC with which we
have approximately 50 discrete contracts for items that are utilized in
vehicles, product lines and spare parts. Given the size of General Dynamics Land
System Division and Tank-automotive and Armaments Command as well as the fact
that there are multiple contracts with each entity, which are not
interdependent, we are of the opinion that this provides us with a fairly well
diversified revenue pool.
Marketing
Plan
Potential
Entrants – Low. In order to enter this market, potential competitors must
overcome several barriers to entry. The first hurdle is that an entrant would
need to prove to the government agency in question the existence of a government
approved accounting system for larger contracts. Second, the entrant would need
to develop the processes required to produce the product. Third, the entrant
would then need to produce the product and then submit successful test
requirements (many of which require lengthy government consultation for
completion). Finally, in many cases the customer has an immediate need and
therefore cannot wait for this qualification cycle and therefore must issue the
contracts to existing suppliers.
Buyers
– Medium. In most cases the buyers (usually government agencies or defense
contractors) have two fairly strong suppliers. It is in their best interest to
keep at least two, and therefore in some cases the contracts are split between
suppliers. In the case of larger contracts, the customer can request an open
book policy on costs and expects a reasonable margin to have been
applied.
12
Substitutes
– Low. Optex Systems Holdings has both new vehicle contracts and replacement
part contracts for the exact same product. The U.S. government has declared that
the Abrams/Bradley base vehicles will be the ground vehicle of choice out
through 2040. The Bradley vehicle has been in service for 28 years, the Abrams
for 27 years. Therefore it appears that the systems are capable of a life of
approximately 30 years. In February 2008, the U.S. Army signed a 5 year
multi-year third party contract for the delivery of improved Abrams and
Bradleys. The contract is for up to 435 tanks and 540 Bradley vehicles. These
are the only production tanks currently being procured by the government. This
in conjunction with the 30 year life span supports their continued use through
2040. There are no replacement systems known to be proposed or funded at this
time. The Abrams is the principal battle tank of the United States Army and
Marine Corps, and the armies of Egypt, Kuwait, Saudi Arabia, and since 2007,
Australia. The new contract terms allow efficiencies within the supply chain and
a very long return on investment on new vehicle proposals.
Suppliers
– Low to Medium. The suppliers of standard processes (e.g.: casting, machining,
plating) have very little power. Given the current state of the economy, they
need to be very competitive to gain and /or maintain contracts. Those suppliers
of products that use top secret clearance processes are slightly better off;
however, there continues to be multiple avenues of supply and therefore moderate
power.
Industry
Competitors – Low. The current suppliers have been partitioned according to
their processes and the products. Optex Systems Holdings and Miller-Holzwarth,
Inc. both compete for plastic periscope products whereas Optex Systems Holdings
and Seiler Instrument & Manufacturing Co., Inc., have competed on the higher
level periscope products. In the last 12-18 months, we have begun to challenge
Seiler in areas where they have long held the dominant role. For example, while
the existing Howitzer contracts are at low margins, the new bids will be at a
much higher margin now that we have proven we can produce the
product.
The
second model is a two by two matrix for products and customers.
This
product/customer matrix sets forth our four basic approaches:
1)
|
Sell existing products to
existing customers.
|
2)
|
Sell existing products to new
customers.
|
3)
|
Develop new products to meet
the needs of our existing
customers.
|
13
4)
|
Develop new products to meet
the needs of new
customers.
|
The
product categories described in the above matrix are associated with the product
lines set forth below:
Name
|
Product Line
|
|
M137,
M187, M119 Aiming Device
|
Howitzer
Sighting Systems
|
|
Aiming
Circle
|
Howitzer
Sighting Systems
|
|
Periscopes
|
Laser
Protected Plastic Periscopes
|
|
Collimators
|
Electronic
Sighting Systems
|
|
Back
Up Sights
|
Mechanical
Sighting Systems
|
|
ICWS
|
Laser
Protected Glass
Periscopes
|
Those
“new customers” listed (BAE and Textron) are producers of armored vehicles.
Optex Systems Holdings has provided them quotations for laser protected plastic
periscopes and mechanical sighting systems. Both of these companies have
previously purchased products from Optex Systems Holdings. “New Customers”
listed (L3 and ITT) are potential customers for night vision
products.
Operations
Plan
Our
operations plan can be broken down into three distinct areas: material
management, manufacturing space planning and efficient economies of
scale.
Materials
Management –
The
largest portion of our costs are materials. We have completed the following
activities in order to demonstrate continuous improvement:
-
|
Successful completion of
ISO9001:2008
certification
|
-
|
Weekly cycle counts on
inventory items
|
-
|
Weekly material review board
meeting on non-moving piece
parts
|
-
|
Kanban kitting on products
with consistent ship weekly ship
quantities
|
-
|
Daily review of yields and
product velocity
|
-
|
Bill of material reviews prior
to work order release
|
Future
continuous improvement opportunities include installation and training of shop
floor control module within the ERP system and organizational efficiencies of
common procurement techniques among buyers.
Manufacturing
Space Planning –
We
currently lease 49,000 square feet of manufacturing space, and we have the
ability to lease additional space (see “Location and Facility”). Given the ample
building opportunities along with competitive lease rates, our objective is to
maintain building and building-related costs consistent with prior historical
norms on a percentage of sales basis.
Consistent
with the space planning, we will drive economies of scale to reduce support
costs on a percentage of sales perspective. These cost reductions can then be
either brought directly to the bottom line or used for business
investment.
This
process is driven by the use of six sigma techniques and process
standardization. Initial activities in this area have been the successful six
sigma projects in several production areas which has led to improved output and
customer approval on the aesthetics of the work environment. In addition to the
5S projects, we have used the Define, Measure, Analyze, Improve, Control Problem
Solving technique to identify bottlenecks within the process flow and improve
product yields. These successful techniques can then be duplicated across the
production floor and drive operational improvements.
14
Intellectual
Property
We
utilize several highly specialized and unique processes in the manufacture of
our products. While we believe that these trade secrets have value, it is
probable that our future success will depend primarily on the innovation,
technical expertise, manufacturing and marketing abilities of our personnel. We
cannot assure you that we will be able to maintain the confidentiality of our
trade secrets or that our non-disclosure agreements will provide meaningful
protection of our trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or other disclosure. The
confidentiality agreements that are designed to protect our trade secrets could
be breached, and we might not have adequate remedies for the breach.
Additionally, our trade secrets and proprietary know-how might otherwise become
known or be independently discovered by others. We do not possess any
patents.
Our
competitors, many of which have substantially greater resources, may have
applied for or obtained, or may in the future apply for and obtain, patents that
will prevent, limit or interfere with our ability to make and sell some of our
products. Although we believe that our products do not infringe on the patents
or other proprietary rights of third parties, we cannot assure you that third
parties will not assert infringement claims against us or that such claims will
not be successful.
Competition
The
markets for our products are competitive. We compete primarily on the basis of
our ability to design and engineer products to meet performance specifications
set by our customers. Our customers include the military and government end
users as well as prime contractors that purchase component parts or
subassemblies, which they incorporate into their end products. Product pricing,
quality, customer support, experience, reputation and financial stability are
also important competitive factors.
There are
a limited number of competitors in each of the markets for the various types of
products that we design, manufacture and sell. At this time we consider our
primary competitors to be Seiler Instruments, Miller-Holzwarth, Kent Periscopes,
and EO System Co.
Our
competitors are often well entrenched, particularly in the defense markets. Some
of these competitors have substantially greater resources than we do. While we
believe that the quality of our technologies and product offerings provides us
with a competitive advantage over certain manufacturers, some of our competitors
have significantly more financial and other resources than we do to spend on the
research and development of their technologies and for funding the construction
and operation of commercial scale plants.
We expect
our competitors to continue to improve the design and performance of their
products. We cannot assure investors that our competitors will not develop
enhancements to, or future generations of, competitive products that will offer
superior price or performance features, or that new technology or processes will
not emerge that render our products less competitive or obsolete. Increased
competitive pressure could lead to lower prices for our products, thereby
adversely affecting our business, financial condition and results of operations.
Also, competitive pressures may force us to implement new technologies at a
substantial cost, and we may not be able to successfully develop or expend the
financial resources necessary to acquire new technology. We cannot assure you
that we will be able to compete successfully in the future.
External Growth
Potential/Roll-Up Opportunities
We
operate in a business environment which is highly fragmented with numerous
private companies, many of which were established more than 20 years ago. We
believe there may be opportunities to pursue mergers with these competitors. We
are not aware of any previous attempts to consolidate companies with our defense
manufacturing expertise.
15
The
typical company we compete with has 50-100 employees and annual revenue of
$20-$50 million dollars. Most of these private companies have never had the
opportunity to enjoy the benefits of consolidation and the resulting economies
of scale associated with a larger entity.
We plan
to engage our competition on a selective basis, and to explore all opportunities
to grow our operations through mergers and/or acquisitions. We have no
acquisition agreements pending at this time and are not currently in discussions
or negotiations with any third parties.
Employees
Optex
Systems Holdings had 84 full time equivalent employees as of June 27, 2010.
Optex Systems Holdings uses a small temporary work force to handle peak
loads. To the best of its knowledge, Optex Systems Holdings is compliant
with local prevailing wage, contractor licensing and insurance regulations, and
has good relations with its employees.
Item
1A Risk Factors
Investing
in our common stock involves a high degree of risk. Prospective investors should
carefully consider the risks described below, together with all of the other
information included or referred to in this prospectus, before purchasing shares
of our common stock. There are numerous and varied risks, known and unknown,
that may prevent us from achieving our goals. The risks described below are not
the only risks we will face. If any of these risks actually occurs, our
business, financial condition or results of operations may be materially and
adversely affected. In such case, the trading price of our common stock could
decline and investors in our common stock could lose all or part of their
investment. The risks and uncertainties described below are not exclusive and
are intended to reflect the material risks that are specific to us , material
risks related to our industry and material risks related to companies that
undertake a public offering or seek to maintain a class of securities that is
registered or traded on any exchange or over-the-counter market.
Investing
in our common stock involves a high degree of risk. Prospective investors should
carefully consider the risks described below, together with all of the other
information included or referred to in this prospectus, before purchasing shares
of our common stock. There are numerous and varied risks, known and unknown,
that may prevent us from achieving our goals. The risks described below are not
the only risks we will face. If any of these risks actually occurs, our
business, financial condition or results of operations may be materially
adversely affected. In such case, the trading price of our common stock could
decline and investors in our common stock could lose all or part of their
investment. The risks and uncertainties described below are not exclusive and
are intended to reflect the material risks that are specific to us, material
risks related to our industry and material risks related to companies that
undertake a public offering or seek to maintain a class of securities that is
registered or traded on any exchange or over-the-counter
market.
Risks Related to our
Business
We
expect that we will need to raise additional capital in the future; additional
funds may not be available on terms that are acceptable to us, or at
all.
We
anticipate we will have to raise additional capital in the future to service our
debt and to finance our future working capital needs. We cannot assure you that
any additional capital will be available on a timely basis, on acceptable terms,
or at all. Future equity or debt financings may be difficult to obtain. If we
are not able to obtain additional capital as may be required, our business,
financial condition and results of operations could be materially and adversely
affected.
We
anticipate that our capital requirements will depend on many factors,
including:
|
¨
|
our ability to fulfill
backlog;
|
|
¨
|
our ability to procure additional
production contracts;
|
16
|
¨
|
our ability to control
costs;
|
|
¨
|
the timing of payments and
reimbursements from government and other contracts, including but not
limited to changes in federal government military spending and the federal
government procurement
process;
|
|
¨
|
increased
sales and marketing expenses;
|
|
¨
|
technological advancements and
competitors’ response to our
products;
|
|
¨
|
capital improvements to new and
existing facilities;
|
|
¨
|
our relationships with customers
and suppliers; and
|
|
¨
|
general economic conditions
including the effects of future economic slowdowns, acts of war or
terrorism and the current international
conflicts.
|
Even
if available, financings may involve significant costs and expenses, such as
legal and accounting fees, diversion of management’s time and efforts, and
substantial transaction costs. If adequate funds are not available on acceptable
terms, or at all, we may be unable to finance our operations, develop or enhance
our products, expand our sales and marketing programs, take advantage of future
opportunities or respond to competitive pressures.
Current
economic conditions may adversely affect our ability to continue
operations.
Current
economic conditions may cause a decline in business and consumer spending and
capital market performance, which could adversely affect our business and
financial performance. Our ability to raise funds, upon which we are fully
dependent to continue to expand our operations, may be adversely affected by
current and future economic conditions, such as a reduction in the availability
of credit, financial market volatility and economic recession.
Our
ability to fulfill our backlog may have an effect on our long term ability to
procure contracts and fulfill current contracts.
Our
ability to fulfill our backlog may be limited by our ability to devote
sufficient financial and human capital resources and limited by available
material supplies. If we do not fulfill our backlog in a timely manner, we
may experience delays in product delivery which would postpone receipt of
revenue from those delayed deliveries. Additionally, if we are
consistently unable to fulfill our backlog, this may be a disincentive to
customers to award large contracts to us in the future until they are
comfortable that we can effectively manage our backlog.
Our
historical operations depend on government contracts and subcontracts. We
face risks related to contracting with the federal government, including federal
budget issues and fixed price contracts.
Future
general political and economic conditions, which cannot be accurately predicted,
may directly and indirectly affect the quantity and allocation of expenditures
by federal agencies. Even the timing of incremental funding commitments to
existing, but partially funded, contracts can be affected by these factors.
Therefore, cutbacks or re-allocations in the federal budget could have a
material adverse impact on our results of operations. Obtaining government
contracts may also involve long purchase and payment cycles, competitive
bidding, qualification requirements, delays or changes in funding, budgetary
constraints, political agendas, extensive specification development, price
negotiations and milestone requirements. In addition, our government contracts
are primarily fixed price contracts, which may prevent us from recovering costs
incurred in excess of budgeted costs. Fixed price contracts require us to
estimate the total project cost based on preliminary projections of the
project’s requirements. The financial viability of any given project depends in
large part on our ability to estimate such costs accurately and complete the
project on a timely basis. Some of those contracts are for products that
are new to our business and are thus subject to unanticipated impacts to
manufacturing costs. Given the current economic conditions, it is also
possible that even if our estimates are reasonable at the time made, that prices
of materials are subject to unanticipated adverse fluctuation. In the
event our actual costs exceed fixed contractual costs of our product contracts,
we will not be able to recover the excess costs which could have a material
adverse effect on our business and results of operations. We examine these
contracts on a regular basis and accrue for anticipated losses on these
contracts, if necessary. As of July 27, 2010, we had approximately $1.3
million of loss provision accrued for these fixed price
contracts.
17
Approximately
95% of our contracts contain contract termination clauses for convenience.
In the event these clauses should be invoked by our customers, future revenues
against these contracts could be affected, however these clauses allow for a
full recovery of any incurred contract cost plus a reasonable fee up through and
as a result of the contract termination. We are currently unaware of any
pending terminations on our existing contracts. In some cases, contract
awards may be issued that are subject to renegotiation at a date (up to 180
days) subsequent to the initial award date. Generally, these subsequent
negotiations have had an immaterial impact (zero to 5%) on the contract price of
the affected contracts. Currently, none of our awarded contracts are
subject to renegotiation.
If
we fail to scale our operations appropriately in response to growth and changes
in demand, we may be unable to meet competitive challenges or exploit potential
market opportunities, and our business could be materially and adversely
affected.
Our past
growth has placed, and any future growth in our historical business is expected
to continue to place, a significant strain on our management personnel,
infrastructure and resources. To implement our current business and product
plans, we will need to continue to expand, train, manage and motivate our
workforce, and expand our operational and financial systems, as well as our
manufacturing and service capabilities. All of these endeavors will require
substantial management effort and additional capital. If we are unable to
effectively manage our expanding operations, we may be unable to scale our
business quickly enough to meet competitive challenges or exploit potential
market opportunities, and our current or future business could be materially and
adversely affected.
We
do not have long-term employment agreements with our key personnel, other than
our Chief Operating Officer. If we are not able to retain our key personnel or
attract additional key personnel as required, we may not be able to implement
our business plan and our results of operations could be materially and
adversely affected.
We
depend to a large extent on the abilities and continued participation of our
executive officers and other key employees. The loss of any key employee could
have a material adverse effect on our business. We currently have only one
employment agreement, with our Chief Operating Officer, and we do not presently
maintain “key man” insurance on any key employees. We believe that as our
activities increase and change in character, additional, experienced personnel
will be required to implement our business plan. Competition for such personnel
is intense, and we cannot assure you that they will be available when required,
or that we will have the ability to attract and retain them. In addition, we do
not presently have depth of staffing in our executive, operational and financial
management areas. Until additional key personnel can be successfully integrated
into our operations, the timing or success of which we cannot currently predict,
our results of operations and ultimate success will be vulnerable to challenges
associated with recruiting additional key personnel and difficulties associated
with the loss of any key personnel in the future.
Our
intangible assets or goodwill may suffer impairment in the future.
Goodwill
represents the cost of acquired businesses in excess of fair value of the
related net assets at acquisition. Valuation of intangible assets, such as
goodwill, requires us to make significant estimates and assumptions including,
but not limited to, estimating future cash flows from product sales, developing
appropriate discount rates, maintaining customer relationships and renewing
customer contracts, and approximating the useful lives of the intangible assets
acquired. To the extent actual results differ from these estimates, our
intangible assets or goodwill may suffer impairment in the future that will
impact our results of operations. We reviewed the fair market value of our
goodwill and intangible assets as of March 28, 2010, and determined that no
impairment of goodwill had occurred. 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.
18
Certain of our
products are dependent on specialized sources of supply that are potentially
subject to disruption which could have a material, adverse impact on our
business.
Optex
Systems Holdings has selectively single-sourced some of our material components
in order to mitigate excess procurement costs associated with significant
tooling and startup costs. Furthermore, because of the nature of
government contracts, we are often required to purchase selected items from U.S.
government approved suppliers, which may further limit our ability to utilize
multiple supply sources for these key components.
To the
extent any of these single sourced or government approved suppliers should have
disruptions in deliveries due to production, quality, or other issues, Optex
Systems Holdings may also experience related production delays or unfavorable
cost increases associated with retooling and qualifying alternate
suppliers. The impact of delays resulting from disruptions in supply for
these items could negatively impact our revenue, our customer reputation, and
our results of operations. In addition, significant price increases from
single-source suppliers could have a negative impact on our profitability to the
extent that we are unable to recover these cost increases on our fixed price
contracts.
Each
contract has a specific quantity of material which needs to be purchased,
assembled, and finally shipped. Prior to bidding a contract, Optex Systems
Holdings contacts potential sources of material and receives qualified
quotations for this material. In some cases, the entire volume is given to
a single supplier and in other cases, the volume might be split between several
suppliers. If a contract has a single source supplier and that supplier
fails to meet their obligations (e.g., quality, delivery), then Optex Systems
Holdings would find an alternate supplier and bring this information back to the
final customer. Contractual deliverables would then be re-negotiated
(e.g., specifications, delivery, price). Currently, approximately 15% of
our total material requirements are single-sourced across 14 suppliers
representing approximately 17% of our active supplier base. Single-sourced
component requirements span across all of our major product lines. The
vast majority of these single-sourced components could be provided by another
supplier with minimal interruption in schedule (supply delay of 3 months or
less) or increased costs. We do not believe these single sourced materials
to pose any significant risk to Optex Systems Holdings as other suppliers are
capable of satisfying the purchase requirements in a reasonable time period with
minimal increases in cost. Of these single sourced components, we have
contracts (purchase orders) with firm pricing and delivery schedules in place
with each of the suppliers to supply parts in satisfaction of our current
contractual needs.
We
consider only those specialized single source suppliers where a disruption in
the supply chain would result in a period of three months or longer for Optex
Systems Holdings to identify and qualify a suitable replacement to present a
material financial or schedule risk. In the table below we identify only
those specialized single source suppliers and the product lines supported by
those materials.
Product Line
|
Supplier
|
Supply Item
|
Risk
|
Purchase Orders
|
||||
Periscopes
|
TSP,
Inc.
|
Window
used on all glass & plastic periscopes
|
Proprietary
coatings would take in excess of 6 months to identify and qualify an
alternative source
|
Current
firm fixed price & quantity purchase orders are in place with the
supplier to meet all contractual requirements. Supplier is on
schedule.
|
||||
Periscopes
|
Spartec
Polycast
|
Acrylic
raw material used on plastic periscope assemblies
|
This
material has quality characteristics which would take in excess of 6
months to identify and qualify an alternative source.
|
Current
firm fixed price & quantity purchase orders are in place with the
supplier to meet all contractual requirements. Supplier is on
schedule.
|
||||
Howitzers
|
Danaher
Controls
|
Counter
Assembly for M137 & M187 Howitzer programs
|
Critical
assembly would take in excess of 6 months to identify and qualify an
alternative source. Currently, the only U.S. government approved
supplier.
|
Current
firm fixed price & quantity purchase orders are in place with the
supplier to meet all contractual requirements. Supplier is on
schedule.
|
||||
Other
|
SWS
Trimac
|
Subcontracted
Electron Beam Welding
|
Subcontracted
welder that is the only qualified supplier for General Dynamics Land
Systems muzzle reference system collimator assemblies. This
operation would take in excess of 6 months to identify and qualify an
alternative supplier.
|
Current
firm fixed price & quantity purchase orders are in place with the
supplier to meet all contractual requirements. Supplier is on
schedule.
|
19
The
defense technology supply industry is subject to technological change and if we
are not able to keep up with our competitors and/or they develop advanced
technology as response to our products, we may be at a competitive
disadvantage.
The
market for our products is generally characterized by technological
developments, evolving industry standards, changes in customer requirements,
frequent new product introductions and enhancements, short product life cycles
and severe price competition. Our competitors could also develop new, more
advanced technologies in reaction to our products. Currently accepted
industry standards may change. Our success depends substantially on our ability,
on a cost-effective and timely basis, to continue to enhance our existing
products and to develop and introduce new products that take advantage of
technological advances and adhere to evolving industry standards. An unexpected
change in one or more of the technologies related to our products, in market
demand for products based on a particular technology or of accepted industry
standards could materially and adversely affect our business. We may or may not
be able to develop new products in a timely and satisfactory manner to address
new industry standards and technological changes, or to respond to new product
announcements by others. In addition, new products may or may not achieve market
acceptance.
Unexpected
warranty and product liability claims could adversely affect our business and
results of operations.
The
possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products. Some of our customers
require that we warrant the quality of our products to meet customer
requirements and be free of defects for up to fifteen months subsequent to
delivery. Approximately 50% of our current contract deliveries are covered
by these warranty clauses. We establish reserves for warranty claims based on
our historical rate of less than one percent of returned shipments against these
contracts. There can be no assurance that this reserve will be sufficient
if we were to experience an unexpectedly high incidence of problems with our
products. Significant increases in the incidence of such claims may
adversely affect our sales and our reputation with consumers. Costs
associated with warranty and product liability claims could materially affect
our financial condition and results of operations.
We
derive almost all of our revenue from three customers and the loss of any
customer or more than one customers could have a material adverse effect on our
revenues.
For
the nine months ended June 27, 2010, we derived approximately 90% of the gross
business revenue from three customers, with 50% from General Dynamics Land
Systems Divisions, 32% from Tank-automotive and Armaments Command and 8% from
NorcaTec LLC. Procuring new customers and contracts may partially mitigate
this risk.
A
decision by either General Dynamics Land System Division or Tank-automotive and
Armaments Command to cease issuing contracts could have a significant material
impact on our business and results of operations. There can be no
assurance that we could replace these customers on a timely basis or at
all.
We
have approximately 90 discrete contracts with General Dynamics Land System
Division and Tank-automotive and Armaments Command. If they choose to
terminate these contracts, Optex Systems Holdings is entitled to fully recover
all contractual costs and reasonable profits incurred up to or as a result of
the terminated contract.
20
We
do not possess any patents and rely solely on trade secrets to protect our
intellectual property.
We
utilize several highly specialized and unique processes in the manufacture of
our products, for which we rely solely on trade secrets to protect our
innovations. We cannot assure you that we will be able to maintain the
confidentiality of our trade secrets or that our non-disclosure agreements will
provide meaningful protection of our trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or other disclosure. The confidentiality agreements that are designed to
protect our trade secrets could be breached, and we might not have adequate
remedies for the breach.
It is
also possible that our trade secrets will otherwise become known or
independently developed by our competitors, many of which have substantially
greater resources, and these competitors may have applied for or obtained, or
may in the future apply for or obtain, patents that will prevent, limit or
interfere with our ability to make and sell some of our products. Although based
upon our general knowledge (and we have not conducted exhaustive patent
searches), we believe that our products do not infringe on the patents or other
proprietary rights of third parties; however, we cannot assure you that third
parties will not assert infringement claims against us or that such claims will
not be successful.
In
the future, we may look to acquire other businesses in our industry and the
acquisitions will require us to use substantial resources, among other
things.
At some
time in the future, we may decide to pursue a consolidation strategy with other
businesses in our industry. In order to successfully acquire other
businesses, we would be forced to spend significant resources in both
acquisition and transactional costs, which could divert substantial resources in
terms of both financial and personnel capital from our current operations.
Additionally, we might assume liabilities of the acquired business, and the
repayment of those liabilities could have a material adverse impact on our cash
flow. Furthermore, when a new business is integrated into our ongoing
business, it is possible that there would be a period of integration and
adjustment required which could divert resources from ongoing business
operations.
Conversion
of our Series A preferred stock could cause substantial dilution to our existing
common stock holders, and certain other rights of the preferred stock holders
present other risks to our existing common stock holders.
As of
September 20, 2010, we had 139,444,940 shares of our common stock issued and
outstanding, as well as 1,027 shares of our Series A preferred stock issued and
outstanding. The Series A preferred stock is convertible into 41,080,000
shares of our common stock, and upon conversion, the Series A preferred stock
would represent 21.7% of our outstanding common stock. This would greatly
dilute the holdings of our existing common stockholders. In addition, the
preferred shareholders vote on a one-to-one basis with our common shareholders
on an as converted basis.
Furthermore,
in the event of a liquidation, the holders of our Series A preferred stock would
receive priority liquidation payments before payments to common shareholders
equal to the amount of the stated value of the preferred stock before any
distributions would be made to our common shareholders. The total stated
value of our preferred stock is $6,162,000, so the preferred shareholders would
be entitled to receive that amount before any distributions could be made to
common shareholders. Our assets with liquidation value are exceeded by our
liabilities on our balance sheet; therefore, upon a liquidation, there
would be no assets remaining for distribution to common
shareholders.
Lastly,
the preferred shareholders have the right, by majority vote of the shares of
preferred stock, to generally approve any issuances by us of equity and/or
indebtedness, which is not ordinary course trade indebtedness. Therefore,
the preferred shareholders can effectively bar us from entering into a
transaction which they feel is not in their best interests even if the
transaction would otherwise be in the best interests of Optex Systems Holdings
and its common shareholders.
