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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______to______.

 

OPTEX SYSTEMS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Charter)

 

Delaware   001-41644   90-0609531
(State or other jurisdiction   (Commission   (IRS Employer
of incorporation)   File Number)   Identification No.)

 

1420 Presidential Drive, Richardson, TX   75081-2439
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (972) 764-5700

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.001 par value   OPXS   The Nasdaq Stock Market LLC

 

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 preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer Smaller Reporting Company

 

Emerging growth company
   
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 13, 2024: 6,852,808 shares of common stock.

 

 

 

 
 

 

OPTEX SYSTEMS HOLDINGS, INC.
FORM 10-Q

 

For the period ended March 31, 2024

 

INDEX

 

PART I— FINANCIAL INFORMATION F-1
   
Item 1. Unaudited Condensed Consolidated Financial Statements F-1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II— OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 1A. Risk Factors 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Mine Safety Disclosures 15
Item 6. Exhibits 15
SIGNATURE 16

 

2
 

 

Part 1. Financial Information

 

Item 1. Unaudited Condensed Consolidated Financial Statements

 

OPTEX SYSTEMS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2024 (UNAUDITED) AND OCTOBER 1, 2023 F-2
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2024 (UNAUDITED) AND THE THREE AND SIX MONTHS ENDED APRIL 2, 2023 (UNAUDITED) F-3
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2024 (UNAUDITED) AND THE SIX MONTHS ENDED APRIL 2, 2023 (UNAUDITED) F-4
   
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2024 (UNAUDITED) AND FOR THE THREE AND SIX MONTHS ENDED APRIL 2, 2023 (UNAUDITED) F-5
   
CONDENSED CONSOLIDATED FINANCIAL STATEMENT FOOTNOTES (UNAUDITED) F-6

 

F-1
 

 

Optex Systems Holdings, Inc.

Condensed Consolidated Balance Sheets

 

   March 31, 2024   October 1, 2023 
   (Thousands, except share and per share data) 
   March 31, 2024   October 1, 2023 
   (Unaudited)     
ASSETS          
Cash and Cash Equivalents  $321   $1,204 
Accounts Receivable, Net   3,680    3,624 
Inventory, Net   13,683    12,153 
Contract Asset   250    336 
Prepaid Expenses   404    219 
           
Current Assets   18,338    17,536 
           
Property and Equipment, Net   983    998 
           
Other Assets          
Deferred Tax Asset   875    922 
Intangible Assets   1,089    - 
Right-of-use Asset   2,490    2,740 
Security Deposits   23    23 
           
Other Assets   4,477    3,685 
           
Total Assets  $23,798   $22,219 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities          
Accounts Payable  $2,049   $810 
Operating Lease Liability   630    620 
Federal Income Taxes Payable   -    247 
Accrued Expenses   1,089    1,265 
Accrued Selling Expense   258    336 
Accrued Warranty Costs   69    75 
Contract Loss Reserves   150    243 
Customer Advance Deposits   481    481 
           
Current Liabilities   4,726    4,077 
           
Other Liabilities          
Credit Facility   500    1,000 
Operating Lease Liability, net of current portion   2,027    2,282 
Fair Value of Contingent Liability   86    - 
           
Other Liabilities   2,613    3,282 
           
Total Liabilities   7,339    7,359 
           
Commitments and Contingencies   -    - 
         
Stockholders’ Equity          
Common Stock – ($0.001 par, 2,000,000,000 authorized, 6,844,362 and 6,763,070 shares issued and outstanding, respectively)   7    7 
Additional Paid in Capital   21,391    21,285 
Accumulated Deficit   (4,939)   (6,432)
           
Stockholders’ Equity   16,459    14,860 
           
Total Liabilities and Stockholders’ Equity  $23,798   $22,219 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

F-2
 

 

Optex Systems Holdings, Inc.

Condensed Consolidated Statements of Operations
(Unaudited)

 

   March 31,
2024
   April 2,
2023
   March 31,
2024
   April 2,
2023
 
   (Thousands, except share and per share data) 
   Three months ended   Six months ended 
   March 31,
2024
   April 2,
2023
   March 31,
2024
   April 2,
2023
 
                 
Revenue  $8,523   $6,370   $15,492   $10,410 
                     
Cost of Sales   5,966    4,817    11,250    8,140 
                     
Gross Profit   2,557    1,553    4,242    2,270 
                     
General and Administrative Expense   1,201    938    2,333    1,937 
                     
Operating Income   1,356    615    1,909    333 
                     
Interest Expense   (9)   (8)   (16)   (8)
                     
Income Before Taxes   1,347    607    1,893    325 
                     
Income Tax Expense, net   285    128    400    69 
                     
Net Income  $1,062   $479   $1,493   $256 
                     
Basic income per share  $0.16   $0.07   $0.22   $0.04 
                     
Weighted Average Common Shares Outstanding - basic   6,768,236    6,643,070    6,717,592    6,589,854 
                     
Diluted income per share  $0.16   $0.07   $0.22   $0.04 
                     
Weighted Average Common Shares Outstanding – diluted   6,823,155    6,668,917    6,774,542    6,620,800 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

F-3
 

 

Optex Systems Holdings, Inc.

Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

   March 31, 2024   April 2, 2023 
  

(Thousands)

Six months ended

 
   March 31, 2024   April 2, 2023 
         
Cash Flows from Operating Activities:          
Net Income  $1,493   $256 
           
Adjustments to Reconcile Net Income to Net Cash provided by (used in) Operating Activities:          
Depreciation and Amortization   209    166 
Stock Compensation Expense   270    53 
Deferred Tax   47    69 
Accounts Receivable   (56)   632 
Inventory   (1,530)   (2,080)
Contract Asset   86    (336)
Prepaid Expenses   (185)   (114)
Leases   5    13 
Accounts Payable and Accrued Expenses   1,063    534 
Federal Income Taxes Payable   (247)   (331)
Accrued Warranty Costs   (6)   97 
Accrued Selling Expense   (78)   336 
Customer Advance Deposits   -    (180)
Estimated Contract Losses Accrued   (93)   (176)
Total Adjustments   (515)   (1,317)
Net Cash provided by (used in) Operating Activities   978    (1,061)
           
Cash Flows from Investing Activities          
Purchase of Intangible Assets   (1,030)   - 
Purchases of Property and Equipment   (167)   (146)
Net Cash used in Investing Activities   (1,197)   (146)
           
Cash Flows from Financing Activities          
Borrowing from Credit Facility   500    1,007 
Payments to Credit Facility   (1,000)   - 
Cash Paid for Taxes Withheld on Net Settled Restricted Stock Unit Shares Issued   (164)   (58)
Net Cash (used in) provided by Financing Activities   (664)   949 
           
Net Decrease in Cash and Cash Equivalents   (883)   (258)
Cash and Cash Equivalents at Beginning of Period   1,204    934 
Cash and Cash Equivalents at End of Period  $321   $676 
           
Supplemental Cash Flow Information:          
           
Cash Transactions:          
Cash Paid for Taxes   758    497 
Cash Paid for Interest   12    8 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

F-4
 

 

Optex Systems Holdings, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Thousands, except share data)

(Unaudited)

 

   Shares   Common    Paid in   Retained   Stockholders 
   Three months ended March 31, 2024 
   Common        Additional       Total 
   Shares   Common    Paid in   Accumulated   Stockholders 
   Issued   Stock    Capital   Deficit   Equity 
Balance at January 1, 2024   6,823,693   $      7    $21,371   $(6,001)  $15,377 
Stock Compensation Expense   -    -     157    -    157 
Vested Restricted Stock Units Issued Net of Tax Withholding   20,669    -     (137)   -    (137)
Net Income   -    -     -    1,062    1,062 
                           
Balance at March 31, 2024   6,844,362   $7    $21,391   $(4,939)  $16,459 

 

   Three months ended April 2, 2023 
   Common         Additional       Total 
   Shares    Common    Paid in   Accumulated   Stockholders 
   Issued    Stock    Capital   Deficit   Equity 
Balance at January 1, 2023   6,763,070    $      7    $21,116   $(8,918)  $12,205 
Stock Compensation Expense   -     -     17    -    17 
Taxes on Shares Issued for Vested Restricted Stock Units   -     -     (42)   -    (42)
Unvested Shares Forfeited (1)   (40,000)    -     -    -    - 
Net Income   -     -     -    479    479 
                            
Balance at April 2, 2023   6,723,070    $7    $21,091   $(8,439)  $12,659 

 

   Six months ended March 31, 2024 
   Common        Additional       Total 
   Shares   Common    Paid in   Accumulated   Stockholders 
   Issued   Stock    Capital   Deficit   Equity 
Balance at October 1, 2023   6,763,070   $      7    $21,285   $(6,432)   14,860 
Stock Compensation Expense   -    -     270    -    270 
Vested Restricted Stock Units Issued Net of Tax Withholding   81,292    -     (164)   -    (164)
Net Income   -    -     -    1,493    1,493 
                           
Balance at March 31, 2024   6,844,362   $7    $21,391   $(4,939)  $16,459 

 

   Six months ended April 2, 2023 
   Common         Additional       Total 
   Shares    Common    Paid in   Accumulated   Stockholders 
   Issued    Stock    Capital   Deficit   Equity 
Balance at October 2, 2022   6,716,638    $      7    $21,096   $(8,695)  $12,408 
Stock Compensation Expense   -     -     53    -    53 
Vested Restricted Stock Units Issued Net of Tax Withholding   46,432     -     (58)   -    (58)