21
If resales of
our stock by the selling shareholders listed in our original SB-2 were held to
be in violation of the Securities Act of 1933, we could experience significant
negative consequences
We
have attempted to determine whether the selling shareholders listed in our
original Form SB-2, declared effective in May 2007, complied with the prospectus
delivery requirements set forth in Section 5 of the Securities Act of 1933. If
the prospectus delivery requirements were not met by the selling shareholders,
then we could also be liable for violating Section 5. As current management was
not appointed until 2009, we have to rely on third parties to obtain information
from 2007. We have contacted prior company counsel for historical information,
but they were unable to supply specific details, thus we still have insufficient
information to form a definitive opinion regarding this matter. If a section 5
violation was found by a court or other legal body to have occurred, and the
alleged violation was not barred by the statute of limitations under Section 13
of the Securities Act of 1933, purchasers of the shares registered under the
2007 SB-2 could have a right of rescission or a claim for other damages, and the
SEC could commence an enforcement action against us. Any of these actions could
potentially have a material adverse effect on us and our stock
price.
We
have utilized various investor relations firms which have published materials
regarding us; however, there may be materials published without our knowledge or
consent. To the extent any of these materials describes our securities
without disclosing the receipt of consideration by these investor relations
firms, there may be liability under Section 17(b) of the Securities Act of
1933.
Section
17(b) of the Securities Act of 1933 states: “It shall be unlawful for any
person, by the use of any means or instruments of transportation or
communication in interstate commerce or by the use of the mails, to publish,
give publicity to, or circulate any notice, circular, advertisement, newspaper,
article, letter, investment service, or communication which, though not
purporting to offer a security for sale, describes such security for a
consideration received or to be received, directly or indirectly, from an
issuer, underwriter, or dealer, without fully disclosing the receipt, whether
past or prospective, of such consideration and the amount thereof.” With
regard to services provided by ECON Corporate Services, there may have been
materials published, without our knowledge or consent, that contained a
description of our securities without appropriate disclosure of consideration
received or to be received directly or indirectly from us. This
nondisclosure could give rise to liability under Section 17(b).
Risks
Relating to the Reorganization
One of our directors, who is also one
of our executive officers, beneficially owns a substantial percentage of
Optex Systems Holdings’ outstanding common stock, which gives him control over
certain major decisions on which Optex Systems Holdings’ stockholders may vote,
which may discourage an acquisition of Optex Systems
Holdings.
As a
result of the reorganization, Sileas Corp., which is owned by Optex Systems
Holdings’ three officers (one of whom is also one of Optex Systems Holdings’
three directors), beneficially owns, in the aggregate, 73.52% of Optex Systems
Holdings’ outstanding common stock. One director who is also an
executive officer, Stanley Hirschman, owns the majority equity interest in
Sileas. The interests of Optex Systems Holdings’ management may differ
from the interests of other stockholders. As Optex Systems Holdings’ executive
management has the right and ability to control virtually all corporate actions
requiring stockholder approval, irrespective of how Optex Systems Holdings’
other stockholders may vote, including the following actions:
|
¨
|
confirming or defeating the
election of directors;
|
|
¨
|
amending or preventing
amendment of Optex Systems Holdings’ certificate of incorporation or
bylaws;
|
|
¨
|
effecting or preventing a
reorganization, sale of assets or other corporate transaction;
and
|
|
¨
|
controlling the outcome of any
other matter submitted to the stockholders for
vote.
|
Optex
Systems Holdings’ management’s beneficial stock ownership may discourage a
potential acquirer from seeking to acquire shares of Optex Systems Holdings’
common stock or otherwise attempting to obtain control of Optex Systems
Holdings, which in turn could reduce the stock price or prevent Optex Systems
Holdings’ stockholders from realizing a premium over Optex Systems Holdings’
stock price.
22
If
Sileas is unable to meet its obligations under the purchase money note to the
party from which it purchased its stock holdings in Optex Systems Holdings,
there could be a change in control in Optex Systems Holdings.
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview Fund, L.P., representing 90% of Optex Systems, Inc. (Delaware), in a
private transaction. The purchase price for the acquisition of Longview’s
position was $13,524,405, and the consideration was paid in the form of a
promissory note. The obligations of Sileas under the promissory note are
secured by a security interest in Optex Systems Holdings’ common and
preferred stock owned by Sileas. As Sileas has no operations or business
activities other than holding the purchased assets, Sileas is depending upon the
value of its common stock and preferred stock holdings in Optex Systems Holdings
to increase over time in order to pay its obligations under the promissory
note. If the value of the holdings does not sufficiently increase, and
Sileas is unable to meet its payment obligations, Longview could exercise its
remedies with respect to its security interest and take control of the pledged
stock, and thus there would be a change in control of Optex Systems Holdings, as
Sileas is currently the majority owner of Optex Systems Holdings. There
can be no guarantee that the investment objectives of Longview will be the same
as those of Sileas or our other shareholders. In the event that control shifts
to Longview from Sileas, Longview may vote its shares differently than Sileas
would have voted under similar circumstances. Merrick Okamoto, a director
of Optex Systems Holdings, is a control person of Viking Asset Management, which
controls Longview Fund.
Public company compliance may make it
more difficult to attract and retain officers and directors
.
The
Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC
have required changes in corporate governance practices of public companies. As
a public entity, Optex Systems Holdings expects these new rules and regulations
to increase compliance costs in 2010 and beyond and to make certain activities
more time consuming and costly. As a public entity, Optex Systems Holdings also
expects that these new rules and regulations may make it more difficult and
expensive for Optex Systems Holdings to obtain director and officer liability
insurance in the future and it may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for Optex Systems Holdings to
attract and retain qualified persons to serve as directors or as executive
officers.
We
did not give separate notice by mailing to then current shareholders of Sustut
of the written consent by Andrey Oks as the majority shareholder of the
reorganization.
Section
228(e) of the Delaware General Corporation Law requires "[p]rompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders . . . who have not consented in
writing.” Prior management of Sustut did not give notice to the other then
existing shareholders of Sustut of the written consent of Andrey Oks in lieu of
a meeting of stockholders approving the reorganization on March 26, 2009 in
compliance with Section 228(e). On April 3, 2009, current management filed
a Form 8-K which detailed the transaction although it did not specifically
mention approval of the transaction by Andrey Oks as the majority shareholder of
Sustut. Potential ramifications of this lack of compliance with Section
228(e) could include possible inquiry or litigation from then existing
shareholders of Sustut for failure of being made aware of the consent. To
the knowledge of current management of Optex Systems Holdings, there have been
no claims or inquiries made and/or any litigation filed by then current
shareholders of Sustut for failure to receive notice under Section 228(e) of the
Delaware General Corporation Law.
Risks
Relating to our Common Stock
Optex Systems Holdings’ stock price
may be volatile.
The
market price of Optex Systems Holdings’ common stock is likely to be highly
volatile and could fluctuate widely in price in response to various factors,
many of which are beyond Optex Systems Holdings’ control, including the
following:
|
¨
|
additions or departures of key
personnel;
|
|
¨
|
limited “public float” following
the reorganization, in the hands of a small number of persons whose sales
or lack of sales could result in positive or negative pricing pressure on
the market price for the common
stock;
|
23
|
¨
|
operating results that fall below
expectations;
|
|
¨
|
economic and other external
factors, including but not limited to changes in federal government
military spending and the federal government procurement process;
and
|
|
¨
|
period-to-period fluctuations
in Optex Systems Holdings’ financial
results.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of Optex Systems Holdings’ common
stock.
There is currently no liquid trading
market for Optex Systems Holdings’ common stock, and Optex Systems Holdings
cannot ensure that one will ever develop or be sustained.
Our
common stock is currently approved for quotation on the OTC Bulletin Board
trading under the symbol OPXS.OB. However, there is limited trading
activity and not currently a liquid trading market. There is no assurance
as to when or whether a liquid trading market will develop, and if such a market
does develop, there is no assurance that it will be maintained.
Furthermore, for companies whose securities are quoted on the
Over-The-Counter Bulletin Board maintained by the National Association of
Securities Dealers, Inc., it is more difficult (1) to obtain accurate
quotations, (2) to obtain coverage for significant news events because major
wire services generally do not publish press releases about such companies, and
(3) to raise needed capital. As a result, purchasers of Optex Systems
Holdings’ common stock may have difficulty selling their shares in the public
market, and the market price may be subject to significant
volatility.
Offers or
availability for sale of a substantial number of shares of Optex Systems
Holdings’ common stock may cause the price of Optex Systems Holdings’ common
stock to decline or could affect Optex Systems Holdings’ ability to raise
additional working capital.
There
are currently 14,999,991 unrestricted shares of Optex Systems Holdings which
were outstanding prior to the March 2009 reorganization. Additionally,
through a combination of the shares available under this registration statement
when it becomes effective, and Rule 144, additional shares will become
available.
Under
Rule 144(i)(2), Optex Systems Holdings’ stockholders can avail themselves of
Rule 144 and commence selling significant amounts of shares into the market one
year after the filing of “Form 10” information with the SEC as long as the other
requirements of Rule 144(i)(2) are met. While affiliates would be subject
to volume limitations under Rule 144(e), which is one percent of the shares
outstanding as shown by our then most recent report or statement published,
nonaffiliates would then be able to sell their stock without volume
limitations. If Optex Systems Holdings’ current stockholders seek to sell
substantial amounts of common stock in the public market either upon expiration
of any required holding period under Rule 144 or pursuant to an effective
registration statement, it could create a circumstance commonly referred to as
“overhang,” in anticipation of which the market price of Optex Systems Holdings’
common stock could decrease substantially. The existence of an overhang,
whether or not sales have occurred or are occurring, could also make it more
difficult for Optex Systems Holdings to raise additional financing in the future
through sale of securities at a time and price that Optex Systems Holdings deems
acceptable.
The
date on which current shareholders can sell a substantial amount of shares into
the public market would be the earlier of the date on which the registration
statement is effective and the one year anniversary of the date on which all
Form 10 information is filed with the SEC (we have determined that September 28,
2009 is the date on which all Form 10 information was filed), which would then
allow sales under Rule 144. The amount of shares then available would be
11,784,177 shares (all of those being registered for resale under this
prospectus, when it becomes effective) and 8,131,667 shares (under Rule 144,
which are the remaining shares of common stock underlying warrants purchased in
the private placement which took place just prior to the reorganization).
There are also 1,780,000 shares which were issued in transactions exempt from
registration under Rule 144 since the date of the reorganization which would
become available under Rule 144 for legend removal in September
2010.
24
The
shares to become available either through this prospectus upon effectiveness and
under Rule 144 are set forth in the following table:
Prospectus
|
11,784,177
|
|||
Shares
from warrants issued in the reorganization
|
8,131,677
|
|||
Shares
issued since the reorganization, all with restrictive
legends
|
1,780,000
|
The elimination of monetary liability
against Optex Systems Holdings’ directors, officers and employees under Delaware
law and the existence of indemnification rights to Optex Systems Holdings’
directors, officers and employees may result in substantial expenditures by
Optex Systems Holdings and may discourage lawsuits against Optex Systems
Holdings’ directors, officers and employees.
Optex
Systems Holdings provides indemnification to its directors and officers to the
extent provided by Delaware law. The foregoing indemnification obligation could
result in Optex Systems Holdings incurring substantial expenditures to cover the
cost of settlement or damage awards against directors and officers, which Optex
Systems Holdings may be unable to recoup. These provisions and resultant costs
may also discourage Optex Systems Holdings from bringing a lawsuit against
directors and officers for breaches of their fiduciary duties and may similarly
discourage the filing of derivative litigation by Optex Systems Holdings’
stockholders against Optex Systems Holdings’ directors and officers even though
such actions, if successful, might otherwise benefit Optex Systems Holdings and
its stockholders.
Item
2 Properties
We are
located in Richardson, TX in a 49,000 square foot facility, and as of August 30,
2010, we had 88 full time equivalent employees. We operate with a single shift,
and capacity could be expanded by adding a second shift. Our proprietary
processes and methodologies provide barriers to entry by other competing
suppliers. In many cases, we are the sole source provider or one of only two
providers of a product. We have capabilities which include machining,
bonding, painting, tracking, engraving and assembly and can perform both optical
and environmental testing in-house.
We
lease our facility. Effective as of January 4, 2010, Optex Systems
Holdings, Inc. renewed its Richardson, TX lease. Under the terms of the
amendment:
|
¨
|
The lease term is extended
until July 31, 2015.
|
|
¨
|
The base rent is as follows:
until 7/31/2010, $0.00 per square foot, from 8/1/2010 – 7/31/2013, $4.70
per square foot and from 8/1/2013 – 7/31/2015, $4.95 per square
foot.
|
|
¨
|
A $195,352.00 improvement
allowance is included.
|
|
¨
|
For the first two years of the
extended term, the landlord has granted the option to take over additional
space at similar terms as in the
amendment.
|
Item
3 Legal Proceedings
None.
Item
4 Submission of Matters to a Vote of Security Holders
None.
PART
II
Market
Information
Effective
with the start of trading on May 1, 2009, our stock received a ticker symbol
change from “SSTX” to “OPXS” from FINRA and commenced trading under the new
symbol on the OTC Bulletin Board. Trading in our stock has
historically been sporadic, trading volumes have been low, and the market price
has been volatile.
25
The
following table shows the range of high and low prices for our common stock as
reported by the OTC Bulletin Board for each quarter since the fourth quarter of
2007, as adjusted. All prices through the date of the reorganization are
as reported on Sustut’s periodic filings, as adjusted for the 2.5:1 forward
split of Sustut's common stock authorized on February 27, 2009. All prices
since the reorganization are derived from market information as to OTCBB prices
as reported through the AOL Finance look up system. The quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.
Period
|
High
|
Low
|
||||||
Commencement
of Trading through Fourth Quarter 2007
|
$ | 0.50 | $ | 0.50 | ||||
First
Quarter 2008
|
$ | 0.50 | $ | 0.50 | ||||
Second
Quarter 2008
|
$ | 0.50 | $ | 0.50 | ||||
Third
Quarter 2008
|
$ | 0.50 | $ | 0.50 | ||||
Fourth
Quarter 2008
|
$ | 0.50 | $ | 0.50 | ||||
First
Quarter 2009
|
$ | 0.50 | $ | 0.50 | ||||
Second
Quarter 2009
|
$ | 0.50 | $ | 0.14 | ||||
Third
Quarter 2009
|
$ | 0.45 | $ | 0.08 | ||||
Fourth
Quarter 2009
|
$ | 0.50 | $ | 0.17 |
On January
7, 2010, the sale price for our common stock as reported on the OTCBB was $0.13
per share.
Securities
outstanding and holders of record
On
January 8, 2010, there were approximately 86 record holders of our common
stock and 139,444,940 shares of our common stock issued and
outstanding.
Dividend
Policy
We have
not paid and do not expect to pay dividends on our common stock. Any future
decision to pay dividends on our common stock will be at the discretion of our
board and will depend upon, among other factors, our results of operations,
financial condition, capital requirements and contractual
restrictions.
Information
respecting equity compensation plans
Summary Equity Compensation
Plan Information
Optex
Systems Holdings had no equity compensation plans as of September 30, 2008 and
adopted its 2009 Stock Option Plan on March 26, 2009.
Item
7 Management’s Discussion and Analysis of Financial Condition and Results
of Operations
The
following discussion should be read in conjunction with the consolidated
financial statements and the related notes that are set forth in our financial
statements elsewhere in this annual report.
This
management's discussion and analysis reflects information known to management as
of September 27, 2009. This MD&A is intended to supplement and complement
our audited financial statements and notes thereto for the year ended September
28, 2008 (Predecessor), 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 a non-GAAP measure is
used in this MD&A, it is clearly identified as a non-GAAP measures and
reconciled to the most closely corresponding GAAP measure.
26
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.
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 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).
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.
27
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 on 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 |
As a
result of the purchase of the assets 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 the 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) which 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).
28
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 Optex Systems Inc.
(Delaware)’s own operating cash flow.
Plan
of Operation
Through a
private placement offering completed prior to 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 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 |
While we
have no current plans to acquire additional product lines or other
businesses, we continue to explore complementary manufacturing
opportunities that could utilize our expertise, as those opportunities are
presented. Additionally, we desire to expand our existing
product catalog by offering to be determined defense protection products which
would derive benefit from our core competencies.
Results
of Operations
We
have experienced substantial improvement in our EBITDA as compared to our prior
year performance. We have increased our EBITDA by $4.3 million in the year
ending September 27, 2009 as compared to the year ending September 28, 2008
(Predecessor), primarily as a result of increased revenue, higher gross margins
and lower general and administrative costs. We expect this trend to
continue over the next 12 months as our product mix shifts towards more
profitable programs and we continue to pursue cost reductions in our production
and general and administrative areas.
The
table below summarizes our quarterly and full year 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 also consider 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.
September
29, 2008 through September 27, 2009
|
Predecessor
- Fiscal Year 2008
|
|||||||||||||||||||||||||||||||||||||||||||
Predecessor - Qtr 1
(Sept 29, 2008
through Oct 14,
2008)
|
Successor- Qtr 1
(Oct 15, 2008
through Dec 27,
2008)
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
12 months ended
September 27, 2009
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
12 months ended
September 28, 2008
|
||||||||||||||||||||||||||||||||||
Net
Loss Applicable to Common Shareholders - GAAP
|
$ | (0.1 | ) | $ | 0.1 | $ | (0.3 | ) | $ | (0.3 | ) | $ | 0.4 | $ | (0.2 | ) | $ | (0.7 | ) | $ | (0.7 | ) | $ | (0.2 | ) | $ | (3.2 | ) | $ | (4.8 | ) | |||||||||||||
Add:
|
||||||||||||||||||||||||||||||||||||||||||||
Interest
Expense
|
— | 0.1 | 0.1 | — | — | 0.2 | 0.1 | 0.1 | — | — | 0.2 | |||||||||||||||||||||||||||||||||
Preferred
Stock Dividend
|
— | — | — | — | 0.2 | 0.2 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Federal
Income Taxes (Benefit)
|
— | 0.2 | 0.1 | 0.1 | (0.7 | ) | (0.3 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||||
Goodwill
Impairment
|
— | — | — | — | — | — | — | — | — | 1.6 | 1.6 | |||||||||||||||||||||||||||||||||
Depreciation
& Amortization
|
— | 0.6 | 0.5 | 0.5 | 0.6 | 2.2 | 0.3 | 0.2 | 0.1 | 0.2 | 0.8 | |||||||||||||||||||||||||||||||||
EBITDA
- Non GAAP
|
$ | (0.1 | ) | $ | 1.0 | $ | 0.4 | $ | 0.3 | $ | 0.5 | $ | 2.1 | $ | (0.3 | ) | $ | (0.4 | ) | $ | (0.1 | ) | $ | (1.4 | ) | $ | (2.2 | ) |
29
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. During the year
ended September 27, 2009, our revenues on legacy periscope programs increased
significantly over the prior year while margins significantly decreased.
The legacy 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 2009, we recognized revenue of $5.4 million
from these legacy periscope programs, with a remaining backlog of $1.2 million
which we expect to ship in the first three quarters of 2010. We expect our
product margins on periscopes to increase over the next twelve months as the
legacy programs are completed and are 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 Tank-automotive and Armaments
Command. If all government forecasted delivery orders against this
Indefinite Delivery/Indefinite Quantity contract are awarded and if we were to
share equally with the other supplier in the awarded releases, the total value
of the contract to us could be valued at approximately $7.5 million over the
next three years. In June 2009, we received an additional $3.4
million dollar award from General Dynamics Land Systems Division and in
September 2009, an additional $1.9 million award to provide product
beginning with delivery starting in 2011 at the completion of our current
production contract. Subsequent to the 2009 fiscal year end, we have booked
additional orders of $4.4 million from several customers, primarily in our
periscopes product line with deliveries covering 2010 into 2011.
As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), our amortizable intangible assets increased significantly
over the prior year. The non cash amortization of intangible assets has
negatively impacted our gross margin for 2009 as compared to 2008. In
2009, our intangible amortization expense was $2 million and it is expected to
decline to $1 million in 2010.
Backlog
as of September 27, 2009 was $26.5 million as compared to a backlog of $44.1
million as of September 28, 2008. The following table depicts the current
expected delivery by quarter of all contracts awarded as of September 27,
2009.
|
2010
|
2011
|
2012
|
2013
|
||||||||||||||||||||||||||||||||||||||||||||||||
Program Backlog (millions)
|
Qtr
1
|
Qtr
2
|
Qtr
3
|
Qtr
4
|
Qtr
1
|
Qtr
2
|
Qtr
3
|
Qtr
4
|
Qtr
1
|
Qtr
2
|
Qtr
3
|
Qtr
4
|
Qtr
1
|
|||||||||||||||||||||||||||||||||||||||
Howitzer
Programs
|
$ | 0.6 | $ | 1.7 | $ | 1.9 | $ | 2.6 | $ | 1.7 | $ | 0.1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
Periscope
Programs
|
2.1 | 2.1 | 2.0 | 1.3 | 1.3 | 0.6 | 0.7 | 0.5 | 0.5 | 0.9 | 0.8 | — | — | |||||||||||||||||||||||||||||||||||||||
Sighting
Systems
|
0.4 | 0.2 | 0.1 | 0.1 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
All
Other
|
1.7 | 1.1 | 0.4 | 0.2 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||||||||||||||||||||
Total
|
$ | 4.8 | $ | 5.1 | $ | 4.4 | $ | 4.2 | $ | 3.1 | $ | 0.8 | $ | 0.8 | $ | 0.6 | $ | 0.6 | $ | 1.0 | $ | 0.9 | $ | 0.1 | $ | 0.1 |
Virtually
all 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.
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.
30
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,
the Government may require us to transfer title and deliver to the
Government any completed supplies, partially completed supplies and materials,
parts, tools, dies, jigs, fixtures, plans, drawings, information, and contract
rights that we have specifically produced or acquired for the
terminated portion of this contract. The Government shall pay contract price for
completed supplies delivered and accepted, and we and the Government would
negotiate an agreed upon amount of payment for manufacturing materials delivered
and accepted and for the protection and preservation of the property. Failure to
agree on an amount for manufacturing materials is subject to the Federal
Acquisition Regulation Disputes clause 52.233-1.
In some
cases, we may receive an “undefinitized” (i.e., price, specifications and terms
are not agreed upon before performance commenced) contract award for contracts
that exceed the $650,000, which is the federal government simplified acquisition
threshold. These contracts are considered firm contracts at an
undefinitized, but not to exceed specified limits threshold. Cost
Accounting Standards Board covered contracts are subject to the Truth in
Negotiations Act disclosure requirements and downward only price
negotiation. As of September 27, 2009, none of our outstanding backlog
fell under this criterion.
For
the 12 months ended September 27, 2009(combined Successor Predecessor) as
compared to the 12 months ended September 28, 2008
(Predecessor)
The
Revenue, Expenses and Income for the fourteen day period of Optex Systems, Inc.
(Texas) prior to the acquisition by Optex Systems, Inc. (Delaware) are
summarized below (in millions).
Optex Systems – Texas
|
||||
(Predecessor)
|
||||
Revenue
|
$
|
0.9
|
||
Cost
of Sales
|
0.7
|
|||
Gross
Margin
|
0.2
|
|||
General
& Administrative
|
0.1
|
|||
Operating
Income
|
$
|
0.1
|
||
Net
Income
|
$
|
0.1
|
The
table below summarizes our quarterly and full year 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 also consider 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.
September 29, 2008 through September 27, 2009
|
Predecessor - Fiscal Year 2008
|
|||||||||||||||||||||||||||||||||||||||||||
Predecessor - Qtr 1
(Sept 29, 2008
through Oct 14,
2008)
|
Successor - Qtr 1
(Oct 15, 2008
through Dec 27,
2008)
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
12 months ended
September 27, 2009
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
12 months ended
September 28, 2008
|
||||||||||||||||||||||||||||||||||
Net
Loss Applicable to Common Shareholders
|
$ | (0.1 | ) | $ | 0.1 | $ | (0.3 | ) | $ | (0.3 | ) | $ | 0.4 | $ | (0.2 | ) | $ | (0.7 | ) | $ | (0.7 | ) | $ | (0.2 | ) | $ | (3.2 | ) | $ | (4.8 | ) | |||||||||||||
Add:
|
||||||||||||||||||||||||||||||||||||||||||||
Interest
Expense
|
- | 0.1 | 0.1 | - | - | 0.2 | 0.1 | 0.1 | - | - | 0.2 | |||||||||||||||||||||||||||||||||
Preferred
Stock Dividend
|
- | - | - | - | 0.2 | 0.2 | - | - | - | - | ||||||||||||||||||||||||||||||||||
Federal
Income Taxes (Benefit)
|
- | 0.2 | 0.1 | 0.1 | (0.7 | ) | (0.3 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||
Goodwill
Impairment
|
- | - | - | - | - | - | - | - | - | 1.6 | 1.6 | |||||||||||||||||||||||||||||||||
Depreciation
& Amortization
|
- | 0.6 | 0.5 | 0.5 | 0.6 | 2.2 | 0.3 | 0.2 | 0.1 | 0.2 | 0.8 | |||||||||||||||||||||||||||||||||
EBITDA
- Non GAAP
|
$ | (0.1 | ) | $ | 1.0 | $ | 0.4 | $ | 0.3 | $ | 0.5 | $ | 2.1 | $ | (0.3 | ) | $ | (0.4 | ) | $ | (0.1 | ) | $ | (1.4 | ) | $ | (2.2 | ) |
31
We
have experienced substantial improvement in our EBITDA during fiscal year 2009
as compared to our prior fiscal year performance. We have increased our
EBITDA by $4.3 million in the year ending September 27, 2009 as compared to the
year ending September 28, 2008 (Predecessor), primarily as a result of increased
revenue, higher gross margins and lower general and administrative costs.
As of the end of the 2009 fiscal year, we had expected this trend to
continue over the next 12 months as our product mix shifts towards more
profitable programs and we continue to pursue cost reductions 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. During the year
ended September 27, 2009, our revenues on legacy periscope programs increased
significantly over the prior year while margins significantly decreased.
The legacy 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
gross margin of zero. During 2009, we recognized revenue of $5.4 million
from these legacy periscope programs, with a remaining backlog of $1.2 million
which we expect to ship in the first three quarters of 2010. We expect our
gross margins on periscopes to increase in fiscal year 2010 as the legacy
programs are completed and are replaced with new awards.
We
have aggressively pursued additional, potentially higher margin periscope
business from various customers, 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 Tank-automotive
and Armaments Command. If all government forecasted delivery orders
against this Indefinite Delivery/Indefinite Quantity contract are awarded and if
we were to share equally with the other supplier in the awarded releases, the
total value of the contract to us could be valued at approximately $7.5 million
over the next three years. In June 2009, we received an additional
$3.4 million dollar award from General Dynamics Land Systems Division and
in September 2009, an additional $1.9 million award to provide product
beginning with delivery starting in 2011 at the completion of our current
production contract. Subsequent to the 2009 fiscal year end, we have booked
additional orders of $4.4 million from several customers, primarily in our
periscopes product line with deliveries occurring during 2010 and
2011.
As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), our amortizable intangible assets increased significantly
over the prior year. The non cash amortization of intangible assets has
negatively impacted our gross margin for 2009 as compared to 2008. In
2009, our intangible amortization expense was $2 million, and it is expected to
decline to $1 million in 2010.
Backlog
as of September 27, 2009 was $26.5 million as compared to a backlog of $44.1
million as of September 28, 2008. The following table depicts the current
expected delivery by quarter of all contracts awarded as of September 27,
2009.
|
2010
|
2011
|
2012
|
2013
|
||||||||||||||||||||||||||||||||||||||||||||||||
Program Backlog
(millions)
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
Qtr 1
|
|||||||||||||||||||||||||||||||||||||||
Howitzer
Programs
|
$ | 0.6 | $ | 1.7 | $ | 1.9 | $ | 2.6 | $ | 1.7 | $ | 0.1 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||
Periscope
Programs
|
2.1 | 2.1 | 2.0 | 1.3 | 1.3 | 0.6 | 0.7 | 0.5 | 0.5 | 0.9 | 0.8 | - | - | |||||||||||||||||||||||||||||||||||||||
Sighting
Systems
|
0.4 | 0.2 | 0.1 | 0.1 | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
All
Other
|
1.7 | 1.1 | 0.4 | 0.2 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||||||||||||||||||||
Total
|
$ | 4.8 | $ | 5.1 | $ | 4.4 | $ | 4.2 | $ | 3.1 | $ | 0.8 | $ | 0.8 | $ | 0.6 | $ | 0.6 | $ | 1.0 | $ | 0.9 | $ | 0.1 | $ | 0.1 |
Virtually
all 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.
By way
of background, the Federal Acquisition Regulation is the principal set of rules
and 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.
32
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, the
government may require us to transfer title and deliver to the government
any completed supplies, partially completed supplies and materials, parts,
tools, dies, jigs, fixtures, plans, drawings, information, and contract rights
that we have specifically produced or acquired for the terminated
portion of this contract. The government shall pay contract price for completed
supplies delivered and accepted, and we and the government would negotiate
an agreed upon amount of payment for manufacturing materials delivered and
accepted and for the protection and preservation of the property. Failure to
agree on an amount for manufacturing materials is subject to the Federal
Acquisition Regulation Disputes clause 52.233-1.
In
some cases, we may receive an “undefinitized” (i.e., price, specifications and
terms are not agreed upon before performance commenced) contract award for
contracts that exceed the $650,000, which is the federal government simplified
acquisition threshold. These contracts are considered firm contracts at an
undefinitized, but not to exceed specified limits threshold. Cost
Accounting Standards Board covered contracts are subject to the Truth in
Negotiations Act disclosure requirements and downward only price
negotiation. As of September 27, 2009, none of our outstanding backlog
fell under this criterion. Our experience has been that the historically
negotiated price differentials have been minimal (5% or less) and accordingly,
we do not anticipate any significant downward adjustments on these booked
orders.
Predecessor
period of September 29, 2008 through October 14, 2008 and Successor period of
October 15, 2008 through September 27, 2009 compared to the Predecessor twelve
month period ended September 28, 2008
Revenues: For the year ended
September 27, 2009 (Combined) revenues increased by 37.8% over the respective
prior period (Predecessor) per the table below:
|
Predecessor
|
Successor
|
Combined
|
Predecessor
|
||||||||||||||||
|
September 29,
2008 through
October 14,
2008
|
October 15,
2008
through
September 27,
2009
|
12 mos.
ended
September 27,
2009
|
12 mos. ended
September 28, 2008
|
Change
|
|||||||||||||||
Revenue
|
$ | 0.9 | $ | 26.7 | $ | 27.6 | $ | 20.0 | $ | 7.6 | ||||||||||
Percent
increase
|
37.8 | % |
The
table below details the revenue changes by product line for the year ended
September 27, 2009 as compared to the year ended September 28,
2008.
Product Line
|
Year ended
9/27/2009
(Combined)
|
Year ended
9/28/2008
(Predecessor)
|
Change
|
|||||||||
Howitzer
Programs
|
$ | 2.6 | $ | 2.4 | 0.2 | |||||||
Periscope
Programs
|
$ | 14.9 | $ | 9.6 | 5.3 | |||||||
Sighting
Systems
|
$ | 4.7 | $ | 4.0 | 0.7 | |||||||
All
Other
|
$ | 5.4 | $ | 4.0 | 1.4 | |||||||
Total
|
$ | 27.6 | $ | 20.0 | 7.6 | |||||||
Percent
increase
|
37.8 | % |
33
Revenues
increased significantly in 2009 over 2008, with the most significant increases
experienced in our periscope line. Significant increases in sales of
periscope product lines is attributable to increased demand by General Dynamics
Land Systems Division and U.S. government accelerated schedules, whereby, in
consideration for increased pricing of approximately $1 million, Optex Systems,
Inc. (Delaware) agreed to accelerate the contract delivery schedule and deliver
at higher volumes to support increased military service needs. Of the total
periscope revenue increase of $5.3 million, approximately $4.5 million or 85% is
attributable to increased production volume, as compared to $0.8 million or 15%
due to higher pricing. The ramp up included the addition of direct labor
headcount of approximately 8 employees, combined with dual sourcing of material
on several key components needed to meet the increased production
requirements. During the year ended September 27, 2009, Optex Systems,
Inc. (Delaware) had delivered approximately 95% of the accelerated units, with
the remaining units to be delivered through the first quarter of 2010. In
the last fiscal quarter of 2009, Optex Systems Holdings received several
additional orders of periscopes from two customers with delivery requirements
starting in the fourth fiscal quarter of 2009 and continuing throughout
2010. Based upon our current backlog demand and a recent decline in new
federal government orders deliverable in the remaining quarter of fiscal 2010,
we expect the periscope product line deliveries to continue to decline an
additional 8% to 17% in the second half of fiscal year 2010 as compared to the
same period in 2009.
Howitzer
program revenue increased $0.2 million for the 2009 fiscal year over the 2008
fiscal year. During the third and fourth fiscal quarters of 2009, we
worked aggressively with the U.S. [Department of Defense] to resolve technical
field issues related to two of our Howitzer programs and completed the First
Article Testing and Acceptance requirements on a third, for which government
acceptance approval was obtained on August 25, 2009. Technical
issues experienced on the Howitzer product lines related to problems with the
government-provided technical data and drawing package affecting the
manufacturability of the products and the functionality of the product during
field use and testing. These issues were resolved through Optex initiated
engineering change proposals and customer changes to the statement of
work. As of this date, the issues have been resolved and the contract
schedules have been modified accordingly to implement the required changes. With
most of the technical and start up issues behind us on these programs, we expect
to increase program deliveries during 2010.
Sighting
systems revenues increased $0.7 million over the prior year due to the delivery
of higher quantities of U.S. government and General Dynamics Land Systems
Division sighting systems in the current year over prior year deliveries, offset
by a reduction in shipments to Textron related to a program that ended in
2008.
Increases
in the other products of 35% or $1.4 million for the year ending September 27,
2009 resulted from increased foreign military sales of azimuth mirror assemblies
of $1.0 million combined with increased revenues in muzzle reference systems of
$0.7 million for several U.S. customers, which were offset by lower revenues in
binoculars and various spare order shipments for various
customers.
Currently
we are experiencing losses on our Howitzer programs as a result of unanticipated
manufacturing costs due to design and technical data package issues impacting
the product manufacturability. These issues have resulted in increased
labor and material costs due to higher scrap and extensive engineering costs
incurred during the start up phase of the programs. In addition some of
our older “legacy” periscope programs are experiencing losses due to significant
material price increases since the initial 5 year contract award in 2004.
As of September 27, 2009, Optex Systems Holdings has reserved $1.2 million in
contract loss reserves on Howitzer programs and $0.1 million on periscope
programs for a total of $1.3 million in contract loss reserves. The total
remaining backlog on these loss programs as of September 27, 2009 is $9.7
million. We are expecting to ship $3.6 million of the existing loss
contract backlog in fiscal 2010, with the remaining $2.3 million expected to
ship in early fiscal year 2011. As these losses have been previously
recognized to the extent identified, future margins on these revenues are
expected to be zero.
34
As of
the fiscal year end 2009, we did not experience any negative impact due to
changes in incremental funding commitments by federal agencies. There has
been one delay in the award of the second delivery order for the U.S. government
periscope contract, however as the contract is a dual award between Optex
Systems Holdings and a competitor with no volume guaranteed to any
single-source, we have not expended any resources in support of the yet to be
awarded portion of the contract. We are anticipating a government award on
the contract in 2010. However, delay of the government procurement has not
negatively impacted Optex Systems Holdings’ revenue in 2009, and due to other
increased periscope orders from non U.S. government contracts deliverable in
2010, a delay in the award on the prime government contract should not
materially affect Optex Systems Holdings in the near future.
Cost of Goods Sold. During
the Predecessor period from September 29, 2008 through October 14, 2008, we
recorded cost of goods sold of $0.7 million and during the Successor period from
October 15 through September 27, 2009 we recorded cost of goods sold of $24.1
million for a total cost of goods sold during fiscal 2009 of $24.8 million as
compared to $18.2 million during fiscal 2008, an increase of $6.5 million or
35.7%. This increase in cost of goods sold was primarily associated with
increased revenue, primarily on our periscope programs in support of higher
backlog and accelerated delivery schedules, and increased intangible
amortization resulting from the acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor) on October 14, 2008. The gross margin during
the Predecessor period beginning September 29, 2008 through October 14, 2008 was
$0.1 million and the gross margin for the Successor period beginning October 15,
2008 through September 27, 2009 was $2.7 million for a total of $2.8 million or
10.1% of revenues as compared to a gross margin of 9.5% for the fiscal year
ended September 28, 2008. Product gross margins were down 0.7% to 14.5% for the
annual period ended September 27, 2009 versus 15.2% for the fiscal year ended
September 28, 2008 due to a shift in revenue mix toward less profitable
contracts for certain programs, combined with increased labor related to the
reallocation of costs associated with 10 employees shifted from general and
administrative costs to manufacturing overhead in fiscal 2009. Intangible
amortization allocable to cost of goods sold increased $1.3 million to $1.7
million in fiscal 2009 versus $0.4 million in fiscal 2008. The increased
intangible amortization costs were offset by decreased warranty costs and
physical inventory valuation reserves of $1.2 million, resulting in an overall
decrease in cost of goods sold of 0.6% of revenues in the annual period ended
September 27, 2009 as compared to the period ended September 28,
2008.
G&A Expenses. During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
operating expense of $0.1 million and during the period from October 15, 2008
through September 27, 2009, we recorded operating expenses of $2.8 million for a
total of $2.9 million for the fiscal year ended September 27, 2009 as opposed to
$6.5 million during the fiscal year ended September 28, 2008, a decrease of
($3.7) million or 56.9%. The components of the significant net decrease in
general and administrative expenses in the fiscal year ended September 27, 2009
as compared to the fiscal year ended September 28, 2008 are outlined
below.
|
¨
|
Elimination of corporate cost
allocations from Irvine Sensors Corporation of ($2.1) million and the
Irvine Sensors employee stock bonus plan of ($0.4) million as a result of
the ownership change.
|
|
¨
|
Increased costs of $0.5
million in legal, accounting fees, board of director fees, and investor
relations.
|
|
¨
|
Lower salaries, wages and
employee related costs due to the reclassification of 10 purchasing and
planning employees from general and administrative to manufacturing
overhead included in cost of sales of ($0.3) million. This decrease was
partially offset by the expense associated with the implementation of a
management incentive bonus plan in 2009 of $0.1 million for a net change
of ($0.2) million to general and administrative salaries, wages and
related employee
expenses.
|
|
¨
|
Increased amortization of
intangible assets of $0.2 million as a result of the ownership change as
of October 14, 2008.
|
|
¨
|
2008 goodwill impairment of
($1.6) million incurred in 2008 versus no impairment in
2009.
|
|
¨
|
Reductions of $(0.1) million
in other general & administrative
spending.
|
35
Income (Loss) from
Operations. During the Predecessor period from September 29, 2008 through
October 14, 2008 we recorded income from operations of $0.07 million and for the
Successor period from October 15, 2008 through September 27, 2009, we recorded a
loss from operations of $(0.2) million for a total net loss of $(0.13) million
during the year ended September 27, 2009 as opposed to a loss from operations of
$(4.7) million during the year ended September 28, 2008, an improvement of $4.57
million. This improvement was primarily due to increased sales revenue for the
period ended September 27, 2009, combined with reduced general and
administrative expenses driven by the elimination of Irvine Sensors’ corporate
costs pushed down to us in the fiscal year ended September 28, 2008. The current
year loss from operations also includes an increase of $1.5 million of non cash
amortization of intangible assets to $2.1 million total for 2009 as a result of
the October 14, 2008 acquisition transaction as opposed to $0.6 million
intangible amortization incurred in the prior year.
Net Income (Loss) applicable to
common shareholders. During the Predecessor period from September 29,
2008 through October 14, 2008 we recorded net income of $0.1 million. For the
period beginning October 15, 2008 through September 27, 2009, we recorded a net
loss of $(0.3) million for a total net loss of $(0.2) million during the year
ended September 27, 2009, as compared to $(4.8) million for the year ended
September 28, 2008, an improvement of $4.6 million or 95.8%. This decrease
in our net loss was principally the result of reduced operating expenses related
to the elimination of corporate cost allocations from Irvine Sensors
Corporations, since the successor operating as a stand-alone entity did not
incur these costs subsequent to the year ended September 28, 2008, combined with
increased revenue for the period ending September 27, 2009 offset by increased
interest and preferred stock dividends in fiscal 2009 over fiscal 2008.
The federal income tax benefit increased by $0.3 million over the prior
year as a result of book-to-tax timing differences attributable to intangible
amortization and changes in contract loss reserve balances in 2009. The
intangible amortization expense is amortized over five years for book purposes
and is deductible over 15 years for income tax purposes. In 2008, there was no
federal income tax expense due to the loss from operations.
Predecessor
period of September 29, 2008 through October 14, 2008 and Successor period of
October 15, 2008 through September 27, 2009 Compared to the Predecessor twelve
month period ended September 28, 2008
Revenues: For the year ended
September 27, 2009 (Combined) revenues increased by 37.8% over the respective
prior period (Predecessor) per the table below:
Predecessor
|
Successor
|
Combined
|
Predecessor
|
|||||||||||||||||
September 29,
2008 through
October 14,
2008
|
October 15,
2008
through
September 27,
2009
|
12 mos.
ended
September 27,
2009
|
12 mos. ended
September 28,
2008
|
Change
|
||||||||||||||||
Revenue
|
$ | 0.9 | $ | 26.7 | $ | 27.6 | $ | 20.0 | $ | 7.6 | ||||||||||
Percent
increase
|
37.8 | % |
The table
below details the revenue changes by product line for the year ended September
27, 2009 as compared to the year ended September 28, 2008.
Product Line
|
Year ended
9/27/2009
(Combined)
|
Year mos ended
9/28/2008
(Predecessor)
|
Change
|
|||||||||
Howitzer
Programs
|
2.6 | 2.4 | 0.2 | |||||||||
Periscope
Programs
|
14.9 | 9.6 | 5.3 | |||||||||
Sighting
Systems
|
4.7 | 4.0 | 0.7 | |||||||||
All
Other
|
5.4 | 4.0 | 1.4 | |||||||||
Total
|
27.6 | 20.0 | 7.6 | |||||||||
Percent
increase
|
37.8 | % |
36
Revenues
increased significantly in 2009 over 2008, with the most significant increases
experienced in our Periscope line. Significant increases in sales of
periscope product lines is attributable to increased demand by General Dynamics
Land Systems Division and U.S. government accelerated schedules, whereby, in
consideration for increased pricing of approximately $1 million, Optex Systems,
Inc. (Delaware) agreed to accelerate the contract delivery schedule and deliver
at higher volumes to support increased military service needs. Of the total
periscope revenue increase of $5.3 million, approximately $4.5 million or 85% is
attributable to increased production volume, as compared to $0.8 million or 15%
due to higher pricing. The ramp up included the addition of direct labor
headcount of approximately 8 employees, combined with dual sourcing of material
on several key components needed to meet the increased production
requirements. During the year ended September 27, 2009, Optex Systems,
Inc. (Delaware) had delivered approximately 95% of the accelerated units, with
the remaining units to be delivered through the first quarter of 2010. In
the last quarter of 2009, Optex Systems Holdings received several additional
orders of periscopes from two customers with delivery requirements starting in
the fourth quarter of 2009 and continuing throughout 2010. Based on our
current backlog demand, we expect the revenue on periscopes to remain strong in
2010 as we continue to quote and receive awards for additional periscopes from
multiple customers.
Howitzer
program revenue increased $0.2 million for the 2009 fiscal year over the 2008
fiscal year. During the third and fourth fiscal quarters of 2009, we
worked aggressively with the U.S. government to resolve technical field issues
related to two of our Howitzer programs and completed the First Article Testing
and Acceptance requirements on a third, for which government acceptance approval
was obtained on August 25, 2009. Technical issues experienced on the
Howitzer product lines related to problems with the government-provided
technical data and drawing package affecting the manufacturability of the
products and the functionality of the product during field use and testing.
These issues were resolved through Optex initiated engineering change proposals
and customer changes to the statement of work. As of this date, the issues
have been resolved and the contract schedules have been modified accordingly to
implement the required changes. With most of the technical and start up issues
behind us on these programs, we expect to increase program deliveries during
early 2010.
Sighting
Systems revenues increased $0.7 million over the prior year due to the delivery
of higher quantities of U.S. government and General Dynamics Land Systems
Division sighting systems in the current year over prior year deliveries, offset
by a reduction in shipments to Textron related to a program that ended in
2008.
Increases
in the other products of 35% or $1.4 million for the year ending September 27,
2009 resulted from increased foreign military sales of azimuth mirror assemblies
of $1.0 million combined with increased revenues in muzzle reference systems of
$0.7 million for several U.S. customers, which were offset by lower revenues in
binoculars and various spare order shipments for various customers.
Currently
we are experiencing losses on our Howitzer programs as a result of unanticipated
manufacturing costs due to design and technical data package issues impacting
the product manufacturability. These issues have resulted in increased
labor and material costs due to higher scrap and extensive engineering costs
incurred during the start up phase of the programs. In addition some of
our older “legacy” periscope programs are experiencing losses due to significant
material price increases since the initial 5 year contract award in 2004.
As of September 27, 2009, Optex Systems Holdings has reserved $1.2 million in
contract loss reserves on Howitzer programs and $0.1 million on periscope
programs for a total of $1.3 million in contract loss reserves. The total
remaining backlog on these loss programs as of September 27, 2009 is $9.7
million. We are expecting to ship $7.9 million of the existing loss
contract backlog in 2010, with the remaining $1.8 million expected to ship in
the first quarter of 2011. As these losses have been previously recognized
to the extent identified, future margins on these revenues are expected to be
zero.
Currently
we are not experiencing any negative impact due to changes in incremental
funding commitments by federal agencies. There has been one delay in the
award of the second delivery order for the U.S. government periscope contract,
however as the contract is a dual award between Optex Systems Holdings and a
competitor with no volume guaranteed to any single-source, we have not expended
any resources in support of the yet to be awarded portion of the contract.
We are anticipating a government award on the contract in the second quarter of
2010. However, delay of the government procurement has not negatively impacted
Optex Systems Holdings ‘revenue in 2009, and due to other increased periscope
orders from non U.S. government contracts deliverable in 2010, a delay in
the award on the prime government contract should not materially affect Optex
Systems Holdings in the near future.
37
Cost of Goods Sold. During
the Predecessor period from September 29, 2008 through October 14, 2008, we
recorded cost of goods sold of $0.7 million and during the Successor period from
October 15 through September 27, 2009 we recorded cost of goods sold of $24.1
million for a total cost of goods sold during fiscal 2009 of $24.8 million as
compared to $18.2 million during fiscal 2008, an increase of $6.5 million or
35.7%. This increase in cost of goods sold was primarily associated with
increased revenue, primarily on our periscope programs in support of higher
backlog and accelerated delivery schedules, and increased intangible
amortization resulting from the acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor) on October 14, 2008. The gross margin during
the Predecessor period beginning September 29, 2008 through October 14, 2008 was
$0.1 million and the gross margin for the Successor period beginning October 15,
2008 through September 27, 2009 was $2.7 million for a total of $2.8 million or
10.1% of revenues as compared to a gross margin of 9.5% for the fiscal year
ended September 28, 2008. Product gross margins were down 0.7% to 14.5% for the
period ended September 27, 2009 versus 15.2% for the fiscal year ended September
28, 2008 due to a shift in revenue mix toward less profitable contracts for
certain programs, combined with increased labor related to the reallocation of
costs associated with 10 employees shifted from general and administrative costs
to manufacturing overhead in fiscal 2009. Intangible amortization
allocable to cost of goods sold increased $1.3 million to $1.7 million in fiscal
2009 versus $0.4 million in fiscal 2008. The increased intangible
amortization costs were offset by decreased warranty costs and physical
inventory valuation reserves of $1.2 million, resulting in an overall decrease
in cost of goods sold of 0.6% of revenues in the period ended September 27, 2009
as compared to the period ended September 28, 2008.
G&A Expenses. During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
operating expense of $0.1 million and during the period from October 15, 2008
through September 27, 2009, we recorded operating expenses of $2.8 million for a
total of $2.9 million for the fiscal year ended September 27, 2009 as opposed to
$6.5 million during the fiscal year ended September 28, 2008, a decrease of
($3.7) million or 56.9%. The components of the significant net decrease in
general and administrative expenses in the fiscal year ended September 27, 2009
as compared to the fiscal year ended September 28, 2008 are outlined
below.
|
·
|
Elimination of corporate cost
allocations from Irvine Sensors Corporation of ($2.1) million and the
Irvine Sensors employee stock bonus plan of ($0.4) million as a result of
the ownership change.
|
|
·
|
Increased costs of $0.5 million
in legal, accounting fees, board of director fees, and investor
relations
|
|
·
|
Lower salaries, wages and
employee related costs due to the reclassification of 10 purchasing and
planning employees from general and administrative to manufacturing
overhead included in cost of sales of ($0.3) million. This decrease
was partially offset by the expense associated with the implementation of
a management incentive bonus plan in 2009 of $0.1 million for a net change
of ($0.2) million to general and administrative salaries, wages and
related employee expenses.
|
|
·
|
Increased amortization of
intangible assets of $0.2 million as a result of the ownership change as
of October 14, 2008.
|
|
·
|
2008 goodwill impairment of
($1.6) million incurred in 2008 versus no impairment in
2009.
|
|
·
|
Reductions of $(0.1) million in
other general & administrative
spending.
|
Income (Loss) from
Operations. During the Predecessor period from September 29, 2008 through
October 14, 2008 we recorded income from operations of $0.07 million and for the
Successor period from October 15, 2008 through September 27, 2009, we recorded a
loss from operations of $(0.2) million for a total net loss of $(0.13) million
during the year ended September 27, 2009 as opposed to a loss from operations of
$(4.7) million during the year ended September 28, 2008, an improvement of $4.57
million. This improvement was primarily due to increased sales revenue for the
period ended September 27, 2009, combined with reduced general and
administrative expenses driven by the elimination of Irvine Sensors’ corporate
costs pushed down to us in the fiscal year ended September 28, 2008. The
current year loss from operations also includes an increase of $1.5 million of
non cash amortization of intangible assets to $2.1 million total for 2009 as a
result of the October 14, 2008 acquisition transaction as opposed to $0.6
million intangible amortization incurred in the prior year.
38
Net Income (Loss) applicable to
common shareholders. During the Predecessor period from September 29,
2008 through October 14, 2008 we recorded net income of $0.1 million. For the
period beginning October 15, 2008 through September 27, 2009, we recorded a net
loss of $(0.3) million for a total net loss of $(0.2) million during the year
ended September 27, 2009, as compared to $(4.8) million for the year ended
September 28, 2008, an improvement of $4.6 million or 95.8%. This decrease
in our net loss was principally the result of reduced operating expenses related
to the elimination of corporate cost allocations from Irvine Sensors
Corporations, since the successor operating as a stand-alone entity did
not incur these costs subsequent to the year ended September 28, 2008,
combined with increased revenue for the period ending September 27, 2009 offset
by increased interest and preferred stock dividends in fiscal 2009 over fiscal
2008. The federal income tax benefit increased by $0.3 million over
the prior year as a result of book-to-tax timing differences attributable to
intangible amortization and changes in contract loss reserve balances in
2009. The intangible amortization expense is amortized over five years for
book purposes and is deductible over 15 years for income tax purposes. In
2008, there was no Federal Income Tax expense due to the loss from
operations.
Liquidity
and Capital Resources
In the
year ended 2008, Optex Systems, Inc. (Texas) working capital was significantly
constrained due a high level of loss programs and production increases across
multiple programs which necessitated the need for investment in inventories and
manpower resources required to meet the additional product demand. As
Optex Systems, Inc. (Texas) was a wholly-owned subsidiary of Irvine Sensors
Corporation, access to additional outside funding apart from government progress
bills was severely limited. Further, Optex Systems, Inc. (Texas) had
incurred significant costs on one of the Howitzer programs and was unable to
recover these costs until fiscal 2009 due to progress billing limitations prior
to first article inspection testing and approval which did not occur until
August of 2009. During 2008, Optex Systems, Inc. (Texas) transferred $0.7
million in cash to Irvine Sensors in support of intercompany services provided
by Irvine Sensors on behalf of Optex Systems, Inc. (Texas) that were outside our
control, including: legal, accounting, and consulting fees; Irvine Sensors
Corporation travel expenses; and insurance costs.
The
estimated total General and Administrative expenses assuming Optex Systems, Inc.
(Texas) was operated on a stand-alone basis during the 2008 fiscal year
are:
Year- Ended
|
||||
September 28,
2008
|
||||
Accounting
& Auditing Fees
|
$ | 250,000 | ||
Legal
Fees
|
60,000 | |||
Consulting
Fees
|
60,000 | |||
Workers
Comp & General Insurance
|
70,000 | |||
Total
|
$ | 440,000 |
As a
result of the purchase of Optex Systems, Inc. (Texas) on October 14, 2008, these
general and administrative costs were incurred and paid directly by Optex
Systems, Inc. (Delaware) for the 2009 fiscal year, and have been reflected in
the financial statements.
Subsequent
to the asset acquisition from Irvine Sensors on October 14, 2008 and the reverse
merger and reorganization on March 30, 2009, Optex Systems Holdings raised
additional cash through a private equity sale that generated gross proceeds of
$1.0 million. As a result of the new capital, Optex Systems Holdings has
been able acquire the necessary inventory and personnel resources required to
operate at the higher revenue levels, and improve year-end cash position
by $0.7 million.
We have
historically met our liquidity requirements from a variety of sources, including
government and customer funding through contract progress bills, short term
loans, notes from related parties, and the sale of equity securities. Based upon
our current working capital position and potential for expanded business
revenues, we believe that our working capital is sufficient to fund our current
operations for the next 12 months. However, based on our strategy and the
anticipated growth in our business, we believe that our liquidity needs may
increase in the future. The amount of such increase will depend on many factors,
including the costs associated with the fulfillment of our projects, whether we
upgrade our technology, and the amount of inventory required for our expanding
business. If our liquidity needs do increase, we believe additional capital
resources will be derived from a variety of sources including, but not limited
to, cash flow from operations and further private placements of our common stock
and/or debt, including receivables funding through a commercial lender.
39
Predecessor
period of September 29, 2008 through October 14, 2008
Cash and Cash Equivalents. As
of October 14, 2008, Optex Systems, Inc. (Texas) (Predecessor) had cash and cash
equivalents of $0.3 million, an increase of $0.1 million from September 29,
2008. The slight increase in cash was primarily due to the timing of cash
receipts on accounts receivable collections and supplier payments. The cash
balance as of October 14, 2008 is included as cash received through Optex
Systems, Inc. (Delaware) (Successor) as of October 15, 2008.
Net Cash Provided by Operating
Activities. Net cash provided by operating activities totaled $0.1
million for the Predecessor period of September 29, 2008 through October 14,
2008. Cash provided by operating activities was primarily due to the timing of
purchases and accounts receivable collections during the 15 day period prior to
the acquisition of Optex Systems Inc, (Texas), by Optex Systems Inc.,
(Delaware). During this period, our net inventory increased by $0.9
million to support substantially increased production rates across all of our
product lines and our accounts receivable decreased $(1.0) million due to timing
of collections from one of our major customers in the second week of October
2008. Accounts payable and accrued expenses decreased by $(0.2) million due to
the timing of cash disbursements prior to the acquisition.
Net Cash Used in Investing
Activities. There was no net cash used in investing activities
during the Predecessor period beginning September 29, 2008 and ending October
14, 2008. Optex Systems Holdings’ business is labor intensive, and we
purchase equipment as it becomes necessary.
Net Cash Provided by Financing
Activities. There was no net cash provided by financing activities
during the Predecessor period beginning September 29, 2008 and ending October
14, 2008.
Successor
period of October 15, 2008 through September 27, 2009
Cash and Cash Equivalents. As
of September 27, 2009, we had cash and cash equivalents of $0.9 million. During
the Successor period of October 15, 2008 through September 27, 2009 we increased
cash and cash equivalents by $0.6 million primarily attributable to the net
proceeds received by us from the private sale of equity securities. A
portion of the net proceeds was used to acquire additional inventory in support
of the higher revenue and production rates during the period and which are
expected to continue through 2010.
Net Cash Used in Operating
Activities. Net cash used in operating activities during the Successor
period beginning October 15, 2008 and ending September 27, 2009 totaled $(0.1)
million. The primary uses of cash during this period resulted from increases of
inventory and accounts receivable in support of higher production and shipping
volumes, partially offset by increases in accounts payable due to higher
purchases required to support the increased revenues. In the period
beginning October 15, 2008 and ending September 27, 2009, our net inventory
increased by $2.5 million to support substantially increased production rates
across all of our product lines. A large portion of this build up in
inventories was progress billable and as such were billed to our customers as
costs were incurred. We expect similar cash flows from operations
until later in fiscal year 2010 when our low margin legacy periscope programs
are ending and will be replaced with newer programs carrying improved pricing
and corresponding better margins.
Net Cash Provided by Investing
Activities. In the Successor period beginning October 15, 2008 and ending
September 27, 2009, net cash provided by investing activities totaled $0.24
million and consisted of cash acquired during the Optex Systems, Inc. (Delaware)
(Predecessor) acquisition as of October 14, 2009 of $0.25 million and cash used
to purchase equipment of $(0.01) million during the period.
Net Cash Provided by Financing
Activities. Net cash provided by financing activities totaled $0.8
million during the period beginning October 15, 2008 through September 27, 2009,
The change of $0.8 million is attributable to the sale of stock for cash
of $1.0 million offset by funds used to repay outstanding loans of $(0.2)
million. We raised funds through a private placement for working capital needs,
primarily inventory purchases, and additional personnel to support increased
revenue and production rates during the period.
40
Critical
Accounting Policies
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. 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. FASB ASC 718 focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. 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.
Optex
Systems Holdings’ accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of FASB
ASC 505-50 (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,
which ever 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. We have provided deferred income tax
benefits on net operating loss carry-forwards to the extent we believe we will
be able to utilize them in future tax filings.
Revenue Recognition:
Optex Systems Holdings recognizes revenue based on the modified
percentage of completion method utilizing the units-of-delivery method, in
accordance with FASB ASC 605-35 (Prior authoritative literature: SOP 81-1
“Accounting for Performance of
Construction–Type and certain Production –Type Contracts”):
|
·
|
The units-of-delivery method
recognizes as revenue the contract price of units of a basic production
product delivered during a period and as the cost of earned revenue the
costs allocable to the delivered units; costs allocable to undelivered
units are reported in the balance sheet as inventory or work in progress.
The method is used in circumstances in which an entity produces units of a
basic product under production-type contracts in a continuous or
sequential production process to buyers'
specifications.
|
Optex
Systems Holdings’ contracts are fixed price production type contracts whereas a
defined order quantity is delivered to the customer in a continuous or
sequential production process to buyers specifications (build to print).
Our deliveries against these contracts generally occur in monthly increments
across fixed delivery periods spanning from 3 to 36 months.
41
Estimated Costs at Completion and
Accrued Loss on Contracts: Optex
Systems Holdings reviews and reports on the performance of its contracts and
production orders against the respective resource plans for such
contracts/orders. These reviews are summarized in the form of estimates at
completion. Estimates at completion include Optex Systems Holdings incurred
costs to date against the contract/order plus management's current estimates of
remaining amounts for direct labor, material, other direct costs and subcontract
support and indirect overhead costs based on the completion status and future
contractual requirements for each order. If an estimate at completion indicates
a potential overrun (loss) against a fixed price contract/order, management
generally seeks to reduce costs and /or revise the program plan in a manner
consistent with customer objectives in order to eliminate or minimize any
overrun and to secure necessary customer agreement to proposed
revisions.
If an
estimate at completion indicates a potential overrun against budgeted
resources for a fixed price contract/order, management first attempts to
implement lower cost solutions to still profitably meet the requirements of the
fixed price contract. If such solutions do not appear practicable, management
makes a determination whether to seek renegotiation of contract or order
requirements from the customer. If neither cost reduction nor renegotiation
appears probable, an accrual for the contract loss/overrun is recorded against
earnings and the loss is recognized in the first period the loss is identified
based on the most recent estimates at completion of the particular contract or
product order.
For the
fiscal years ended September 27, 2009 and September 28, 2008, estimated loss
reserves were $1,348,060 and $821,885, respectively. Increases in
estimated loss reserves from fiscal 2008 to fiscal 2009 of $526,175 were
primarily attributable to unanticipated increases in material and production
costs encountered in 2009 due to manufacturing issues on our U.S. government
Howitzer programs.
Government Contracts:
Virtually all 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”.
Warranty Costs: Some
of our customers require that we warranty the quality of our products to meet
customer requirements and be free of defects for up to fifteen months subsequent
to delivery. In the year ended September 27, 2009, Optex Systems Holdings
recognized income of $145,470 for unrecognized warranty costs due to an
improvement in the warranty experience rate related to warranties expiring in
2009. In the year ended September 28, 2008, Optex Systems, Inc.
(Texas) incurred $227,000 of warranty expenses representing the estimated cost
of repair or replacement for specific customer returned products still covered
under warranty as of the return date and awaiting repair or replacement, in
addition to estimated future warranty costs for covered shipments occurring
during the fifteen months proceeding September 28, 2008. Future warranty
costs are based on the estimated cost of replacement for expected returns based
upon our most recent experience rate of defects as a percentage of warranty
covered sales.
Recent
Accounting Pronouncements.
In June
2008, FASB issued FASB ASC 260-10-55 (Prior authoritative literature: FASB
Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”). FASB ASC 260-10-55 clarifies that share-based payment
awards that entitle their holders to receive nonforfeitable dividends or
dividend equivalents before vesting should be considered participating
securities. As participating securities, we will be required to include these
instruments in the calculation of our basic earnings per share, and we will need
to calculate basic earnings per share using the "two-class method." Restricted
stock is currently included in our dilutive earnings per share calculation using
the treasury stock method. The two-class method of computing earnings per share
is an earnings allocation formula that determines earnings per share for each
class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings. FASB ASC
260-10-55 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those fiscal
years. As such, Optex Systems Holdings is required to adopt these provisions at
the beginning of the fiscal year ending October 3, 2010. Optex Systems Holdings
does not expect adoption of FASB ASC 260-10-55 to have a material effect
on Optex Systems Holdings’ financial statements.
In May
2009, FASB issued FASB ASC 855-10 (Prior authoritative literature: SFAS
No. 165, "Subsequent
Events"). FASB ASC 855-10 establishes principles and requirements for the
reporting of events or transactions that occur after the balance sheet date, but
before financial statements are issued or are available to be issued. FASB ASC
855-10 is effective for financial statements issued for fiscal years and interim
periods ending after June 15, 2009. As such, Optex Systems Holdings adopted
these provisions at the beginning of the interim period ended June 28, 2009.
Adoption of FASB ASC 855-10 did not have a material effect on Optex
Systems Holdings’ financial statements.
42
In June
2009, FASB issued ASC 105-10 (Prior authoritative literature: SFAS No.
168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10
establishes the FASB Accounting Standards Codification TM (Codification) as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. FASB ASC 105-10 is effective for financial statements
issued for fiscal years and interim periods ending after September 15, 2009. As
such, Optex Systems Holdings is required to adopt these provisions at the
beginning of the interim period ending September 27, 2009. Adoption of
FASB ASC 105-10 did not have a material effect on Optex Systems Holding’s
financial statements.
In June
2006, FASB issued FASB ASC 740-10 (Prior authoritative literature:
FASB Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 ”). This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB No.
109, “ Accounting for
Income Taxes ” . FASB ASC
740-10 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FASB ASC 740-10 is effective for fiscal
years beginning after December 15, 2006. The adoption of FASB ASC 740-10 did not
have a material impact on Optex Systems Holdings’ financial position, results of
operations, or cash flows.
In
September 2006, the FASB issued FASB ASC 820-10 (Prior authoritative
literature: FASB Statement 157, “Fair Value Measurements”).
FASB ASC 820-10 defines fair value, establishes a framework for measuring fair
value under GAAP and expands disclosures about fair value measurements. FASB ASC
820-10 applies under other accounting pronouncements that require or permit fair
value measurements. Accordingly, FASB ASC 820-10 does not require any new fair
value measurements. However, for some entities, the application of FASB ASC
820-10 will change current practice. The changes to current practice resulting
from the application of FASB ASC 820-10 relate to the definition of fair value,
the methods used to measure fair value and the expanded disclosures about fair
value measurements. The provisions of FASB ASC 820-10 are effective as of
January 1, 2008, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. However,
delayed application of this statement is permitted for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
until fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The adoption of FASB ASC 820-10 did not have a material
impact on Optex Systems Holdings’ financial position, results of
operations, or cash flows.
In
February 2007, FASB ASC 825-10 (Prior authoritative literature: Statement
of Financial Accounting Standards No. 159, “ The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115 ,”) was issued. This standard allows a company to irrevocably
elect fair value as the initial and subsequent measurement attribute for certain
financial assets and financial liabilities on a contract-by-contract basis, with
changes in fair value recognized in earnings. The provisions of this standard
were effective as of the beginning of fiscal year 2008, with early adoption
permitted. The adoption of FASB ASC 825-10 did not have a material impact on
Optex Systems Holdings’ financial position, results of operations, or cash
flows.
In March
2007, FASB ASC 715-60 (Prior authoritative literature: EITF Issue No.
06-10, "Accounting for
Collateral Assignment Split-Dollar Life Insurance Agreements”). FASB ASC
715-60 provides guidance for determining a liability for the postretirement
benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment agreement. FASB ASC
715-60 is effective for fiscal years beginning after December 15, 2007. The
adoption of FASB ASC 715-60 did not have a material impact on Optex
Systems Holdings’ financial position, results of operations, or cash
flows.
43
In
December 2007, FASB issued FASB ASC 805 (Prior authoritative literature:
SFAS No. 141(R), “Business
Combinations”) and FASB ASC 810-10-65 (Prior authoritative
literature: SFAS No. 160, “Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB No. 51”) . These new standards will significantly change the
accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. FASB ASC 805 and FASB
ASC 810-10-65 are required to be adopted simultaneously and are effective for
the first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited. Optex Systems Holdings is currently evaluating
the impact of adopting FASB ASC 805 and FASB ASC 810-10-65 on its financial
statements.
In
December 2007, the SEC issued FASB ASC 718-10-S99-1 (Prior authoritative
literature: Staff Accounting Bulletin No. 110). FASB ASC 718-10-S99-1
permits companies to continue to use the simplified method, under certain
circumstances, in estimating the expected term of “plain vanilla” options beyond
December 31, 2007. FASB ASC 718-10-S99-1 updates guidance provided in SAB 107
that previously stated that the Staff would not expect a company to use the
simplified method for share option grants after December 31, 2007. Optex
Systems Holdings does not have any outstanding stock options issued before
December 31, 2007.
In March
2008, FASB issued FASB ASC 815-10 (Prior authoritative literature: SFAS
No. 161, " Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.
133 ”). FASB ASC 815-10 requires enhanced disclosures about an entity’s
derivative and hedging activities. FASB ASC 815-10 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008 with early application encouraged. As such, Optex Systems Holdings is
required to adopt these provisions at the beginning of the fiscal year ended
September 27, 2009. The adoption of FASB ASC 815-10 did not have a
material impact Optex Systems Holdings’ financial position, results of
operations, or cash flows.
In May
2008, FASB issued FASB ASC 944 (Prior authoritative literature: SFAS No.
163, "Accounting for Financial
Guarantee Insurance Contracts—an interpretation of FASB Statement No.
60 "). FASB ASC 944 interprets Statement 60 and amends existing
accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of that Statement. FASB
ASC 944 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years. As
such, Optex Systems Holdings is required to adopt these provisions at the
beginning of the fiscal year ended September 30, 2011. Optex Systems Holdings is
currently evaluating the impact of FASB ASC 944 on its financial statements but
does not expect it to have a material effect.
Cautionary
Factors That May Affect Future Results
This
Report on Form 10-K and other written reports and oral statements made from time
to time by Optex Systems Holdings may contain so-called “forward-looking
statements,” all of which are subject to risks and uncertainties. You can
identify these forward-looking statements by their use of words such as
“expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words
of similar meaning. You can identify them by the fact that they do not relate
strictly to historical or current facts. These statements are likely to address
Optex Systems Holdings’ growth strategy, financial results and product and
development programs. You must carefully consider any such statement and should
understand that many factors could cause actual results to differ from Optex
Systems Holdings’ forward-looking statements. These factors include
inaccurate assumptions and a broad variety of other risks and uncertainties,
including some that are known and some that are not. No forward-looking
statement can be guaranteed and actual future results may vary
materially.
We
do not assume the obligation to update any forward-looking statement. You
should carefully evaluate such statements in light of factors described in this
prospectus. In this prospectus Optex Systems Holdings has identified important
factors that could cause actual results to differ from expected or historic
results. You should understand that it is not possible to predict or identify
all such factors. Consequently, you should not consider any such list to be a
complete list of all potential risks or uncertainties.
44
Item
8 Financial Statements and Supplementary Data
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Optex Systems Holdings, Inc.
Richardson,
Texas
We have
audited the accompanying balance sheet of Optex Systems Holdings, Inc. (the
Company) as of September 27, 2009, and the related statements of operations,
stockholders’ equity, and cash flows for the period October 15, 2008 through
September 27, 2009. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Optex Systems Holdings, Inc. as of
September 27, 2009, and the results of its operations and its cash flows for the
period October 15, 2008 through September 27, 2009 in conformity with accounting
principles generally accepted in the United States of America.
/s/EFP
Rotenberg, LLP
|
|
EFP
Rotenberg, LLP
|
|
Rochester,
New York
|
|
January
11, 2010
|
45
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Optex Systems, Inc. (Texas)
Richardson,
Texas
As
successor by merger, effective October 1, 2009, of the registered public
accounting firm Rotenberg & Co., LLP, we have audited the accompanying
balance sheet of Optex Systems, Inc. (Texas) (the Company) as of September 28,
2008, and the related statements of operations, stockholders’ equity, and cash
flows for the year then ended and for the period September 29, 2008 through
October 14, 2008. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Optex Systems, Inc. (Texas) as of
September 28, 2008, and the results of its operations and its cash flows for the
year then ended and for the period September 29, 2008 through October 14, 2008
in conformity with accounting principles generally accepted in the United States
of America.
/s/EFP
Rotenberg, LLP
EFP
Rotenberg, LLP
Rochester,
New York
January
11, 2010
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Balance Sheets
Successor
|
Predecessor
|
|||||||
September 27, 2009
|
September 28, 2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 915,298 | $ | 170,183 | ||||
Accounts
Receivable
|
1,802,429 | 2,454,235 | ||||||
Net
Inventory
|
8,013,881 | 4,547,726 | ||||||
Deferred
Tax Asset
|
711,177 | — | ||||||
Prepaid
Expenses
|
318,833 | 307,507 | ||||||
Total
Current Assets
|
$ | 11,761,618 | $ | 7,479,651 | ||||
Property
and Equipment
|
||||||||
Property
Plant and Equipment
|
$ | 1,341,271 | $ | 1,314,109 | ||||
Accumulated
Depreciation
|
(1,094,526 | ) | (994,542 | ) | ||||
Total
Property and Equipment
|
$ | 246,745 | $ | 319,567 | ||||
Other
Assets
|
||||||||
Security
Deposits
|
$ | 20,684 | $ | 20,684 | ||||
Intangibles
|
1,965,596 | 1,100,140 | ||||||
Goodwill
|
7,110,415 | 10,047,065 | ||||||
Total
Other Assets
|
$ | 9,096,695 | $ | 11,167,889 | ||||
Total
Assets
|
$ | 21,105,058 | $ | 18,967,107 |
The
accompanying notes are an integral part of these financial
statements
46
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Balance Sheets - Continued
Successor
|
Predecessor
|
|||||||
September 27, 2009
|
September 28, 2008
|
|||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
Payable
|
$ | 2,497,322 | $ | 1,821,534 | ||||
Accrued
Expenses
|
671,045 | 798,974 | ||||||
Accrued
Warranties
|
81,530 | 227,000 | ||||||
Accrued
Contract Losses
|
1,348,060 | 821,885 | ||||||
Loans
Payable
|
— | 373,974 | ||||||
Income
Tax Payable
|
— | 4,425 | ||||||
Total
Current Liabilities
|
$ | 4,597,957 | $ | 4,047,792 | ||||
Other
Liabilities
|
||||||||
Note
Payable
|
— | $ | 2,000,000 | |||||
Accrued
Interest on Note
|
— | 336,148 | ||||||
Due
to Parent
|
— | 4,300,151 | ||||||
Total
Other Liabilities
|
$ | — | $ | 6,636,299 | ||||
Total
Liabilities
|
$ | 4,597,957 | $ | 10,684,091 | ||||
Stockholders'
Equity
|
||||||||
Optex
Systems Holdings, Inc. – (par $0.001, 200,000,000 authorized, 139,444,940
shares issued and outstanding as of September 27,
2009)
|
$ | 139,445 | ||||||
Optex
Systems Holdings, Inc. Preferred Stock ($0.001 par 5,000
authorized, 1027 series A preferred issued and
outstanding)
|
1 | |||||||
Optex
Systems, Inc. – Texas Common Stock (no par 100,000 authorized, 18,870
shares issued and 10,000 shares outstanding)
|
164,834 | |||||||
Optex
Systems, Inc. – Texas Treasury Stock (8,870 shares at
cost)
|
— | (1,217,400 | ) | |||||
Additional
Paid-in-capital
|
16,643,388 | 15,246,282 | ||||||
Retained
Earnings (Deficit)
|
(275,733 | ) | (5,910,700 | ) | ||||
Total
Stockholders' Equity
|
$ | 16,507,101 | $ | 8,283,016 | ||||
Total
Liabilities and Stockholders' Equity
|
$ | 21,105,058 | $ | 18,967,107 |
The
accompanying notes are an integral part of these financial
statements
47
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Statements of Operations
Successor
|
Predecessor
|
Predecessor
|
||||||||||
For the period
October 15,
2008 through
September 27, 2009
|
For the period
September 29, 2008
through October 14,
2008
|
Twelve Months
ended September
28, 2008
|
||||||||||
Revenues
|
$ | 26,708,799 | $ | 871,938 | $ | 20,017,209 | ||||||
Total
Cost of Sales
|
24,073,449 | 739,868 | 18,164,019 | |||||||||
Gross
Margin
|
$ | 2,635,350 | $ | 132,070 | $ | 1,853,190 | ||||||
General
and Administrative
|
||||||||||||
Salaries
and Wages
|
$ | 644,861 | $ | 22,028 | $ | 910,854 | ||||||
Employee
Benefits & Taxes
|
227,315 | 495 | 190,489 | |||||||||
Employee
Stock/Option Bonus Plan
|
39,528 | (4,812 | ) | 378,716 | ||||||||
Amortization
of Intangible
|
404,634 | — | 223,491 | |||||||||
Rent,
Utilities and Building Maintenance
|
210,258 | 12,493 | 228,694 | |||||||||
Investor
Relations
|
203,696 | — | — | |||||||||
Legal
and Accounting Fees
|
434,309 | 360 | 223,715 | |||||||||
Consulting
and Contract Service Fees
|
220,090 | 10,527 | 325,723 | |||||||||
Travel
Expenses
|
47,595 | — | 135,821 | |||||||||
Corporate
Allocations
|
— | — | 2,076,184 | |||||||||
Board
of Director Fees
|
125,000 | — | — | |||||||||
Asset
Impairment of Goodwill
|
— | — | 1,586,416 | |||||||||
Other
Expenses
|
282,136 | 16,155 | 227,336 | |||||||||
Total
General and Administrative
|
$ | 2,839,422 | $ | 57,246 | $ | 6,507,440 | ||||||
Operating
Income (Loss)
|
$ | (204,072 | ) | $ | 74,824 | $ | (4,654,251 | ) | ||||
Other
Expenses
|
||||||||||||
Other
Income and Expense
|
$ | — | $ | — | $ | (507 | ) | |||||
Interest
(Income) Expense – Net
|
170,078 | 9,492 | 199,753 | |||||||||
Total
Other
|
$ | 170,078 | $ | 9,492 | $ | 199,246 | ||||||
Income
(Loss) Before Taxes
|
$ | (374,150 | ) | $ | 65,332 | $ | (4,853,496 | ) | ||||
Income
Taxes (Benefit)
|
(284,663 | ) | — | (21,544 | ) | |||||||
Net
Income (Loss) After Taxes
|
$ | (89,487 | ) | $ | 65,332 | $ | (4,831,952 | ) | ||||
Less
preferred stock dividend
|
$ | (186,246 | ) | $ | — | $ | — | |||||
Net
income (loss) applicable to common shareholders
|
$ | (275,733 | ) | $ | 65,332 | $ | (4,831,952 | ) | ||||
Basic
and diluted earnings (loss) per share
|
$ | (0.00 | ) | $ | 6.53 | $ | (483.20 | ) | ||||
Weighted
Average Common Shares Outstanding
|
126,290,753 | 10,000 | 10,000 |
The
accompanying notes are an integral part of these financial
statements
48
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Statements of Cash Flows
Successor
|
Predecessor
|
Predecessor
|
||||||||||
For the period
October 15, 2008
through
September 27, 2009
|
For the period
September 29,
2008 through
October 14, 2008
|
Year ended
September 28, 2008
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
Income (Loss)
|
$ | (89,487 | ) | $ | 65,332 | $ | (4,831,952 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash (used in) provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
2,161,486 | 9,691 | 760,801 | |||||||||
Provision
for (use of) allowance for inventory valuation
|
(146,266 | ) | 27,363 | (102,579 | ) | |||||||
Noncash
interest expense
|
159,780 | 9,500 | 200,000 | |||||||||
(Gain)
loss on disposal and impairment of assets
|
— | — | 1,586,416 | |||||||||
Stock
Option Compensation Expense
|
39,528 | — | — | |||||||||
(Increase)
decrease in accounts receivable
|
(397,996 | ) | 1,049,802 | (410,602 | ) | |||||||
(Increase)
decrease in inventory (net of progress billed)
|
(2,483,686 | ) | (863,566 | ) | 1,667,418 | |||||||
(Increase)
decrease in other current assets
|
196,633 | 18,541 | (290,435 | ) | ||||||||
(Increase)
decrease in deferred tax asset
|
(711,177 | ) | — | — | ||||||||
Increase
(decrease) in accounts payable and accrued expenses
|
733,453 | (186,051 | ) | (1,132,319 | ) | |||||||
Increase
(decrease) in accrued warranty costs
|
(145,470 | ) | — | 227,000 | ||||||||
Increase
(decrease) in due to parent
|
— | 1,428 | 2,312,280 | |||||||||
Increase
(decrease) in accrued estimated loss on contracts
|
541,479 | (15,304 | ) | (555,462 | ) | |||||||
Increase
(decrease) in income taxes payable
|
— | — | (21,544 | ) | ||||||||
Total
adjustments
|
$ | (52,236 | ) | $ | 51,404 | $ | 4,240,974 | |||||
Net
cash (used in)provided by operating activities
|
$ | (141,723 | ) | $ | 116,736 | $ | (590,978 | ) | ||||
Cash
flows from investing activities:
|
||||||||||||
Cash
Received through Optex Systems, Inc. (Texas) acquisition
|
$ | 253,581 | $ | — | $ | — | ||||||
Purchased
of property and equipment
|
(13,824 | ) | (13,338 | ) | (117,566 | ) | ||||||
Net
cash (used in) provided by investing activities
|
$ | 239,757 | $ | (13,338 | ) | $ | (117,566 | ) | ||||
Cash
flows from financing activities:
|
||||||||||||
Issuance
of common stock for cash
|
$ | 1,024,529 | $ | — | $ | — | ||||||
Proceeds
(to) from loans payable
|
(207,265 | ) | (20,000 | ) | 373,974 | |||||||
Net
cash (used in) provided by financing activities
|
$ | 817,264 | $ | (20,000 | ) | $ | 373,974 | |||||
Net
increase (decrease) in cash and cash equivalents
|
$ | 915,298 | $ | 83,398 | $ | (334,570 | ) | |||||
Cash
and cash equivalents at beginning of period
|
— | 170,183 | 504,753 | |||||||||
Cash
and cash equivalents at end of period
|
$ | 915,298 | $ | 253,581 | $ | 170,183 |
The
accompanying notes are an integral part of these financial
statements
49
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Statements of Cash Flows – continued
Successor
|
Predecessor
|
Predecessor
|
||||||||||
For the period
October 15, 2008
through
September 27, 2009
|
For the period
September 29,
2008 through
October 14,
2008
|
Year ended
September 28,
2008
|
||||||||||
Noncash
investing and financing activities:
|
||||||||||||
Optex
Systems, Inc. (Delaware) (Successor) purchase of Optex Systems, Inc.
(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
|
||||||||||||
Additional
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
|
||||||||||||
Prepaid
Expenses (1,030,000 shares issued at .001 par)
|
$
|
226,500
|
—
|
—
|
||||||||
Supplemental
cash flow information:
|
||||||||||||
Cash
paid for interest
|
$
|
10,290
|
—
|
—
|
||||||||
Cash
paid for taxes
|
$
|
488,799
|
—
|
—
|
The
accompanying notes are an integral part of these financial
statements
50
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Statement of Stockholders' Equity
|
Common
|
Series A
|
Additional
|
Total
|
||||||||||||||||||||||||||||
|
Shares
|
Preferred
|
Common
|
Preferred
|
Treasury Stock
|
Paid in
|
Retained
|
Stockholders
|
||||||||||||||||||||||||
|
Outstanding
|
Shares
|
Stock
|
Series A Stock
|
Optex Texas
|
Capital
|
Earnings
|
Equity
|
||||||||||||||||||||||||
Predecessor
Entity
|
||||||||||||||||||||||||||||||||
Balance
at September 28, 2008
|
10,000
|
$
|
164,834
|
$
|
(1,217,400
|
)
|
$
|
15,246,282
|
$
|
(5,910,700
|
)
|
$
|
8,283,016
|
|||||||||||||||||||
Net
Income
|
65,332
|
65,332
|
||||||||||||||||||||||||||||||
Balance
at October 14, 2008
|
10,000
|
—
|
$
|
164,834
|
$
|
—
|
$
|
(1,217,400
|
)
|
$
|
15,246,282
|
$
|
(5,845,368
|
)
|
$
|
8,348,348
|
||||||||||||||||
Successor
Entity
|
||||||||||||||||||||||||||||||||
Balance
at October 15, 2008
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
Issuance
of Common Stock (1)
|
113,333,282
|
—
|
$
|
113,333
|
$
|
—
|
$
|
—
|
$
|
8,886,667
|
$
|
—
|
$
|
9,000,000
|
||||||||||||||||||
Cancellation
of Investor Relations Stock
|
(700,000
|
)
|
(700
|
)
|
(104,300
|
)
|
(105,000
|
)
|
||||||||||||||||||||||||
Investor
Relations Common Stock Issued
|
480,000
|
480
|
143,520
|
144,000
|
||||||||||||||||||||||||||||
Issuance
of Common Stock
|
750,000
|
750
|
149,250
|
150,000
|
||||||||||||||||||||||||||||
Conversion
of 6,000,000 Debt and Interest to Series A preferred
shares
|
1,027
|
1
|
6,159,780
|
6,159,781
|
||||||||||||||||||||||||||||
Sustut
Exploration Reorganization
|
17,449,991
|
17,450
|
170,050
|
187,500
|
||||||||||||||||||||||||||||
Stock
Option Compensation Expense
|
—
|
—
|
—
|
—
|
39,528
|
—
|
39,528
|
|||||||||||||||||||||||||
Private
Placement Sale of Stock
|
8,131,667
|
—
|
8,132
|
—
|
—
|
1,012,647
|
—
|
1,020,779
|
||||||||||||||||||||||||
Accumulated
Dividends on Preferred Stock
|
186,246
|
(186,246
|
)
|
—
|
||||||||||||||||||||||||||||
Net
Earnings (Loss) from continuing operations
|
—
|
—
|
—
|
—
|
—
|
—
|
(89,487
|
)
|
(89,487
|
)
|
||||||||||||||||||||||
Balance
at September 27, 2009
|
139,444,940
|
1,027
|
$
|
139,445
|
$
|
1
|
$
|
—
|
$
|
16,643,388
|
$
|
(275,733
|
)
|
$
|
16,507,101
|
The
accompanying notes are an integral part of these financial
statements
(1)After
giving effect to the equivalent number of shares issued to existing Optex
shareholders due to the reorganization.
51
Note 1 - Organization and
Operations
On March
30, 2009, Optex Systems Holdings, Inc., (formerly known as Sustut Exploration,
Inc.), a Delaware corporation, along with Optex Systems, Inc., a privately held
Delaware corporation, which is a wholly-owned subsidiary of Optex
Systems Holdings’ , also known as Successor, entered into a
reorganization agreement and plan of reorganization, 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, 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.
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 and wholly-owned
subsidiary of Irvine Sensors Corporation, also known as Predecessor, 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.
Optex
Systems, Inc. (Texas) was a privately held Subchapter “S” Corporation from
inception in 1987 until December 30, 2005 when 70% of the issued and outstanding
stock was acquired by Irvine Sensors Corporation, and Optex Systems, Inc.
(Texas) was automatically converted to a Subchapter “C”
Corporation. On December 29, 2006, the remaining 30% equity interest
in Optex Systems, Inc. (Texas) was purchased by Irvine Sensors
Corporation.
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),
representing 90% of the issued and outstanding common equity interests in Optex
Systems, Inc. (Delaware), in a private transaction. See Note
4.
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 73.52% of 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 will be 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.
Optex
Systems Holdings’ operations are based in Richardson, Texas in a leased facility
comprising 49,100 square feet. As of September 27, 2009, Optex
Systems Holdings operated with 107 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.
52
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.
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 period from October
15, 2008 through September 27, 2009. The accompanying financial
statements include the balance sheet at September 28, 2008 and the results
of operations, changes in stockholders’ equity and cash flows for the period
from September 29, 2008 through October 14, 2008 of Optex Systems, Inc. (Texas),
Predecessor.
The
accompanying financial statements for the balance sheet as of September 28, 2008
and the results of operations and cash flows for the period ending September 28,
2008 include the historical accounts of Optex Systems, Inc. (Texas). These
financial statements have been presented as subsidiary-only financial
statements, reflecting the balance sheets, results 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. 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.
Upon
completing the business combination with Sustut on March 30, 2009, Optex Systems
Holdings elected to change its fiscal year to match that of Optex Systems, Inc.
(Delaware). Accordingly, all activity of the combined companies was presented as
of the quarter’s end of the accounting acquirer, which was March 29,
2009.
Although
the effective date of the merger was March 30, 2009, all transactions related to
the business combination (and only those transactions), with Sustut have been
reflected as if they had taken place one day prior (on March 29, 2009) so as to
coincide with the accounting acquirer’s quarter end of March 29, 2009. See Note
5 for details of the reorganization.
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.
53
Segment
Reporting: Management has determined that Optex Systems Holdings, Inc. is
organized, managed and internally reported as one business segment. Segments are
determined based on differences in products, internal reporting and how
operational decisions are made.
Fiscal
Year: Optex’s fiscal year ends on the Sunday nearest
September 30. Fiscal year 2009 ended on September 27, 2009 and
included 52 weeks. Fiscal year 2008 ended on September 28, 2008 and
included 52 weeks.
Fair Value of
Financial Instruments: FASB ASC 825-10 (Prior
authoritative literature: FASB No. 107, " Disclosures about Fair Value of
Financial Instruments) ," requires disclosure of fair value information
about certain financial instruments, including, but not limited to, cash and
cash equivalents, accounts receivable, refundable tax credits, prepaid expenses,
accounts payable, accrued expenses, notes payable to related parties and
convertible debt-related securities. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information available to
management as of fiscal years ended September 27, 2009 and September 28, 2008.
The carrying value of the balance sheet financial instruments included in Optex
Systems, Inc. (Texas)’s consolidated financial statements approximated their
fair values.
Cash and Cash
Equivalents: For financial statement
presentation purposes, Optex considers those short-term, highly liquid
investments with original maturities of three months or less to be cash or cash
equivalents.
Concentration of
Credit Risk: Optex’s cash and cash equivalents are on deposit with banks.
Only a portion of the cash and cash equivalents would be covered by deposit
insurance and the uninsured balances are substantially greater than the insured
amounts. Although cash and cash equivalent balances exceed insured deposit
amounts, management does not anticipate non-performance by the
banks.
Optex
revenues and accounts receivables are derived from sales to U.S. government
agencies (51%), General Dynamics (46%) or other prime government contractors
(3%). Optex does not believe that this concentration results in undue
credit risk because of the financial strength of the payees.
Accounts
Receivable: Optex records its accounts receivable at the original sales
invoice amount less shipment liquidations for previously collected
advance/progress bills and an allowance for doubtful accounts. An account
receivable is considered to be past due if any portion of the receivable balance
is outstanding beyond its scheduled due date. On a quarterly basis, Optex
evaluates its accounts receivable and establishes an allowance for doubtful
accounts, based on its history of past write-offs and collections, and current
credit conditions. No interest is accrued on past due accounts receivable. As
the customer base is primarily U.S. government and government prime contractors,
Optex has concluded that there is no need for an allowance for doubtful accounts
for the years ended September 27, 2009 and September 28, 2008. Optex
charges uncollectible accounts to bad debt expense in the period as they are
first deemed uncollectible. In 2009, Optex Systems Holdings recorded
$35,297 in bad debt expense attributable to one customer that went out of
business.
Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted as
appropriate for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. Cost is determined using the first-in
first-out method. 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
September 27, 2009, and September 28, 2008 inventory included:
Successor
|
Predecessor
|
|||||||
|
|
As of
September 27, 2009
|
|
|
As of
September 28, 2008
|
|
||
Raw
Materials
|
$
|
7,161,241
|
$
|
5,575,520
|
||||
Work
in Process
|
4,043,308
|
4,199,657
|
||||||
Finished
Goods
|
245,056
|
28,014
|
||||||
Gross
Inventory
|
$
|
11,449,605
|
$
|
9,803,191
|
||||
Less:
|
||||||||
Unliquidated
Progress Payments
|
(2,880,898
|
)
|
(4,581,736
|
)
|
||||
Inventory
Reserves
|
(554,826
|
)
|
(673,729
|
)
|
||||
Net
Inventory
|
$
|
8,013,881
|
$
|
4,547,726
|
54
Warranty
Costs: Some of Optex Systems Holdings’ customers require that the
company warrant the quality of its products to meet customer requirements and be
free of defects for up to fifteen months subsequent to delivery.. In
the year ended September 27, 2009, Optex Systems Holdings, Inc. recognized
income of $145,470 for unrecognized warranty costs due to an improvement in the
warranty experience rate related to warranties expiring in fiscal
2009. In the year ended September 28, 2008, Optex Systems, Inc.
(Texas) incurred $227,000 of warranty expenses representing the estimated cost
of repair or replacement for specific customer returned products still covered
under warranty as of the return date and awaiting repair or replacement, in
addition to estimated future warranty costs for covered shipments occurring
during the fifteen months proceeding September 28, 2008. Future
warranty costs are based on the estimated cost of replacement for expected
returns based upon our most recent experience rate of defects as a percentage of
warranty covered sales.
Property and
Equipment: Property and equipment
are recorded at cost. Depreciation is computed using the straight line method
over the estimated useful lives of the assets, ranging from three to seven
years. Expenditures for renewals and betterments are
capitalized. Expenditures for minor items, repairs and maintenance
are charged to operations as incurred. Gain or loss upon sale or retirement due
to obsolescence is reflected in the operating results in the period the event
takes place.
Goodwill and
Other Intangible Assets: Goodwill represents the cost of
acquired businesses in excess of fair value of the related net assets at
acquisition. (See also notes 4 and 11). Optex Systems Holdings does not amortize
goodwill, but tests it annually for impairment using a fair value approach
during the fiscal fourth quarter and between annual testing periods, if
circumstances warrant. The performance of the test involves a
two-step process. The first step of the impairment test involves
comparing the fair values of the applicable reporting units with their aggregate
carrying values, including goodwill. We generally determine the fair
value of our reporting units using the income approach methodology of valuation
that includes the discounted cash flow method as well as other generally
accepted valuation methodologies, which requires significant judgment by
management. If the carrying amount of a reporting unit exceeds the
reporting unit’s fair value, we perform the second step of the goodwill
impairment test to determine the amount of impairment loss. The
second step of the goodwill impairment test involves comparing the implied fair
value of the affected reporting unit’s goodwill with the carrying value of that
goodwill. These impairment tests may result in impairment charges
that could have a material adverse impact on our results of
operations. The goodwill of Optex Systems Holdings, Inc. was reviewed
as of September 27, 2009 and based on the assessment, it was determined that no
impairment was required.
Optex
amortizes the cost of other intangibles over their estimated useful lives,
unless such lives are deemed indefinite. Amortizable intangible assets are
tested for impairment based on undiscounted cash flows and, if impaired, written
down to fair value based on either discounted cash flows or appraised values.
The identified amortizable intangible assets at September 27, 2009 derived from
the acquisition of Optex Systems, Inc. (Delaware) from Irvine Sensors as of
October 14, 2008 and consisted of customer backlog, with initial useful lives
ranging from one to five years. (See note 4 and 11). The identified amortizable
intangible assets at September 28, 2008 derived from the acquisition of Optex
Systems, Inc. (Texas) by Irvine Sensors and consisted of non-competition
agreements and customer backlog, with initial useful lives ranging from two to
eight years. (See note 4 and 11).
Intangible
assets with indefinite lives are tested annually for impairment, during the
fiscal fourth quarter and between annual periods, if impairment indicators
exist, and are written down to fair value as required.
55
Impairment or
Disposal of Long-Lived Assets: Optex Systems Holdings adopted the
provisions of FASB ASC 360-10 (Prior authoritative literature FASB No. 144,
“ Accounting for the
Impairment or Disposal of Long-lived
Assets .”) This standard requires, among
other things, that long-lived assets be reviewed for potential impairment
whenever events or circumstances indicate that the carrying amounts may not be
recoverable. The assessment of possible impairment is based on the ability to
recover the carrying value of the asset from the expected future pre-tax cash
flows (undiscounted and without interest charges) of the related operations. If
these expected cash flows are less than the carrying value of such asset, an
impairment loss is recognized for the difference between estimated fair value
and carrying value. The primary measure of fair value is based on discounted
cash flows. The measurement of impairment requires management to make estimates
of these cash flows related to long-lived assets, as well as other fair value
determinations.
Revenue
Recognition:
Optex
Systems Holdings recognizes revenue based on the modified percentage of
completion method utilizing the units-of-delivery method, in accordance with
FASB ASC 605-35 (Prior authoritative literature: SOP 81-1 “Accounting for Performance of
Construction–Type and certain Production –Type Contracts”):
The
units-of-delivery method recognizes as revenue the contract price of units of a
basic production product delivered during a period and as the cost of earned
revenue the costs allocable to the delivered units; costs allocable to
undelivered units are reported in the balance sheet as inventory or work in
progress. The method is used in circumstances in which an entity produces units
of a basic product under production-type contracts in a continuous or sequential
production process to buyers' specifications.
Optex
Systems Holdings contracts are fixed price production type contracts whereby a
defined order quantity is delivered to the customer during a continuous or
sequential production process tailored to the buyer’s specifications (build to
print). Optex Systems Holdings’ deliveries against these contracts
generally occur in monthly increments across fixed delivery periods spanning
from 3 to 36 months.
Estimated Costs
at Completion and Accrued Loss on Contracts: Optex Systems
Holdings reviews and reports on the performance of its contracts and production
orders against the respective resource plans for such contracts/orders. These
reviews are summarized in the form of estimates at completion. Estimates at
completion include Optex Systems Holdings’ incurred costs to date against the
contract/order plus management's current estimates of remaining amounts for
direct labor, material, other direct costs and subcontract support and indirect
overhead costs based on the completion status and future contractual
requirements for each order. If an estimate at completion indicates a potential
overrun (loss) against a fixed price contract/order, management generally seeks
to reduce costs and /or revise the program plan in a manner consistent with
customer objectives in order to eliminate or minimize any overrun and to secure
necessary customer agreement to proposed revisions.
If an
estimate at completion indicates a potential overrun against budgeted
resources for a fixed price contract/order, management first attempts to
implement lower cost solutions to still profitably meet the requirements of the
fixed price contract. If such solutions do not appear practicable, management
makes a determination whether to seek renegotiation of contract or order
requirements from the customer. If neither cost reduction nor renegotiation
appears probable, an accrual for the contract loss/overrun is recorded against
earnings and the loss is recognized in the first period the loss is identified
based on the most recent estimates at completion of the particular contract or
product order.
For the
fiscal years ended September 27, 2009 and September 28, 2008, estimated loss
reserves were $1,348,060 and $821,885, respectively. Increases in
estimated loss reserves from fiscal 2008 to fiscal 2009 of $526,175 were
primarily attributable to unanticipated increases in material and production
costs encountered in 2009 due to manufacturing issues on our U.S. government
Howitzer programs.
Government
Contracts: Virtually all of Optex Systems Holdings’ contracts
are prime or subcontracted directly with the Federal government and as such, are
subject to Federal Acquisition Regulation (Federal Acquisition Regulation)
Subpart 49.5, “Contract Termination Clauses” and more specifically Federal
Acquisition Regulation clauses 52.249-2 “Termination for
Convenience of the Government (Fixed-Price)”, and 49.504 “Termination of
fixed-price contracts for default”. These clauses are standard clauses on
prime military contracts and are generally, “flowed down” to Optex Systems
Holdings as subcontractors on other military business. It has been Optex
Systems Holdings’ experience that the termination for convenience is rarely
invoked, except where it has been mutually beneficial for both parties.
Optex Systems Holdings is not currently aware of any pending
terminations for convenience or default on its existing
contracts.
56
In the
event a termination for convenience were to occur, these Federal
Acquisition Regulation clause 52.249-2 provides for full recovery of
all contractual costs and profits reasonably occurred up to and as a result of
the terminated contract. In the event a termination for default were
to occur, Optex Systems Holdings could be liable for any excess cost incurred by
the government to acquire supplies from another supplier similar to those
terminated from Optex Systems Holdings. Optex Systems Holdings would
not be liable for any excess costs if the failure to perform the contract arises
from causes beyond the control and without the fault or negligence of the
company as defined by Federal Acquisition Regulation clause
52.249-8. In addition, the government may require Optex Systems
Holdings to transfer title and deliver to the government any completed supplies,
partially completed supplies and materials, parts, tools, dies, jigs, fixtures,
plans, drawings, information, and contract rights that Optex Systems Holdings
has specifically produced or acquired for the terminated portion of this
contract. The government shall pay contract price for completed
supplies delivered and accepted, and Optex Systems Holdings and the government
would negotiate an agreed upon amount of payment for manufacturing materials
delivered and accepted and for the protection and preservation of the property.
Failure to agree on an amount for manufacturing materials is subject to the
Federal Acquisition Regulation Disputes clause 52.233-1.
In some
cases, Optex Systems Holdings may receive orders subject to subsequent price
negotiation on contracts exceeding the $650,000 federal government simplified
acquisition threshold. These “undefinitized” contracts are considered firm
contracts but as Cost Accounting Standards Board covered contracts, they are
subject to the Truth in Negotiations Act disclosure requirements and downward
only price negotiation. As of September 27, 2009 and September 28, 2008
zero and approximately $4.0 million of booked orders fell under this
criteria. Optex Systems Holdings’ experience has been that the
historically negotiated price differentials have been immaterial and
accordingly, it does not anticipate any significant downward adjustments on
these booked orders.
Shipping and
Handling Costs: All shipping and handling costs are included as a
component of Cost of Goods sold.
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. 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. FASB ASC 718 focuses primarily
on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. 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.
Optex
Systems Holdings’ accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of FASB
ASC 505-50 (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. 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.
57
Earnings per
Share: Basic earnings per share is computed by dividing
income available to common shareholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) for the
period. Diluted earnings per common share gives effect to the assumed
exercise of stock options when dilutive. Diluted earnings per share is
computed by assuming that any dilutive convertible securities outstanding were
converted, with related preferred stock dividend requirements and outstanding
common shares adjusted accordingly. It is also assumes that
outstanding common shares were increased by shares issuable upon exercise of
those stock options for which market price exceeds the exercise price, less
shares which could have been purchased by us with the related proceeds. In
period of losses, diluted loss per share is computed on the same basis as basic
loss per share as the inclusion of any other potential shares outstanding would
be anti-dilutive.
If Optex
Systems Holdings had recorded income applicable to common shareholders for the
period October 15, 2008 through September 27, 2009, weighted average number of
common shares outstanding would have increased by 42,570,745 shares, reflecting
the addition of dilutive securities in the calculation of diluted earnings per
share. There were no dilutive convertible securities for the 2008
fiscal year.
Note
3 - Recent Accounting Pronouncements
In June
2008, FASB issued FASB ASC 260-10-55 (Prior authoritative
literature: FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”). FASB ASC 260-10-55 clarifies that share-based
payment awards that entitle their holders to receive nonforfeitable dividends or
dividend equivalents before vesting should be considered participating
securities. As participating securities, we will be required to include these
instruments in the calculation of our basic earnings per share, and we will need
to calculate basic earnings per share using the "two-class method." Restricted
stock is currently included in our dilutive earnings per share calculation using
the treasury stock method. The two-class method of computing earnings per share
is an earnings allocation formula that determines earnings per share for each
class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings. FASB ASC
260-10-55 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those fiscal
years. As such, Optex Systems Holdings is required to adopt these provisions at
the beginning of the fiscal year ending October 3, 2010. Optex Systems Holdings
does not expect adoption of FASB ASC 260-10-55 to have a material
effect on Optex Systems Holdings’ financial statements.
In May
2009, FASB issued FASB ASC 855-10 (Prior authoritative
literature: SFAS No. 165, "Subsequent Events"). FASB
ASC 855-10 establishes principles and requirements for the reporting of events
or transactions that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. FASB ASC 855-10 is
effective for financial statements issued for fiscal years and interim periods
ending after June 15, 2009. As such, Optex Systems Holdings adopted these
provisions at the beginning of the interim period ended June 28, 2009. Adoption
of FASB ASC 855-10 did not have a material effect on Optex
Systems Holdings’ financial statements.
In June
2009, FASB issued ASC 105-10 (Prior authoritative literature: SFAS
No. 168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10
establishes the FASB Accounting Standards Codification TM (Codification) as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. FASB ASC 105-10 is effective for financial statements
issued for fiscal years and interim periods ending after September 15, 2009. As
such, Optex Systems Holdings is required to adopt these provisions at the
beginning of the interim period ending September 27, 2009. Adoption
of FASB ASC 105-10 did not have a material effect on Optex Systems Holding’s
financial statements.
58
In June
2006, FASB issued FASB ASC 740-10 (Prior authoritative
literature: FASB Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No.
109 ”). This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB No. 109, “ Accounting for Income
Taxes ” . FASB
ASC 740-10 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FASB ASC 740-10 is effective for fiscal
years beginning after December 15, 2006. The adoption of FASB ASC 740-10 did not
have a material impact on Optex Systems Holdings’ financial position,
results of operations, or cash flows.
In
September 2006, the FASB issued FASB ASC 820-10 (Prior authoritative
literature: FASB Statement 157, “Fair Value Measurements”).
FASB ASC 820-10 defines fair value, establishes a framework for measuring fair
value under GAAP and expands disclosures about fair value measurements. FASB ASC
820-10 applies under other accounting pronouncements that require or permit fair
value measurements. Accordingly, FASB ASC 820-10 does not require any new fair
value measurements. However, for some entities, the application of FASB ASC
820-10 will change current practice. The changes to current practice resulting
from the application of FASB ASC 820-10 relate to the definition of fair value,
the methods used to measure fair value and the expanded disclosures about fair
value measurements. The provisions of FASB ASC 820-10 are effective as of
January 1, 2008, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. However,
delayed application of this statement is permitted for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
until fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The adoption of FASB ASC 820-10 did not have a material
impact on Optex Systems Holdings’ financial position, results of
operations, or cash flows.
In
February 2007, FASB ASC 825-10 (Prior authoritative
literature: Statement of Financial Accounting Standards No. 159,
“ The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115 ,”) was issued. This standard allows a
company to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities on
a contract-by-contract basis, with changes in fair value recognized in earnings.
The provisions of this standard were effective as of the beginning of fiscal
year 2008, with early adoption permitted. The adoption of FASB ASC 825-10 did
not have a material impact on Optex Systems Holdings’ financial
position, results of operations, or cash flows.
In March
2007, FASB ASC 715-60 (Prior authoritative literature: EITF Issue No.
06-10, "Accounting for
Collateral Assignment Split-Dollar Life Insurance Agreements”). FASB ASC
715-60 provides guidance for determining a liability for the postretirement
benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment agreement. FASB ASC
715-60 is effective for fiscal years beginning after December 15, 2007. The
adoption of FASB ASC 715-60 did not have a material impact on Optex Systems
Holdings’ financial position, results of operations, or cash flows.
In
December 2007, FASB issued FASB ASC 805 (Prior authoritative
literature: SFAS No. 141(R), “Business Combinations”) and
FASB ASC 810-10-65 (Prior authoritative literature: SFAS No.
160, “Accounting and Reporting
of Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB No. 51”) . These new standards will significantly change the
accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. FASB ASC 805 and FASB
ASC 810-10-65 are required to be adopted simultaneously and are effective for
the first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited. Optex Systems Holdings is currently evaluating
the impact of adopting FASB ASC 805 and FASB ASC 810-10-65 on its financial
statements.
In
December 2007, the SEC issued FASB ASC 718-10-S99-1 (Prior authoritative
literature: Staff Accounting Bulletin No. 110). FASB ASC 718-10-S99-1
permits companies to continue to use the simplified method, under certain
circumstances, in estimating the expected term of “plain vanilla” options beyond
December 31, 2007. FASB ASC 718-10-S99-1 updates guidance provided in SAB 107
that previously stated that the Staff would not expect a company to use the
simplified method for share option grants after December 31,
2007. Optex Systems Holdings does not have any outstanding stock
options issued before December 31, 2007.
59
In March
2008, FASB issued FASB ASC 815-10 (Prior authoritative
literature: SFAS No. 161, " Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”). FASB ASC 815-10 requires enhanced disclosures about an entity’s
derivative and hedging activities. FASB ASC 815-10 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008 with early application encouraged. As such, Optex Systems Holdings is
required to adopt these provisions at the beginning of the fiscal year ended
September 27, 2009. The adoption of FASB ASC 815-10 did not have a
material impact Optex Systems Holdings’ financial position, results
of operations, or cash flows.
In May
2008, FASB issued FASB ASC 944 (Prior authoritative literature: SFAS
No. 163, "Accounting for
Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No.
60"). FASB ASC 944 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. FASB ASC 944 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. As such, Optex Systems
Holdings is required to adopt these provisions at the beginning of the fiscal
year ended September 30, 2011. Optex Systems Holdings is currently evaluating
the impact of FASB ASC 944 on its financial statements but does not expect it to
have a material effect.
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 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. Longview and Arland
Holdings, Ltd. owned Optex Systems, Inc. (Delaware) together until February 20,
2009, when Longview sold 100% of its equity 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 which will be achieved by improving Optex
Systems Holdings’ working capital availability as opposed to the
limited working capital that was available during the time period in which the
assets were owned by Irvine Sensors Corporation.
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) delivered 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) promissory note to Sileas, as described below. On March 27, 2009,
Sileas and Alpha exchanged their Notes plus accrued and unpaid interest of
$159,780 for 1,027 shares of Optex Systems, Inc. (Delaware) Series A preferred
stock.
60
Acquisition
by Sileas on February 20, 2009
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc.
(Delaware). Currently, Sileas is the majority owner of Optex Systems
Holdings.
Secured
Promissory Note Due February 20, 2012/Longview Fund, LP
As a
result of the transaction described above between Sileas and Longview Fund, LP
on February 20, 2009, Sileas, 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. The Note bears simple interest at
the rate of 4% per annum, and the interest rate upon an event of default
increases to 10% per annum. 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 a reorganization into Sileas or
reincorporation in another jurisdiction, then this 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 the Sileas receiving net consideration
with a fair market value in excess of the principal and interest due under the
terms of the secured note (the “Optex Consideration”), then in addition to
paying the principal and interest due, Sileas shall also pay an amount equal to
90% of the Optex Consideration. The obligations of Sileas under the note are
secured by a security interest in Optex Systems Holdings’ common and
preferred stock owned by Sileas that was granted to Longview pursuant to a Stock
Pledge Agreement delivered by Sileas to Longview and also by a lien on all of
the assets of Sileas.
Optex
Systems Holdings has not guaranteed the note and Longview is not entitled to
pursue 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, the 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 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 agreement, 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.
61
The
following table represents the reorganization and private placement transactions
which occurred on March 30, 2009 reflected in March 29, 2009 statements due to
the election to report as of the accounting acquirers’ period
end:
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 March 29,
2009)
|
113,333
|
17,450
|
8,132
|
138,915
|
||||||||||||
Optex
Systems Holdings, Inc. preferred stock (par value $0.001per
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
expenses reflected by Optex Systems Holdings on its Statement of Operations were
increased by $63,750 for fiscal year 2009 and are expected to increase for 2010
by $18,750 (as a non-cash expense) as a result of the issuance of the 1,250,000
shares for Investor Relations Services by Sustut and subsequent return of
700,000 shares to Optex Systems Holdings and are carried on the Optex Systems
Holdings’ Balance Sheet as a prepaid expense. The same Investor Relations
agreements also called for an aggregate cash payment $36,000 for 2009.
Therefore, the total pre-tax impact of the agreements for Investor Relations
Services was $99,750 for fiscal 2009 including both the cash expense and the
amortization of the prepaid expense which is carried on the Condensed
Consolidated Balance Sheet of Optex Systems Holdings.
62
The
accompanying unaudited pro forma financial information for the consolidated
successor and predecessor year ended September 27, 2009 and successor year ended
September 28, 2008 present the historical financial information of the
accounting acquirer. The pro forma financial information is presented for
information purposes only. Such information is based upon the standalone
historical results of each company 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 fiscal years ended September 27, 2009 and September 28, 2008 as if the
acquisition of Optex Systems, Inc. (Texas) and the reorganization had occurred
on the first day of each of the fiscal years.
|
Unaudited, Pro forma
|
|||||||
|
Years Ended
|
|||||||
|
September 27,
2009
|
September 28,
2008
|
||||||
Revenues
|
$ | 27,580,737 | $ | 20,017,209 | ||||
Net
Income (Loss) applicable to common shareholders
|
$ | (362,149 | ) | $ | (4,461,601 | ) | ||
Diluted
earnings per share
|
$ | (0.00 | ) | $ | (0.03 | ) | ||
Weighted
Average Shares Outstanding
|
139,045,625 | 138,914,940 |
The
unaudited, 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. There is no
expected tax effect of the proforma adjustments for the periods affected in 2008
due to net loss and accumulated retained deficit of Irvine Sensors
Corporation.
Note
6 - Property and Equipment
A summary
of property and equipment at September 27, 2009 and September 28, 2008 is as
follows:
Successor
|
Predecessor
|
||||||||
|
Estimated Useful Life
|
|
Year Ended
September 27, 2009
|
|
|
Year Ended
September 28, 2008
|
|
||
Property
and Equipment
|
|||||||||
Furniture
and Equipment
|
3-5yrs
|
$
|
159,724
|
$
|
145,071
|
||||
Machinery
and Equipment
|
5
yrs
|
1,034,440
|
1,026,250
|
||||||
Leasehold
Improvements
|
7
yrs
|
147,107
|
142,788
|
||||||
Less:
Accumulated Depreciation
|
(1,094,526
|
)
|
(994,542
|
)
|
|||||
Net
Property & Equipment
|
$
|
246,745
|
$
|
319,567
|
|||||
Depreciation
Expense
|
$
|
99,984
|
$
|
164,434
|
Depreciation
expense included in cost of goods sold and general and administrative expense
for fiscal 2009 is $61,628 and $38,356 respectively. Depreciation
expense included in cost of goods sold and general and administrative expense
for fiscal 2008 is $104,837 and 59,597,
respectively.
63
Note
7 – Accrued Liabilities
The
components of accrued liabilities for years ended September 27, 2009 and
September 28, 2008 are summarized below:
Successor
|
Predecessor
|
|||||||
|
|
Year Ended
September 27, 2009
|
|
|
Year Ended
September 28, 2008
|
|
||
Customer
Advance Payments
|
$
|
80,753
|
$
|
-
|
||||
Deferred
Rent Expense
|
27,860
|
84,435
|
||||||
Accrued
Vacation
|
153,291
|
94,311
|
||||||
Property
Taxes
|
17,532
|
17,557
|
||||||
Contract
Settlement
|
-
|
351,217
|
||||||
Franchise
Taxes
|
5,100
|
-
|
||||||
Operating
Expenses
|
244,884
|
128,717
|
||||||
Payroll
& Payroll Related
|
141,625
|
122,737
|
||||||
Total
Accrued Expenses
|
$
|
671,045
|
$
|
798,974
|
Contract
Settlement Costs represent amounts due to the U.S. government in relation to a
progress billed contract that was cancelled prior to completion. The
remaining government-owned (progress billed) materials on the contract were
subsequently used to satisfy other existing and new contracts at full value,
although the unliquidated progress payments for the original contract have yet
to be refunded. Optex Systems, Inc. (Texas) settled the contract
overpayment with the customer in fiscal year 2009.Accrued operating expenses
include additional operating costs for estimated costs not yet invoiced or
invoices not vouched into accounts payable as of year-end period
close.
Note
8 - Commitments and Contingencies
Leases
As of
September 27, 2009 Optex Systems Holdings leased its office and manufacturing
facilities under two non-cancellable operating leases expiring November 2009 and
February 2010 in addition to maintaining several non-cancellable operating
leases for office and manufacturing equipment. Optex Systems Holdings
concluded negotiations on a new lease on the existing facilities effective as of
January 4, 2010 (see subsequent events). Total expenses under the
existing facility lease agreements as of the fiscal year ended September 27,
2009 was $309,693. Total expenses for manufacturing and office
equipment for fiscal year ended 2009 was $2,726. Total expenses under
these facility lease agreements for the fiscal year ended September 28, 2008 was
$313,032 and total expenses for manufacturing and office equipment was
$21,830.
At
September 27, 2009, the remaining minimum lease payments under the
non-cancelable operating leases for equipment, office and facility space were as
follows:
|
|
Operating
|
|
|
|
|
Leases
|
|
|
Fiscal
year
|
||||
2010
|
$
|
79,867
|
||
2011
|
16,753
|
|||
2012
|
—
|
|||
2013
|
—
|
|||
Thereafter
|
—
|
|||
Total
minimum lease payments
|
$
|
96,620
|
64
Note
9 - Transactions with a Related Party
Corporate Cost
Allocations: In accordance with government contracting
regulations, Irvine Sensors Corporation was required to allocate some
portion of its corporate general and administrative expense to its operating
subsidiaries, such as Optex Systems Holdings. Irvine Sensors
Corporation elected to use Cost Accounting Standards 403.40, a recognized
government contract allocation methodology, to satisfy this requirement in which
the proportional contribution of Optex to Irvine Sensors’ total revenues,
payroll expense and net book value of tangible assets determined a percentage of
corporate general and administrative expense for allocation to Optex Systems
Holdings. The Cost Accounting Standards Board allocation
methodology was chosen as the most reasonable method because adequate historical
information was not available at the time to allow for the use of alternative
allocation methodologies.
The
estimated total General and Administrative expenses assuming Optex Systems, Inc.
(Texas) was operated on a standalone basis during the 2008 fiscal year
are:
Year- Ended
|
||||
September 28,
2008
|
||||
Accounting
& Auditing Fees
|
$
|
250,000
|
||
Legal
Fees
|
60,000
|
|||
Consulting
Fees
|
60,000
|
|||
Workers
Comp & General Insurance
|
70,000
|
|||
Total
|
$
|
440,000
|
As a
result of the purchase of Optex Systems, Inc. (Texas) on October 14, 2008, these
general and administrative costs were incurred and paid directly by Optex
Systems, Inc. (Delaware) for the 2009 fiscal year, and have been reflected in
the financial statements.
Due to Parent
(Irvine Sensors Corporation): Due to Parent relates to
expenses of Optex Systems, Inc. (Texas) incurred by or shared with Irvine
Sensors and pushed down to Optex Systems, Inc. (Texas) through an intercompany
payable account, “Due to Parent,” during the fiscal year ended September 28,
2008. The ending balance as of September 28, 2008 represents the
cumulative expenses incurred, net of any cash transfers made to/from Irvine
Sensors since inception in January 2006. Significant amounts charged
through this account include Irvine Sensors corporate cost allocations, legal
expenses, accounting and audit fees, travel expenses, consulting fees, and
insurance costs. As a result of the asset purchase on October 14,
2008 the balance was eliminated and no longer applicable to Optex Systems, Inc.
(Texas) during the 2009 fiscal year.
Note
10 - Debt Financing
Related
Parties
Note
Payable/Timothy Looney - In
January 2007, Irvine Sensors Corporation amended its earn-out agreement
with Timothy Looney in consideration for Mr. Looney providing Optex Systems,
Inc. (Texas) with a secured subordinated term note providing for advances of up
to $2 million, bearing interest at 10% per annum and maturing on the earlier of
February 27, 2009 or sixty days after retirement of Irvine Sensors Corporation’s
senior debt. Aggregate advances of $2 million were provided to Optex Systems,
Inc. (Texas) in January 2007 pursuant to the secured subordinated term note, and
the advances and accrued interest were outstanding at September 28,
2008. This Note was secured by the assets of Optex Systems, Inc.
(Texas), but was subordinated to the liens of Alpha and Longview that were
secured by the assets of Irvine Sensors Corporation, including Optex Systems,
Inc. (Texas), its wholly-owned subsidiary. Following the public sale
of the assets of Optex Systems, Inc. (Texas) to Optex Systems, Inc. (Delaware)
on October 14, 2008, the entire $2,000,000 Note Payable with accrued interest of
$345,648 remained a liability of Optex Systems, Inc. (Texas) and as such in not
included in the Optex Systems Holdings, Inc. fiscal 2009 financial
statements.
65
Short Term Note
Payable/Longview Fund - On September 23, 2008, Optex Systems,
Inc. (Delaware) borrowed $146,709 from Longview and issued a promissory note
dated September 23, 2008, to Longview in connection therewith.
Pursuant to an Allonge No. 1 to the promissory note, dated January 20, 2009, the
maturity date was extended until March 31, 2009. On March 30, 2009 in
conjunction with the reorganization and private placement, Longview Fund
purchased 3.25 units of the private placement using $146,250 of the outstanding
note payable as consideration for the purchase. (See Note 5). In the
year ended 2009, Optex Systems paid $459 against the principle balance recorded
interest expenses and paid $7,557 as a result of the interest accrued on the
note prior to its conversion to common stock.
Short term note
payable (Qioptic) - On November 20, 2008, Optex Systems, Inc. (Delaware)
issued a promissory note to Qioptiq Limited in the amount of $117,780. The note
originated as a trade payable as of September 28, 2008 in the amount of
$227,265, and was paid in full including accrued interest expense of $2,733, as
of March 29, 2009.
Note
11 – Intangible Assets and Goodwill
Fiscal
year ended September 27, 2009
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
|
Goodwill
was tested for impairment as of September 27, 2009 using a fair value approach
and based on the review no impairment was required.
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 fiscal year 2009 was
$2,071,194. The expenses split between manufacturing cost of sales
and general and administrative cost were $1,666,558 and $404,635, respectively.
The identifiable intangible assets and recorded goodwill are amortized over five
years for book purposes and is deductible over 15 years for income tax
purposes.. As of the year ended September 27, 2009, the total
unamortized balance of intangible assets was $1,965,596. The
amortizable intangible assets were tested for impairment as of September 27,
2009 based on undiscounted cash flows and no impairment was
required.
66
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
|
||||||||||||||
Contracted
backlog amortized by delivery schedule
|
COS
|
$ | 718,290 | $ | 126,158 | $ | 19,614 | $ | 4,762 | ||||||||
Contracted
backlog amortized by delivery schedule
|
G&A
|
64,646 | 11,354 | 1,765 | 427 | ||||||||||||
Program
backlog amortized straight line across 5 years
|
G&A
|
254,645 | 254,645 | 254,645 | 254,645 | ||||||||||||
Total
Amortization by Year
|
$ | 1,037,581 | $ | 392,157 | $ | 276,024 | $ | 259,834 |
Fiscal
year ended September 28, 2008
On
December 30, 2005, Irvine Sensors Corporation entered into an agreement
with Optex Systems, Inc. (Texas) pursuant to which Irvine Sensors Corporation
purchased 70% of the issued and outstanding common stock of Optex Systems, Inc.
(Texas), thereby becoming its majority shareholder. On
December 29, 2006, Irvine Sensors Corporation exercised a buyer option to
acquire the remaining 30% ownership interest in Optex Systems, Inc.
(Texas).
Optex
Systems, Inc. (Texas) allocated the purchase consideration for the purchase to
tangible and intangible assets acquired and liabilities assumed based on the
valuation determinations made in connection with the initial acquisition of
Optex Systems, Inc. (Texas) in December 2005 and the purchase of the remaining
minority in December 2006 as shown in the following table, which sets forth the
estimated amounts related to the acquisition of all of the issued and
outstanding stock of Optex Systems, Inc. (Texas) by Irvine Sensors
Corporation. The excess of the purchase price over such values is
presented as goodwill in the accompanying balance sheet for the fiscal year
ended September 28, 2008.
Assets:
|
||||||||
Current
assets, consisting primarily of inventory of $5,734,500 and accounts
receivable of $2,191,800
|
$
|
8,070,300
|
||||||
Identifiable
intangible assets
|
3,180,000
|
|||||||
Other
non-current assets, principally property and equipment
|
455,100
|
|||||||
Total
assets
|
11,705,400
|
|||||||
Liabilities:
|
||||||||
Current
liabilities, consisting of accounts payable of $1,638,600, tax liabilities
of $112,800 and accrued liabilities of $682,100
|
2,433,481
|
|||||||
Acquired
net assets
|
9,271,919
|
|||||||
Purchase
price
|
||||||||
Total
consideration to seller
|
$
|
19,865,400
|
||||||
Direct
acquisition costs
|
1,040,000
|
|||||||
20,905,400
|
||||||||
Excess
purchase price reported as goodwill
|
$
|
11,633,481
|
67
Goodwill
related to the Irvine Sensors Corporation acquisition of Optex Systems, Inc.
(Texas) was reviewed as of September 28, 2008 and it was determined that an
impairment charge of $1,586,416 was required. The fair values assigned to the
assets of Optex Systems, Inc. (Texas) and the goodwill was based upon the most
recent value of Optex Systems, Inc. (Texas) as determined by the asset sale via
public auction to third party purchasers on October 14, 2008.
Identifiable
intangible assets as of September 28, 2008 included non-competition agreements
and customer backlog, and were amortized over their respective estimated useful
lives as follows:
|
|
Useful Life in
Years
|
|
|
Acquired
Fair Value
|
|
||
Non-competition
agreement
|
2
|
$
|
80,000
|
|||||
Contractual
backlog
|
2
|
$
|
1,570,000
|
|||||
Program
backlog
|
8
|
$
|
1,530,000
|
The
amortization of identifiable intangible assets associated with the Optex
Systems, Inc. (Texas) acquisition in fiscal 2008 was $596,367. The identifiable
intangible assets and recorded goodwill are deductible over 15 years for income
tax purposes. As of the year ended September 28, 2008, the total unamortized
balance of intangible assets was $1,100,140.
The
September 28, 2008 unamortized balance of intangible assets was estimated to be
amortized as follows:
Year
|
|
Annual
Amortization
|
|
|
2009
|
|
266,365
|
||
2010
|
204,490
|
|||
2011
|
204,490
|
|||
2012
|
204,490
|
|||
2013
|
186,837
|
|||
2014
|
33,468
|
|||
Total
|
$
|
1,100,140
|
Note
12-Stock Based Compensation
On March
26, 2009, the Board of Directors 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.
Options
granted under the 2009 Stock Option Plan vest as determined by the Board of
Directors of Optex Systems Holdings or 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 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.
68
On March
30, 2009, 1,414,649 stock options with an exercise price of $0.15 were granted
to an officer of Optex Systems Holdings which vest as follows: 34% after
the first year, and 33% each after the second and third years. These
options carry a grant expiration date of seven years after
issuance. On May 14, 2009, 1,267,000 stock options were issued to
other Optex Systems Holdings employees, including 250,000 shares to one
officer. These stock options vest 25% per year after each year
of employment and carry a grant expiration date of seven years after
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 as of the
end of the contract term. As of September 27, 2009 none of the stock
options had vested and 14,000 shares had been forfeited due to employee
turnover.
Optex
Systems Holdings recorded compensation costs for options and shares granted
under the plan amounting to $39,528 for the fiscal year ended September 27,
2009. There were no stock options or shares granted or outstanding
prior to September 28, 2008, therefore no compensation expense was recorded in
fiscal 2008. The impact of this expense was immaterial to the basic
and diluted net loss per share for the fiscal year ended September
27, 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 year ended September 27,
2009 estimated deferred tax assets related to option compensation costs were
$13,440 and have been recorded for the tax effect of the financial statement
expense. There was no tax effect of the income tax deduction in excess of the
financial statement expense for 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 - Sholes -
Merton option pricing model. The fair value of the underlying
shares was determined based on the opening price of Optex
Systems Holdings’ publicly-traded shares as of September 28, 2009.
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 Optex
Systems Holdings 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:
|
Year ended
|
|||
|
September 27, 2009
|
|||
Expected
dividend yield
|
0%
|
|||
Expected
stock price volatility
|
23.6%
|
|||
Risk-free
interest rate (1)
|
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.
|
69
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 09/27/09
|
|
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
|
313,250
|
05/13/2016
|
05/14/2010
|
|||||||||||
05/14/09
|
316,750
|
0.15
|
313,250
|
05/13/2016
|
05/14/2011
|
|||||||||||
05/14/09
|
316,750
|
0.15
|
313,250
|
05/13/2016
|
05/14/2012
|
|||||||||||
05/14/09
|
316,750
|
0.15
|
313,250
|
05/13/2016
|
05/14/2013
|
|||||||||||
Total
|
2,681,649
|
2,667,649
|
|
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 28, 2008
|
—
|
$
|
—
|
—
|
—
|
|||||||||||
Granted
– 2009
|
2,681,649
|
$
|
0.21
|
5.14
|
.
|
$
|
563,146
|
|||||||||
Forfeited
– 2009
|
(14,000)
|
$
|
0.21
|
5.14
|
(2,940)
|
|||||||||||
Exercised
– 2009
|
—
|
$
|
—
|
—
|
—
|
|||||||||||
Outstanding
as of September 27, 2009
|
2,667,649
|
$
|
0.21
|
5.14
|
$
|
560,206
|
||||||||||
Exercisable
as of September 27, 2009
|
0
|
$
|
—
|
—
|
$
|
—
|
The
weighted-average grant date fair value of options granted during the year ended
September 27, 2009 was $0.14. The total intrinsic value of options
exercised during the year ended September 27, 2009 was $0.
The
following table summarizes the status of Optex Systems Holdings’ aggregate
non-vested shares granted under the 2009 Stock Option Plan (See Note
9):
Number of
Non-
vested
Shares
Subject to
Options
|
Weighted-
Average
Grant-
Date
Fair Value
|
|||||||
Non-vested
as of September 27, 2009
|
—
|
$
|
||||||
Non-vested
granted — year ended September 27, 2009
|
2,681,649
|
$
|
0.14
|
|||||
Vested —
year ended September 27, 2009
|
—
|
$
|
0.00
|
|||||
Forfeited — year
ended September 27, 2009
|
(14,000)
|
$
|
||||||
Non-vested
as of September 29, 2009
|
2,667,649
|
$
|
0.14
|
As of
September 27, 2009, the unrecognized compensation cost related to
non-vested share based compensation arrangements granted under the plan that was
approximately $320,973. 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 year ended September 27, 2009
was $0.0.
70
Total
stock-based compensation expense of Optex Systems, Inc. (Texas) (Predecessor)
associated with Irvine Sensors Corporation stock grants during fiscal years 2009
and 2008 was ($4,812) and $378,716, respectively. These amounts
were pushed down by Irvine Sensors Corporation and charged to general and
administrative expense for 2009 and 2008.
For the
fiscal year ended September 27, 2009, Optex Systems 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 2009, Optex Systems expensed $36,000 for shares earned
and the unamortized balance of shares issued against the contract is $108,000 to
be expensed in fiscal year 2010.
There
were no stock options issued to Optex Systems, Inc. (Texas) employees or equity
instruments issued to consultants and vendors in fiscal 2008.
Note
13 – 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.
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. Longview and Arland
Holdings, Ltd. both owned Optex Systems, Inc. (Delaware) until February 20,
2009, when Longview sold 100% of its equity interests in Optex Systems, Inc.
(Delaware) to Sileas Corp., as discussed below.
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc. (Delaware). As of the date of
this transaction, Sileas is the majority owner of Optex Systems
Holdings.
Stock
Split
On March
26, 2009, Optex Systems, Inc. (Delaware)’s Board of Directors reconfirmed 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 $0.001 par value common stock, 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
|
71
Reorganization
& Private Placement:
On March
29, 2009, as a result of the reorganization agreement and private placement, the
85,000,000 outstanding shares of Optex Systems, Inc. (Delaware) as of March 30,
2009 were exchanged for 113,333,282 shares of Optex Systems Holdings (formerly
Sustut Exploration, Inc.). An additional 8,131,667 shares were issued in
connection with the private placement closed prior to the
reorganization.
On June
29, 2009, 750,000 common shares were sold to in a private transaction for gross
proceeds of $150,000.
Each
share of stock entitles the holder to one vote on matters brought to a vote of
the shareholders.
Optex
Systems Holdings 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. See Note 12 -
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 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.
Series A preferred stock was exchanged on a 1:1 basis for Series A preferred
stock of Optex Systems Holdings. As of the year ended September 27,
2009 Optex Systems has recorded $186,246 of dividends payable on Series A
preferred shares.
Cancellation
of Common Stock
On June
29, 2009 Optex 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, Inc., and then cancelled. (see also Note 12
on new investor relations shares issued).
72
Note
14 - Income Taxes
The
income tax provision as of September 27, 2009 includes the
following:
2009
|
||||
Current
income tax expense:
|
||||
Federal
|
$
|
426,514
|
||
State
|
—
|
|||
426,514
|
||||
Deferred
income tax provision (benefit):
|
||||
Federal
|
(711,177
|
)
|
||
State
|
—
|
|||
Change
in valuation allowance
|
—
|
|||
(711,177
|
)
|
|||
Provision
for (Benefit from) income taxes, net
|
$
|
(284,663
|
)
|
The
income tax provision for Optex Systems as of September 27, 2009 differs from
those computed using the statutory federal tax rate of 34%, due to the following
permanent differences:
2009
|
%
|
|||||||
Tax
benefit at statutory federal rate
|
$
|
(127,211
|
)
|
34
|
%
|
|||
Nondeductible
expenses
|
(157,452
|
)
|
42
|
%
|
||||
$
|
(284,663
|
)
|
76
|
%
|
Deferred
income taxes recorded in the balance sheets results from differences between
financial statement and tax reporting of income and deductions. A
summary of the composition of the deferred income tax assets (liabilities)
follows:
2009
|
||||
Stock
Options
|
$
|
13,440
|
||
Inventory
Reserve
|
(40,427
|
)
|
||
Unicap
|
54,494
|
|||
Contract
Loss Reserve
|
178,900
|
|||
Fixed
assets
|
(58,476
|
)
|
||
Intangible
Asset Amortization
|
612,707
|
|||
Other
|
(49,461
|
)
|
||
Subtotal
|
$
|
711,177
|
||
Valuation
allowance
|
—
|
|||
Net
deferred asset (liability)
|
$
|
711,177
|
Optex
Systems Holdings has no loss carryforwards available as of October 15,
2008.
As the
result of the assessment of the FASB ASC 740-10 (Prior Authoritative Literature:
FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement No. 109”),
Optex Systems Holdings has no unrecognized tax benefits. By statute, the tax
year ending in September 27, 2009 is open to examination by the major taxing
jurisdictions to which the Optex Systems Holdings is subject.
Cash paid
for income taxes for the fiscal years ended September 27, 2009 and September 28,
2008 were $488,799, and $0, respectively.
As of
September 28, 2008 Optex Systems, Inc. (Texas) had generated net losses for
financial accounting purposes in the amount of approximately
$4,831,952. During this period Optex Systems, Inc. (Texas) was a
member of a consolidated entity for tax reporting purposes. As such, any losses
that would have qualified as net operating losses for federal income tax
purposes as potential deductions were available to the consolidated entity. Such
losses may have been utilized by the consolidated entity and are not available
to Optex Systems, Inc. (Delaware) to offset its future taxable
income. Additionally, since Optex Systems, Inc. (Texas) was acquired
in a transaction effected as an asset purchase, Optex Systems, Inc. (Delaware)
would only be entitled to tax deductions generated after the date of the
acquisition. Accordingly, no deferred tax assets have been recorded in the
accompanying financial statements for net operating losses generated by Optex
Systems, Inc. (Texas). There was no provision for income taxes in
fiscal 2008.
73
Note
15 — Subsequent Events
On
October 27, 2009, Optex Systems Holdings borrowed $250,000 from Longview
pursuant to a promissory note, which originally expired on December 1, 2009, but
was extended until July 15, 2010. The note bears interest at the rate
of 10% per annum, and all accrued and unpaid interest will be due upon
maturity. Optex will 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 are at least $900,000, with any remaining unpaid balance due on
July 15, 2010. In exchange for the extension, Optex Systems Holdings
granted Longview a warrant to purchase 100,000 shares of restricted
common stock with an exercise price of $0.15 per share and a term of three
years.
Effective
as of January 4, 2010, Optex Systems Holdings, Inc. renewed its Richardson, TX
lease. Under the terms of the amendment:
|
·
|
The lease term is extended until
July 31, 2015.
|
|
·
|
The base rent is as follows:
until 7/31/2010, $0.00 per square foot, from 8/1/2010 – 7/31/2013, $4.70
per square foot and from 8/1/2013 – 7/31/2015, $4.95 per square
foot.
|
|
·
|
A $195,352.00 improvement
allowance is included.
|
|
·
|
For the first two years of the
extended term, the landlord has granted the option to take over additional
space at similar terms as in the
amendment.
|
Optex
Systems Holdings has evaluated subsequent events for the period September 28,
2009 through October __, 2010, the date its financial statements were issued,
and concluded there were no other events or transactions occurring during this
period that required recognition of disclosure in its financial
statements.
Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure.
|
None.
Controls and
Procedures
|
Evaluation
of Disclosure Controls and Procedures
As of
September 27, 2009, management performed, with the participation of our
Principal Executive Officer and Principal Financial Officer, an evaluation of
the effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the report we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s forms,
and that such information is accumulated and communicated to our management
including our Principal Executive Officer and our Principal Financial Officer,
to allow timely decisions regarding required disclosures. Based on the
evaluation and the identification of the material weaknesses in our internal
control over financial reporting described below, our Principal Executive
Officer and our Principal Financial Officer concluded that, as of September 27,
2009, our disclosure controls and procedures were effective.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with GAAP. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projection of any evaluation of effectiveness to
future periods is subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
74
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. In connection with our
management’s assessment of our internal control over financial reporting as
required under Section 404 of the Sarbanes-Oxley Act of 2002, we have not
identified any material weaknesses in our internal control over financial
reporting as of September 27, 2009. We have thus concluded that our
internal control over financial reporting was effective as of September 27,
2009.
This
annual report does not include an attestation report of Optex Systems Holdings’
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by Optex Systems
Holdings’ registered public accounting firm pursuant to temporary rules of the
Commission that permit Optex Systems Holdings to provide only management's
report in this quarterly report.
Directors
and Executive Officers
The
following table sets forth information regarding the members of our board of
directors and our executive officers and other significant employees. All of our
officers and directors were appointed on March 30, 2009, the closing date
of the reorganization.
Name
|
|
Age
|
|
Position
|
Stanley
A. Hirschman
|
63
|
President,
Secretary, Treasurer & Director
|
||
Merrick
D. Okamoto
|
49
|
Director
|
||
Ronald
F. Richards
|
44
|
Chairman
of the Board
|
||
Danny
Schoening
|
46
|
Chief
Operating Officer
|
||
Karen
L. Hawkins
|
45
|
Vice
President of Finance and Controller
|
Stanley A. Hirschman.
Mr. Hirschman served as a Director and President of Optex Systems, Inc.
(Delaware) since September 28, 2008 and assumed the same roles on behalf of
Optex Systems Holdings on March 30, 2009, in which roles he is committed to
providing Optex his management experience and provides direction and oversight
of other executive officers and management. From 1997 to 2009, he was president
of CPointe Associates, Inc., a Plano, Texas consulting group, and provided
consulting services to small and medium sized companies. As of October 2009, in
order to meet his responsibilities at Optex, he concluded his active role at
CPointe. Additionally, since February 2009 he has been the majority beneficial
owner of Sileas Corp (which has no active business), the majority shareholder of
Optex Systems Holdings. Mr. Hirschman is a director of Axion Power
International, where he serves on the Audit Committee. During the past
five years, Mr. Hirschman has also sat on the following Boards: Goldspring,
Inc., Bravo Brands, 5G Wireless Communications, SVI Media, Inc., Bronco
Energy, Energy + Engine Technology, Dalrada Financial, Datascension, iWorld
Projects and Systems, Inc. and South Texas Oil. Prior to establishing
CPointe Associates, he was Vice President Operations, Software Etc., Inc., a 396
retail store software chain, from 1989 until 1996. He has also held executive
positions with T.J. Maxx, Gap Stores and Banana Republic. Mr. Hirschman is a
member of the National Association of Corporate Directors, regularly
participates in the KMPG Audit Committee Institute and is a graduate of the
Harvard Business School Audit Committees in the New Era of Governance symposium.
He is active in community affairs and serves on the Advisory Board of the
Salvation Army Adult Rehabilitation Centers.
75
Merrick D.
Okamoto . Mr. Okamoto served as a Director of Optex Systems, Inc.
(Delaware) since October 2008 and has served as a Director of Optex Systems
Holdings since March 30, 2009. In 2001, Mr. Okamoto co-founded Viking Asset
Management, LLC and is the President and a Managing Member. Viking Asset
Management is the investment advisor to Longview Fund, LP and Longview Fund
International, Ltd. Limited partners in Viking’s family of funds are comprised
of institutions, private banks, family offices and high net worth individuals
from around the world. Mr. Okamoto has completed financings for hundreds of
public and private companies across a broad array of industries and sectors. In
1998, Mr. Okamoto co-founded and was the President of TradePortal.com, Inc.
TradePortal.com, Inc. is a software development company and its wholly owned
subsidiary, TradePortal Securities, Inc., a direct access execution brokerage
firm. Mr. Okamoto was instrumental in developing the proprietary Trade Matrix™
software platform. In 2000, TradePortal.com, Inc. sold a minority stake to
Thomson Reuters (TRI:NYSE), a US $12 billion revenue company. In 1995, he
founded First Stage Capital, Inc. which specializes in investment banking and
consulting to public and private companies. From 1983 to 1994, he was employed
in the securities industry with Shearson Lehman Brothers, Prudential Securities
and Paine Webber. Mr. Okamoto is widely recognized as an advanced trader
specializing in short-term trading and has more than 25 years of extensive
experience in technical market analysis techniques and has been a frequent
speaker at national trading venues. From 1987 to 1990, he created and hosted the
television program, The Income Report in Los Angeles . He has also appeared on
CNN and The MacNeil-Lehrer Report.
Ronald F.
Richards. Mr. Richards has been a director of Optex Systems
Holdings since October 2008. Since January 2009, Mr. Richards has
served Optex Systems Holdings as its Chairman of the Board. Mr.
Richards is the founder and Managing Director of Gray Wolf Partners, LLC, a
strategic and financial advisory firm. From February 2007 to October 2008, he
served as a Managing Director of Viking Asset Management, LLC where his
responsibilities included: (i) sourcing, conducting due diligence, and
structuring potential investment opportunities and (ii) working with portfolio
companies to enhance shareholder value. He previously served as Chief Financial
Officer and Senior Vice President, Business Development of Biopure Corporation,
a publicly traded biotechnology company developing oxygen therapeutics and as a
Managing Director, Corporate Finance of Wells Fargo Van Kasper. Mr. Richards has
over 21 years of experience working with public and private companies in the
areas of investment banking, corporate finance, law and accounting. He has
structured and executed numerous public offerings and private placements raising
a total of more than $660 million. He also co-authored PIPES: A CEO's Guide to Successful
Private Placements in Public Equities. Mr. Richards holds JD, MBA and BA
degrees from UCLA. He is a member of the State Bar of California and a retired
Certified Public Accountant.
Danny
Schoening. Mr. Schoening joined Optex Systems, Inc. (Texas) in
January 2008. Upon the acquisition of the assets of Optex Systems,
Inc. (Texas) by Optex Systems, Inc. (Delaware), Mr. Schoening became the COO of
Optex Systems, Inc. (Delaware) (as of September 28, 2008) and he commenced
service with Optex Systems Holdings as its Chief Operating Officer as
of the date of the reorganization, March 30, 2009. He has been
instrumental in establishing the systems and infrastructure required to continue
Optex System’s rapid growth. This activity was rewarded with Optex
System’s recent ISO9001:2000 Certification. From February 2004 to January
2008, Danny was the Vice President of Operations for The Finisar Corporation AOC
Division for 4 years where he led a team of up to 200 employees to produce
vertical cavity lasers for the data communications industry at production rates
of hundreds of thousands of units per week. Prior to Finisar, Danny was
the Director of Operations for multiple divisions of Honeywell
International. Serving the Automotive, Medical, Aerospace, and Consumer
Commercial Markets. During this 17 year period, Danny was recognized with
Honeywell’s Lund Award, their highest award for developing employee resources.
Danny has a broad experience level in the following technologies: Mechanical
Assembly Processes, Micro-Electronic Assembly Processes, Laser Manufacturing,
Plastic Molding, Metal Machining, Plating, Thick Film Printing, Surface Mount
Technology, Hall Effect Technology and MEMS based Pressure Devices. Danny
received a Bachelors of Science in Manufacturing Engineering Technology from the
University of Nebraska, an MBA from Southern Methodist University, and holds
three united States Patents.
76
Karen L.
Hawkins. Ms. Hawkins has served Optex Systems Holdings as its Vice
President, Finance and Controller, since the date of the reorganization, March
30, 2009 and was the controller of Optex Systems, Inc. (Delaware), effective
September 28, 2009. She began her employment with Optex Systems, Inc.
(Texas) in April 2007. Ms. Hawkins is a Certified Public Accountant since
1992 with over 22 years experience in Financial Accounting and Management,
primarily focused in the Defense and Transportation Industries. She has a strong
background in both Financial & Cost Accounting, with extensive Government
Pricing, Financial Analysis, and Internal Auditing experience. Her past
history also includes Program Management, Materials Management and Business
Development. She brings over 14 years direct experience in Government
Contracting with a strong knowledge of Cost Accounting Standards Board and
Federal Acquisition Regulation. Her previous employment includes General
Dynamics – Ordinance and Tactical Division, Garland (formerly known as
Intercontinental Manufacturing) for over 13 years from November, 1994 through
March , 2007. During her tenure there she served in the roles of
Controller (Accounting & IT), Program Manager over a $250M 3 year Army
Indefinite Delivery/Indefinite Quantity (Indefinite Delivery/Indefinite
Quantity) type contract, as well as Materials Manager with oversight of
Purchasing, Production Control & Warehousing functions. Prior to her
employment at General Dynamics, Ms. Hawkins served in various finance and
accounting positions at Luminator, a Mark IV Industries Co, and Johnson
Controls, Battery Division - Garland. Karen received her Bachelors of
Business Administration in Accounting from Stephen F. Austin State University in
Texas in 1986.
Family
Relationships
There are
no family relationships among the officers and directors.
Code
of Business Conduct and Ethics
Our board
of directors has adopted a Financial Code of Ethics which has been distributed
to all directors, and executive officers, and will be distributed to employees
and will be given to new employees at the time of hire. The Financial Code of
Ethics contains a number of provisions that apply principally to our CEO, Chief
Financial Officer and other key accounting and financial personnel. A copy of
our Code of Business Conduct and Ethics can be found under the “Investor
Relations” section of our website (www.optexsys.com)
under the section for Governance Docs. We also intend to disclose any amendments
or waivers of our Code on our website.
Board
and Committee Meetings
We are
incorporated under the laws of the State of Delaware. The interests of our
stockholders are represented by the board of directors, which oversees our
business and management. This solicitation of proxies is intended to give all
stockholders the opportunity to vote for the persons who are to be their
representatives, as directors, in our governance.
The board
of directors meets regularly during the year and holds special meetings and acts
by unanimous written consent whenever circumstances require. The board held 4
meetings (including special meetings) and took action by unanimous written
consent 3 times during our fiscal year ended September 27, 2009.
If the
board of directors convenes a special meeting, the non-management directors meet
in executive session if circumstances warrant.
Board
Committees
At this
time, the board of directors currently does not have any active
committees.
Board
nominations
Stockholders
wishing to bring a nomination for a director candidate before a stockholders
meeting must give written notice to our Corporate Secretary, either by personal
delivery or by United States mail, postage prepaid. The stockholder’s notice
must be received by the Corporate Secretary not later than (a) with respect to
an Annual Meeting of Stockholders, 90 days prior to the anniversary date of the
immediately preceding annual meeting, and (b) with respect to a special meeting
of stockholders for the election of directors, the close of business on the
tenth day following the date on which notice of the meeting is first given to
stockholders. The stockholder’s notice must set forth all information relating
to each person whom the stockholder proposes to nominate that is required to be
disclosed under applicable rules and regulations of the SEC, including the
written consent of the person proposed to be nominated to being named in the
proxy statement as a nominee and to serving as a director if elected. The
stockholder’s notice must also set forth as to the stockholder making the
nomination (i) the name and address of the stockholder, (ii) the number of
shares held by the stockholder, (iii) a representation that the stockholder is a
holder of record of stock of the Optex Systems Holdings, entitled to vote at the
meeting and intends to appear in person or by proxy at the meeting to nominate
the person named in the notice, and (iv) a description of all arrangements or
understandings between the stockholder and each nominee.
77
Stockholder
Communications with the Board of Directors
Stockholders
may communicate directly with the board of directors or any board member by
writing to them at Optex Systems Holdings, Inc., 1420 Presidential Drive,
Richardson, TX 75081. The outside of the envelope should prominently indicate
that the correspondence is intended for the board of directors or for a specific
director. The secretary will forward all such written communications to the
director to whom it is addressed or, if no director is specified, to the entire
board of directors.
Director
Attendance at Annual Meetings of Stockholders
We
encourage our directors to attend annual meetings, although such attendance is
not required.
Director
Compensation
See table
below under “Executive Compensation – Director Compensation.”
Executive
Compensation
Summary
Compensation Table
The
following table sets forth, for the years indicated, all compensation paid,
distributed or accrued for services, including salary and bonus amounts,
rendered in all capacities by Optex Systems Holdings’ principal executive
officer, principal financial officer and all other executive officers who
received or are entitled to receive remuneration in excess of $100,000 during
the stated periods. These officers are referred to herein as the “named
executive officers.” Except as provided below, none of our executive officers
received annual compensation in excess of $100,000 during the last two fiscal
years.
|
|
Stock
|
Option
|
All Other
|
|||||||||||||||||||||||
|
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Total
|
||||||||||||||||||||
Name and Principal Position
|
Year
|
($)
|
($)
|
($)
|
($)(6)
|
($)
|
($)
|
||||||||||||||||||||
Stan
Hirschman, President (7)
|
2009
|
(5)
|
- | - | - | - | 25,000 | 25,000 | |||||||||||||||||||
2008
|
(5)
|
- | - | - | - | - | - | ||||||||||||||||||||
Danny
Schoening, Chief
|
2009
|
$ | 182,932 | $ | 11,000 | $ | - | $ | 10,588 | $ | $ | 204,520 | |||||||||||||||
Operating
Officer (7)
|
2008
|
(1,2)
|
122,646 | 10,300 | 7,500 | - | - | 140,446 | |||||||||||||||||||
Karen
Hawkins, VP Finance /
|
2009
|
133,647 | 7,271 | - | 5,516 | - | 146,434 | ||||||||||||||||||||
Controller
(7)
|
2008
|
132,473 | 300 | - | - | - | 132,773 | ||||||||||||||||||||
2007
|
(1)
|
56,900 | 300 | - | - | - | 57,200 | ||||||||||||||||||||
Andrey
Oks, CEO, CFO,
Secretary,
Treasurer and Director
|
2008
|
(3)
|
- | - | 10,000 | - | - | 10,000 | |||||||||||||||||||
Terry
Hughes, CEO
|
2007
|
(4)
|
- | - | - | - | 42,000 | 42,000 |
78
1
|
The compensation depicted is
not reflective of a full year’s compensation as Danny Schoening did not
begin employment until the second quarter of fiscal year 2008 and Karen
Hawkins did not begin employment until the third quarter of fiscal year
2007. For Mr. Schoening and Ms. Hawkins, information is for service as an
officer of Optex Texas and Optex Delaware. Given the fact that there has
not been a change in fiscal year but rather adoption of the fiscal year of
the accounting acquirer, there has been no adjustment made to treat the
period since the change in fiscal year as a stub period, and all numbers
presented are for complete fiscal
years.
|
2
|
Stock awards include issues of
10,000 common shares of Irvine Sensors Common Stock on January 16, 2008 at
the then current market share price of $0.75 per
share.
|
3
|
Mr. Oks was appointed as an
officer of Sustut as of September 15, 2008 and resigned as of March 29,
2009. Mr. Oks was given 10,000,000 shares of restricted stock as
compensation for services which was forfeited to Sustut on the date of his
resignation.
|
4
|
Mr. Hughes served as an
officer of Sustut and resigned on September 12, 2008 and forfeited the
9,902,624 shares of Common Stock in Optex Systems Holdings he owned at
that time. He received no other compensation during 2008. In 2007 Mr.
Hughes received $42,500 in compensation, the nature of which is
unspecified.
|
5
|
Stanley Hirschman’s
compensation in 2009 consisted solely of $25,000 cash paid for Director’s
Fees. He received no other compensation Mr. Hirschman was not compensated
for his service in 2008, so this table does not include compensation
amounts for him for
2008.
|
6
|
The amounts in the “Option
awards” column reflect the dollar amounts recognized as the executive
portion of compensation expense for financial statement reporting purposes
for each named executive officer during fiscal 2009, as required by FASB
ASC 718 (prior authoritative literature SFAS 123(R)), disregarding any
estimates for forfeitures relating to service-based vesting conditions.
For the assumptions relating to these valuations, see note 12 to our
fiscal 2009 audited financial statements. Andrey Oks & Terry Hughes
were executives of Sustut Exploration, Inc. during the years 2007 and
2008, prior to the reverse merger on March 30, 2009. Concurrent with the
reverser merger and name change to Optex Systems Holdings, Inc on March
30, 2009 Optex Systems Holdings adopted the fiscal year end of the
accounting acquirer and changed the period end from December 31 to a
fiscal year end of September. There were no earnings of either of these
individuals subsequent to the reverse merger and adoption of the
accounting acquirers’ fiscal period. All compensation expense shown for
these individuals prior to the March 30, 2009 reorganization are depicted
in calendar years ending December 31, 2008 and December 31,
2007.
|
7
|
Danny Schoening, Karen Hawkins
and Stanley Hirschman were all executives of Optex Systems Holdings
subsequent to the March 30, reorganization. Prior to the reorganization
Danny Schoening and Karen Hawkins were executives of Optex Systems, Inc.
(Texas) and Optex Systems, Inc. (Delaware) and Stanley Hirschman became an
executive of Optex Systems, Inc. (Delaware) in September 2008. Both Optex
Systems, Inc. (Texas) and Optex Systems, Inc. (Delaware) had previously
been operating under an October through September fiscal year end and as
such, compensation for these individuals is depicted in fiscal years
beginning in October and ending in September for each of the years 2007
through 2009.
|
Option
Grants in Last Fiscal Year
The
following table sets forth information with respect to each grant of a plan
based award made to our named executive officers during the fiscal year ended
September 27, 2009. There were no options granted to any of the named
executive officers during the fiscal year ended September 28, 2008.
Fiscal
Year 2009 Grants of Plan-Based Awards
Name
|
Grant
Date
|
|
All Other
Option
Awards: No
of Securities
Underlying
Options
|
|
|
Equity Exercise
or Base Price of
Option Awards
($/Sh)
|
|
|
Grant Date
Fair Value of
Stock and
Option Awards
($)(3)
|
|
||||
Danny
Schoening (1)
|
3/30/2009
|
1,414,649
|
$
|
0.15
|
$
|
63,705
|
||||||||
Karen
Hawkins (2)
|
5/14/2009
|
250,000
|
$
|
0.15
|
$
|
63,910
|
(1)
|
On March 29, 2009 Danny
Schoening was awarded 1,414,649 options pursuant to his employment
agreement with vesting rights over three years on the anniversary date of
the grant at 34%, 33% and 33% for each respective year. The options expire
on March 28, 2016
|
79
(2)
|
On May 14, 2009 Karen Hawkins was
awarded 250,000 options pursuant to the equity compensation plan detailed
below. The options vest over four years on the anniversary date at 25% per
year respectively and expire on May 13,
2016.
|
(3)
|
Amounts represent the total grand
date fair value of stock options granted in fiscal year 2009 under FASB
ASC 718 (Prior authoritative literature: SFAS No. 123R). The assumptions
used by us with respect to the valuation of options are set forth in Note
12 to our fiscal 2009 audited financial
statements.
|
Employment
Agreement
Optex
Systems Holdings entered into an employment agreement with Danny Schoening dated
December 1, 2008. The term of the agreement commenced as of December 1, 2008 and
shall continue through June 1, 2010. Thereafter, the term of the agreement shall
be automatically extended for successive 18 month periods, unless Optex Systems
Holdings or Schoening shall provide a written notice of termination at least
ninety (90) days prior to the end of the initial term or any extended term, as
applicable. During the first eighteen months of the term of the agreement, Optex
Systems Holdings shall pay to Schoening a base salary at the annual rate of
$190,000. Schoening was paid a one time bonus of $10,000 at the commencement of
the employment agreement in December 2008 and was granted options to purchase
1,414,649 shares of common stock of Optex Systems Holdings at an exercise price
of $0.15 per share at the time of the closing of the reorganization.
On
each renewal date of the commencement of employment, Schoening’s base salary
shall be reviewed by the Board and may be increased to such rate as the Board,
in its sole discretion, may hereafter from time to time determine. During the
term of the agreement, Schoening shall be entitled to receive bonuses of up to
30% of his base salary per year at the discretion of Optex Systems Holdings’
Board of Directors pursuant to performance objectives to be determined by the
Board of Directors. Any bonuses shall be payable in cash and shall be paid
within ninety (90) days of any year anniversary of the date of the agreement.
Upon closing of the reorganization, Optex Systems Holdings granted Schoening
stock options equal to 1% of the issued and outstanding shares of Optex Systems
Holdings immediately after giving effect to the reorganization, with 34% of the
options vesting on March 30, 2010, and 33% of the options vesting on each of
March 31, 2011 and March 31, 2012.
The
employment agreement contains the following events of termination: (i) death of
Mr. Schoening; (ii) termination by Optex Systems Holdings 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
without cause by Optex Systems Holdings and (iv) termination by Mr. Schoening
for good reason (including breach by Optex Systems Holdings 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 then outstanding
securities of Optex Systems Holdings or its successor changing ownership or a
sale of all or substantially all of Optex Systems Holdings’ assets, without the
surviving entity assuming the obligations under the agreement). For a
termination by Optex Systems Holdings for cause or upon death of Mr. Schoening,
then Mr. Schoening shall be paid salary and bonus earned through the date of
termination. For a termination by Optex Systems Holdings without cause or by Mr.
Schoening with good reason, then Mr. Schoening shall also be paid six months
base salary in effect and all granted stock options shall remain exercisable for
a period of two years after such termination, with all unvested stock options
immediately vesting. The agreement contains a standard non-solicitation and
non-compete agreement that extends for one year following termination
thereof.
Optex
Systems Holdings does not have any other employment agreements with its
executive officers and directors.
Equity
Compensation Plan Information
Optex
Systems Holdings currently has an option compensation plan covering the issuance
of options for the purchase of up to 6,000,000 shares. The purpose of the Plan
is to assist Optex Systems Holdings in attracting and retaining highly competent
employees and to act as an incentive in motivating selected officers and other
employees of Optex Systems Holdings and its subsidiaries, and directors and
consultants of Optex Systems Holdings and its subsidiaries, to achieve long-term
corporate objectives. There are 6,000,000 shares of common stock reserved for
issuance under this Plan. As of September 27, 2009, Optex Systems Holdings had
issued 2,681,649 share options under this Plan of which zero shares had vested
as of September 27, 2009.
80
Outstanding
Equity Awards as of September 27, 2009
|
Option Awards
|
||||||||||||||||||||
|
Equity Incentive Plan Awards
|
|
|||||||||||||||||||
|
Number of shares underlying unexercised options
|
|
|||||||||||||||||||
|
# | # |
Exercise
|
Expiration
|
|||||||||||||||||
Name
|
Exercisable
|
Unexercisable
|
Unearned
|
Price
|
Date
|
Footnotes
|
|||||||||||||||
|
|
||||||||||||||||||||
Danny
Schoening
|
- | 1,414,649 | 1,414,649 | $ | 0.15 |
3/29/2016
|
(1 | ) | |||||||||||||
|
|
||||||||||||||||||||
Karen
Hawkins
|
- | 250,000 | 250,000 | $ | 0.15 |
5/13/2016
|
(2 | ) |
(1)
|
Options
granted on March 30, 2009 pursuant to employment agreement and reverse
Merger. Shares vest over 3 years at a rate of 34%, 33% and 33% for each
respective anniversary date subsequent to 2009 and expire after seven
years. As of September 27, 2009 none of the options had
vested.
|
(2)
|
Options
granted on May 14, 2009 pursuant to employee stock option compensation
plan. Shares vest over 4 years at a rate of 25% per year each respective
anniversary date subsequent to 2009 and expire after seven years. As of
September 27, 2009 none of the options had
vested.
|
Nonqualified
deferred compensation
We had no
non-qualified deferred compensation plans during year ended September 27,
2009.
Director
Compensation
The
following table provides information regarding compensation paid to directors
for services rendered during the year ended September 27, 2009.
|
|
|
Fees
|
|
|
|
|
|
|
Non-Equity
|
|
|
Nonqualified
|
|
|
|
|
|
||||||||||||
|
|
|
Earned or
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Deferred
|
|
|
All Other
|
|
|
|
|||||||||
|
|
|
Paid in Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
|
|
|||||||||
Name
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Earnings ($)
|
|
|
($)
|
|
|
Total ($)
|
|
||||||||
Ronald
Richards
|
(1)
|
$
|
100,000
|
-
|
-
|
-
|
-
|
-
|
$
|
100,000
|
||||||||||||||||||||
Stanley
Hirschman
|
(2)
|
25,000
|
-
|
-
|
-
|
-
|
-
|
25,000
|
||||||||||||||||||||||
Merrick
Okamoto
|
(3)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
(1)
|
Director Fees paid monthly
from December 2008 through September 2009. Ronald Richards is paid $2,500
monthly as an Independent Director, $2,500 monthly for serving as Chairman
of the Audit Committee, and $5,000 monthly for serving as Chairman of the
Board of Directors. Note that fees paid through March 29, 2009 were for
service as a director of Optex Systems, Inc. (Delaware) and that the
Director become a Director of Optex Systems Holdings on March 30,
2009.
|
|
(2)
|
Director Fees paid monthly
from December 2008 through September 2009. Stanley Hirschman is paid
$2,500 monthly as a Director. Note that fees paid through March 29, 2009
were for service as a director of Optex Systems, Inc. (Delaware) and that
the Director become a Director of Optex Systems Holdings on March 30,
2009.
|
|
(3)
|
Merrick Okamoto serves as a
non-independent director and does not earn directors
fees.
|
The
members of our board of directors are actively involved in various aspects of
our business ranging from relatively narrow board oversight functions to
providing hands-on guidance to our executives and scientific staff with respect
to matters within their personal experience and expertise. We believe that the
active involvement of all directors in our principal business and policy
decisions increases our board of directors’ understanding of our needs and
improves the overall quality of our management
decisions.
81
All of
our directors are compensated separately for service as members of our board of
directors.
Nonqualified
deferred compensation
We had no
non-qualified deferred compensation plans during year ended September 27,
2009.
Post-Termination
Compensation
We
have not entered into change in control agreements with any of our named
executive officers or other members of the executive management team other than
the provision with respect to Mr. Schoening described above. However, our Board
of Directors has the full and exclusive power to interpret the plans, including
the power to accelerate the vesting of outstanding, unvested awards. A “change
in control” is generally defined as (1) the acquisition by any person of 30% or
more of the combined voting power of our outstanding securities or (2) the
occurrence of a transaction requiring stockholder approval and involving the
sale of all or substantially all of our assets or the merger of us with or into
another corporation.
On
September 20, 2010, we had 139,444,940 shares of common stock, and 1,027 shares of Series A
preferred stock issued and outstanding. The following table sets forth certain
information with respect to the beneficial ownership of our securities as of
September 20, 2010, for (i) each of our directors and executive officers; (ii)
all of our directors and executive officers as a group; and (iii) each person
who we know beneficially owns more than 5% of our common stock.
Beneficial
ownership data in the table has been calculated based on Commission rules that
require us to identify all securities that are exercisable for or convertible
into shares of our common stock within 60 days of September 20, 2010 and treat the underlying
stock as outstanding for the purpose of computing the percentage of ownership of
the holder.
Except
as indicated by the footnotes following the table, and subject to applicable
community property laws, each person identified in the table possesses sole
voting and investment power with respect to all capital stock held by that
person. The address of each named executive officer and director, unless
indicated otherwise by footnote, is c/o Optex Systems Holdings’ corporate
headquarters.
Except
as otherwise set forth below, the address of each of the persons listed below is
Optex Systems Holdings’ address.
Title of Class
Common
Stock
|
Name of Beneficial
Owner
|
|
Number of
Shares
|
|
|
Preferred
Conversion
(4)
|
|
|
Combined
Ownership
|
|
|
Percentage
of
Outstanding
Shares
|
|
|||||
5%
Holders
|
Arland
Holdings, Ltd. (1)
|
11,148,935
|
11,148,935
|
5.89
|
%
|
|||||||||||||
Sileas
Corporation (2,3)
|
102,184,347
|
37,040,000
|
139,224,347
|
73.52
|
%
|
|||||||||||||
Directors
and Officers:
|
Stanley
Hirschman (2)
|
102,184,347
|
37,040,000
|
139,224,347
|
73.52
|
%
|
||||||||||||
Danny
Schoening (5)(10)
|
102,665,328
|
37,040,000
|
139,698,460
|
73.62
|
%
|
|||||||||||||
Karen
Hawkins (11)
|
62,500
|
-
|
-
|
0.00
|
%
|
|||||||||||||
Ronald
Richards
|
-
|
-
|
-
|
-
|
||||||||||||||
Merrick
Okamoto(9)
|
1,950,000
|
-
|
1,950,000
|
1.40
|
%
|
|||||||||||||
Andrey
Oks (6)
|
-
|
-
|
-
|
-
|
||||||||||||||
Terry
Hughes (7)
|
-
|
-
|
-
|
-
|
||||||||||||||
Directors
and officers as a group (7 Individuals)
|
104,134,347
|
37,040,000
|
141,710,960
|
75.02
|
%
|
82
Title of Class
|
Name of Beneficial
Owner
|
Number of
Shares
|
Percentage
of
Outstanding
Shares
|
|||||||
Preferred
Stock
|
||||||||||
5%
Holders
|
Sileas
Corporation (2,3)
|
926
|
90.0
|
%
|
||||||
Alpha
Capital Anstalt (8)
|
101
|
10.0
|
%
|
1
|
Represents shares held by
Arland Holdings, Ltd., which is located at 551 5th Avenue, Suite 1601, New
York, NY 10176. Arie Rabinowitz has voting control over the shares held by
Arland Holdings, Ltd.
|
2
|
Represents shares held by
Sileas of which Stanley Hirschman, a Director/Officer Optex Systems
Holdings, has a controlling interest (80%); therefore, under Rule 13d-3 of
the Exchange Act, Mr. Hirschman is deemed to be the beneficial owner,
along with Mr.
Schoening.
|
3
|
Sileas’ ownership interest in
Optex Systems Holdings has been pledged to Longview as security for a loan
in connection with the acquisition of Longview’s interests in Optex
Delaware by Sileas. Investment decisions for Longview are made by its
investment advisor, Viking Asset Management, LLC. Mr. Peter Benz is the
Chairman, Chief Executive Officer and a Managing Member of Viking Asset
Management and may be deemed to control its business activities, including
the investment activities of Longview. Mr. Merrick Okamoto who is a
director of Optex Systems Holdings is the President and a Managing Member
of Viking Asset Management and may be deemed to control its business
activities, including the investment activities of Longview. In the event
of a default by Sileas on its debt obligation to Longview, the shares held
by Sileas may be returned to Longview. Viking and Longview each may be
deemed to have shared voting and dispositive authority over the shares of
Optex Systems Holdings’ common stock if they are returned to Longview. In
such an event, Mr. Benz and Mr. Okamoto, as control persons of Viking
and/or Longview, may be deemed to beneficially own all such shares;
however, they have stated that they would disclaim such beneficial
ownership were this to
occur.
|
4
|
Represents shares of common
stock issuable upon conversion of preferred stock held by the stockholder.
Sileas Corporation holds 90% or 926 of the preferred shares which are
convertible into 37,040,000 common shares. Alpha Capital owns the
remaining 10% or 101 preferred shares convertible into 4,040,000 common
shares, representing less than 2.13% total beneficially
ownership.
|
5
|
Represents shares held by
Sileas of which Mr. Schoening, an Officer of Optex Systems Holdings, has a
controlling interest (15%); therefore, under Rule 13d-3 of the Exchange
Act, Mr. Schoening is deemed to be the beneficial owner, along with Mr.
Hirschman, of those
shares.
|
6
|
Andrey Oks did not own any
shares subsequent to the reverse merger. Andrey Oks was given 10,000,000
shares of restricted stock as compensation for services in 2008 as an
executive officer , which he forfeited on the date of his resignation on
March 29, 2009.
|
7
|
Terry Hughes served as an
officer of Sustut and resigned on September 12, 2008 at which time he
forfeited 9,902,624 shares of common shares he owned at the
time.
|
8
|
Represents shares held by
Alpha Capital Anstalt, which is located at Pradfant 7, 9490 Furstentums,
Vaduz, Lichtenstein. Konrad Ackerman has voting control and investment
power over the shares held by Alpha Capital
Anstalt.
|
9
|
Represents 975,000 shares of
Common Stock and 975,000 warrants held by Longview Fund, LP. Investment
decisions for Longview are made by its investment advisor, Viking Asset
Management, LLC. Mr. Merrick Okamoto who is a director of Optex
Systems Holdings is the President and a Managing Member of Viking Asset
Management and may be deemed to control its business activities, including
the investment activities of Longview. Mr. Okamoto, as a control person of
Viking and/or Longview, may be deemed to beneficially own all such shares;
however, he disclaims such beneficial
ownership.
|
10
|
Includes options to purchase
480,981 shares of our common stock which have vested and are currently
exercisable.
|
83
11
|
Represents options to purchase
62,500 shares of our common stock which have vested and are currently
exercisable.
|
Item
13 Certain Relationships and Related Transactions, and Director
Independence
Relationship
between Optex Systems, Inc. (Texas), Irvine Sensors Corporation and Longview and
Alpha
Longview
and Alpha were owed certain debt by Irvine Sensors Corporation including debt
evidenced by (i) a December 29, 2006 Term Loan and Security Agreement executed
by Irvine Sensors Corporation and Longview and Alpha, and (ii) a series of
secured promissory notes purchased by them and issued to them on December 29,
2006, July 19, 2007 and November 28, 2007. As of August 24, 2008, the total
amount due under all of the described notes was approximately $18.4 million.
Optex Systems, Inc. (Texas), which was and is a wholly owned subsidiary of
Irvine Sensors Corporation, was a guarantor of all of those notes, and pursuant
to related security agreements Longview and Alpha had a validly perfected, fully
enforceable security interest in all personal property of Optex Systems, Inc.
(Texas). On September 19, 2008, pursuant to an Assignment and Stock/Note
Issuance Agreement, Alpha and Longview transferred and assigned to Optex
Systems, Inc. (Delaware) which assumed, $15 million of their respective
interests and rights in the aforesaid notes and obligations to Optex Systems,
Inc. (Delaware) in exchange for$9 million of equity and $6 million of
debt.
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) purchased all of the assets of Optex
Systems, Inc. (Texas) 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).
Longview and Alpha owned Optex Systems, Inc. (Delaware) until February 20, 2009,
when Longview sold 100% of its interests in Optex Systems, Inc. (Delaware) to
Sileas, as discussed below. In referring to these transactions, Optex Systems,
Inc. (Delaware) is considered to be the successor entity to Optex Systems, Inc.
(Texas), the predecessor entity.
Secured
Promissory Notes and Common Shares Issued in connection with Purchase by Optex
Systems, Inc. (Delaware)
In
connection with the public sale of the Optex Systems, Inc. (Texas) assets to
Optex Systems, Inc. (Delaware), Optex Systems, Inc. (Delaware) delivered to each
of Longview and Alpha a Secured Promissory Note due September 19, 2011 in the
principal amounts of $5,409,762 and $540,976, respectively. Each Note bears
simple interest at the rate of 6% per annum, and the interest rate upon an event
of default increases to 8% per annum. After 180 days from the issue date, the
principal amount of the Notes and accrued and unpaid interest thereon may be
converted into Optex Systems, Inc. (Delaware) common stock at a conversion price
of $1.80 per share (pre-split and pre-reorganization price). The Notes may be
redeemed prior to maturity at a price of 120% of the then outstanding principal
amount plus all accrued and unpaid interest thereon. The obligations of Optex
Systems, Inc. (Delaware) under the Notes are secured by a lien against all of
the assets of Optex Systems, Inc. (Delaware) in favor of Longview and Alpha. In
addition, Optex Systems, Inc. (Delaware) issued common stock to each of Longview
and Alpha in the quantities of 45,081,350 and 4,918,650, respectively. On
October 30, 2008, Alpha sold its Optex Systems, Inc. (Delaware) common stock to
Arland Holding, Ltd. On February 20, 2009, Longview sold its Note to Sileas (see
below).
Acquisition
by Sileas of Longview’s Interests in Optex Systems, Inc. (Delaware) on February
20, 2009
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc. (Delaware), in a private
transaction. The primary reason for the acquisition was to eliminate shareholder
control of Optex Systems Holdings by Longview and to limit any perception of
control over the day-to-day operations of Optex Systems Holdings, whether or not
such control actually existed. While Longview makes investments in a variety of
companies, it strives to invest passively and leave the day-to-day operations of
the companies in its investment portfolio to the management teams of those
companies. In addition, the acquisition allowed Optex Systems Holdings to avoid
potential conflicts of interest or other related business issues that might have
adversely affected Optex Systems Holdings’ operations as a result of Longview’s
investments in other companies.
84
The
purchase price for the acquisition was $13,524,405. Sileas issued a purchase
money note to Longview for the full amount of the purchase price in exchange for
45,081,350 shares of common stock of Optex Systems Holdings (representing 90% of
the outstanding shares) and transfer to Sileas of a note dated December 2, 2008,
issued by Optex Systems Holdings to Longview in the principal amount of
$5,409,762. No contingent consideration is due the seller in the transaction.
The obligations of Sileas under the Note are secured by a security interest in
Optex Systems Holdings’ common and preferred stock owned by Sileas that was
granted to Longview pursuant to a Stock Pledge Agreement delivered by Sileas to
Longview and also by a lien on all of the assets of Sileas. On March 27, 2009,
Sileas and Alpha (which owned the balance of the $6,000,000 of the notes)
exchanged the $6,000,000 aggregate principal amount of notes, plus accrued and
unpaid interest thereon, for 1,027 shares of Optex Systems, Inc. (Delaware)
Series A preferred stock.
Sileas
has no operations or business activities other than holding the stock and notes
described above and has no revenues, and it holds no assets other than the stock
and notes described above. The management of Sileas believes that the value of
its common stock and preferred stock holdings in Optex Systems Holdings will
increase over time. Sileas plans to repay Longview, no later than the maturity
date, through some combination of a recapitalization of Sileas equity and debt
and partial or full liquidation of its interests in Optex Systems Holdings.
Sileas will be limited by the extent of the stock price of Optex Systems
Holdings and limitations on ability to resell the stock it owns in Optex Systems
Holdings.
Secured
Promissory Note Due February 20, 2012/Longview Fund, LP
As a
result of the transaction described above between Sileas and Longview on
February 20, 2009, Sileas, the new majority owner of Optex Systems, Inc.
(Delaware), executed and delivered to Longview, a Secured Promissory Note due
February 20, 2012 in the principal amount of $13,524,405. The Note bears simple
interest at the rate of 4% per annum, and the interest rate upon an event of
default increases to 10% per annum. In the event that a Major Transaction
occurs prior to the maturity date resulting in the Borrower receiving Net
Consideration with a fair market value in excess of the principal and interest
due under the terms of this Secured Note, then in addition to paying the
principal and interest due, Sileas shall also pay an amount equal to 90% of the
consideration. “Major Transaction” refers to a transaction whereby Optex
Systems, Inc. (Delaware) would consolidate or merge into or sell or convey all
or substantially all of its assets to a third party entity for more than nominal
consideration, and “Net Consideration” refers to the fair market value of the
consideration received in connection with a Major Transaction less all
outstanding liabilities of Optex Systems, Inc. (Delaware).
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:1 (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, which also occurred on March 30, 2009, were exchanged by
Optex Systems Holdings for 8,131,667 shares of Optex Systems Holdings common
stock. The per share price in the private placement was $0.15 per share of
common stock, and the closing date was March 30, 2009. Optex Systems, Inc.
(Delaware) remains a wholly-owned subsidiary of Optex Systems
Holdings.
At the
time of the reorganization, 25,000,000 shares owned by Andrey Oks, the former
CEO of Optex Systems Holdings, were cancelled. Immediately prior to the closing,
17,449,991 shares of Optex Systems Holdings common stock were outstanding. The
17,449,991 shares derives from the 17,999,995 shares outstanding as of December
31, 2008 plus the 26,999,996 shares issued in conjunction with the 2.5:1 forward
stock split authorized by the Sustut Board and shareholders and effected on
February 27, 2009 less retirement of Andrey Oks’ 25,000,000 shares and
cancellation of 3,800,000 shares previously issued to Newbridge Securities
Corporation, shares plus issuance of 1,250,000 shares in payment for two
investor relations agreements. The total outstanding common shares of Optex
Systems Holdings subsequent to the closing of the reorganization is as
follows:
85
Existing
Sustut Shareholders
|
17,449,991
|
|||
Optex
Systems, Inc. (Delaware) shares exchanged
|
113,333,282
|
|||
Optex
Systems, Inc. (Delaware) Private Placement shares
exchanged
|
8,131,667
|
|||
Total
Shares after reorganization
|
138,914,940
|
|||
Cancellation
of shares - American Capital Ventures
|
(700,000
|
)
|
||
Private
placement - June 29, 2009
|
750,000
|
|||
Issuance
of shares as consideration - ZA Consulting
|
480,000
|
|||
Shares
Outstanding on September 27, 2009
|
139,444,940
|
Short Term Note Payable/Longview
Fund - On
September 23, 2008 Optex Systems, Inc. (Texas) borrowed $146,709 from Longview
and issued a promissory note dated September 23, 2008, to Longview in connection
therewith. The September 23, 2008 Note bore interest at the rate of 10% per
annum with interest accruing until the maturity date of the September 23, 2008
Note, which was originally set as November 7, 2008. On March 30, 2009 in
conjunction with the reorganization and Private Placement, Longview purchased
3.25 units of the Private Placement using $146,250 of the amount due under the
Note as consideration for the purchase. The outstanding balance related to the
original note issue of $459 plus $11,101 of accrued interest was paid in
September 2009.
On
October 27, 2009, Optex Systems Holdings borrowed $250,000 from Longview on an
unsecured basis pursuant to a promissory note, which originally expired on
December 1, 2009, but was extended until July 15, 2010. The note bore interest
at the rate of 10% per annum, and all accrued and unpaid interest was due upon
maturity.
In
exchange for the extension, Optex Systems Holdings granted Longview a warrant to
purchase 100,000 shares of restricted common stock with an exercise price of
$0.15 per share and a term of three years. On March 22, 2010, Optex
Systems Holdings repaid $125,000 in principal plus $10,000 in accrued interest
on the outstanding Longview note. On June 4, 2010, Optex Systems Holdings
paid off the remaining principal balance and all accrued and unpaid interest
thereon.
1 Rule
409(b) states: “(b) The registrant shall include a statement either showing that
unreasonable effort or expense would be involved or indicating the absence of
any affiliation with the person within whose knowledge the information rests and
stating the result of a request made to such person for the
information.”
We
made requests of counsel representing Sustut’s directors and officers to obtain
additional information into the principles behind their determination that the
securities of the registrant issued in the March 30, 2009 share exchange
represented “fair market value” to acquire the business operations of Optex
Systems, Inc. (Delaware), and they were not able to provide any
information. We confirm that we have no affiliation with Sustut’s former
counsel, Anslow & Jacklin, who was our only source of information regarding
the prior history of Sustut and that the result of our request was that they
stated they had no information and were not able to obtain further information
on this issue.
We have
not been able to provide further background as to how the merger consideration
was determined beyond the fact that it was determined by negotiation between
Sustut and Optex Systems, Inc. (Delaware). Thus, we have invoked Rule
409(b) which states: “(b) The registrant shall include a statement either
showing that unreasonable effort or expense would be involved or indicating the
absence of any affiliation with the person within whose knowledge the
information rests and stating the result of a request made to such person for
the information.”
86
Transactions
with Executive Management
See the
“Executive Compensation” section for a discussion of the material elements of
compensation awarded to, earned by or paid to our named executive officers.
Other than as stated in the “Executive Compensation” section, we have not
entered into any transactions with executive management.
The
following table sets forth the fees paid to date for services rendered by EFP
Rotenberg as successor by merger, effective October 1, 2009, of the registered
public accounting firm Rotenberg & Co., LLP during fiscal years ended
September 27, 2009 and September 28, 2008, respectively.
Fee Category
|
EFP Rotenberg
2009 Fees
|
|||
Audit
Fees (1)
|
$ | 189,000 | ||
|
||||
Audit-Related
Fees-registration statement consents (2)
|
$ | 31,260 | ||
|
||||
Tax
Fees
|
$ | — | ||
|
||||
All
Other Fees
|
$ | 0 |
( 1) Audit Fees are fees for
professional services performed by EFP Rotenberg LLP for the audit of our annual
consolidated financial statements and review of consolidated financial
statements included in our 10-Q filings for the fiscal years ended September 27,
2009 and September 28, 2008, respectively.
(2) Fees
paid in related to consent for S-1 registration statement and procedures
associated with SEC comment letter for S-1 registration statement.
(3) There
were no audit fees paid to EFP Rotenberg, LLP during the year ended September
28, 2008. Audit fees for 2008 were paid by Irvine Sensors Corporation
prior to the asset acquisition and apportioned to Optex Systems, Inc. (Delaware)
through the intercompany "Due to Parent" account. Subsequent to the
asset acquisition from Irvine Sensors Corporation on October 14, 2008 EFP
Rotenberg, LLP was engaged to perform audit procedures on Optex Systems, Inc.
(Texas) as a stand-alone entity, and Optex Systems Inc. (Delaware) for 2007,
2008 and 2009 per note 1.
Exhibits
Exhibit
No.
|
|
Description
|
2.1
|
Agreement
and Plan of Reorganization, dated as of the March 30, 2009, by and between
registrant, a Delaware corporation and Optex Systems, Inc., a Delaware
corporation (1).
|
|
3.1
|
Certificate
of Incorporation, as amended, of Optex Systems Holdings, Inc
(2).
|
|
3.2
|
Bylaws
of Optex Systems Holdings (1).
|
|
10.1
|
2009
Stock Option Plan (1).
|
|
10.2
|
Employment
Agreement with Danny Schoening (1).
|
|
10.3
|
Lease
for 1420 Presidential Blvd., Richardson, TX
(1).
|
87
10.4
|
Form
of Warrant (3)
|
|
10.5
|
Specimen
Stock Certificate (3)
|
|
10.6
|
Contract
W52H0905D0248 with Tank-automotive and Armaments Command, dated July 27,
2005 (5) (6)
|
|
10.7
|
Contract
W52H0909D0128 with Tank-automotive and Armaments Command, dated March 24,
2009 (5)
|
|
10.8
|
Contract
W52H0905D0260 with Tank-automotive and Armaments Command, dated August 3,
2005 (5) (6)
|
|
10.9
|
PO#
40050551 with General Dynamics, dated June 8, 2009 (5)
(6)
|
|
10.10
|
Contract
9726800650 with General Dynamics, dated April 9, 2007 (5)
(6)
|
10.11
|
Form
of Subscription Agreement (4)
|
|
10.12
|
Single
Source Supplier Purchase Orders with TSP Inc. (5)
|
|
10.13
|
Single
Source Supplier Purchase Orders with SWS Trimac (5)
|
|
10.14
|
Since
Source Supplier Purchase Orders with Danaher Controls
(5)
|
|
10.15
|
Single
Source Supplier Purchase Orders with Spartech Polycast
(5)
|
|
10.16
|
Third
Amendment to Lease, between Aquiport DFWIP and Optex Systems, Inc., dated
January 7, 2010 (5)
|
|
10.17
|
$250,000
principal amount Note in favor of the Longview Fund, L.P., dated October
27, 2009 (9)
|
|
10.18
|
Investor
Relations Agreement, dated April 1, 2009 between Optex Systems and
American Capital Ventures, Inc. (9)
|
|
10.19
|
Form
of Loan and Security Agreement between Optex Systems, Inc. and Peninsula
Bank Business Funding, dated March 4, 2010 (5)
|
|
10.20
|
Form
of Unconditional Guaranty executed by Optex Systems Holdings, Inc. in
favor of Peninsula Bank Business Funding, dated March 4, 2010
(5)
|
|
10.21
|
Form
of Warrant issued by Optex Systems Holdings, Inc. to Peninsula Bank
Business Funding, dated March 4, 2010 (5)
|
|
10.22
|
Allonge
to Promissory Note, dated January 5, 2010 (9)
|
|
10.23
|
Showcase
Agreement between Optex Systems, Inc. and ECON Corporate Services,
Inc., dated April 1, 2009 (9)
|
|
10.24
|
Consulting
Agreement dated June 29, 2009, between ZA Consulting, Inc. and Optex
Systems, Inc. (9)
|
|
10.25
|
Purchase
Order dated June 28, 2010 with TACOM-Warren (7)
|
|
10.26
|
First
Amendment to Loan and Security Agreement, dated August 3, 2010, by and
between Peninsula Bank Business Funding and Optex Systems, Inc.
(8)
|
88
14.1
|
Code
of Ethics (3)
|
|
21.1
|
List
of Subsidiaries – Optex Systems, Inc.
(1)
|
(1)
|
Incorporated by reference from
our Current Report on Form 8-K dated April 3,
2009.
|
(2)
|
Incorporated by reference from
our Amendment No. 1 to Registration Statement on Form S-1 filed on
September 28, 2009
|
(3)
|
Incorporated by reference from
our Registration Statement on Form S-1 filed on May 19,
2009
|
(4)
|
Incorporated by reference from
our Form 10-K for the fiscal year ended September 27, 2009, filed on
January 11, 2010
|
(5)
|
Incorporated by reference from
our Amendment No. 4 to Registration Statement on Form S-1 filed
on June 14, 2010
|
(6)
|
This exhibit is missing part
of the original bid/solicitation package as such information can only be
obtained from third parties with which the registrant has no affiliation,
and registrant has made requests from such third parties for such
information, and such parties have not been able to provide such
information.
|
(7)
|
Incorporated by reference from
our Current Report on Form 8-K dated July 2,
2010
|
(8)
|
Incorporated by reference from
our Form 10-Q for the quarter ended on June 27, 2010, filed on August 11,
2010
|
(9)
|
Incorporated by reference from
our Amendment No. 5 to Registration Statement on Form S-1 filed on July
23, 2010
|
(10)
|
Incorporated
by reference from our Amendment No. 6 to Registration Statement on Form
S-1 filed on September 3, 2010.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
OPTEX
SYSTEMS HOLDINGS, INC.
|
||
By:
|
/s/
Stanley Hirschman
|
|
Stanley
Hirschman, Principal Executive Officer and Director
|
||
Date:
October 25,
2010
|
89
By:
|
/s/
Karen Hawkins
|
|
Karen
Hawkins, Principal Financial Officer and Principal Accounting
Officer
|
||
Date:
October 25,
2010
|
Pursuant
to the requirements of the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/ Merrick Okamoto
|
||||
Merrick
Okamoto
|
Director
|
October
25, 2010
|
||
/s/ Ronald Richards
|
||||
Ronald
Richards
|
Director
|
October
25, 2010
|
||
/s/
Stanley Hirschman
|
||||
Stanley
Hirschman
|
Principal
Executive Officer and
Director
|
October
25, 2010
|
||
/s/
Karen Hawkins
|
||||
Karen
Hawkins
|
Principal
Financial Officer and Principal Accounting Officer
|
October
25, 2010
|
90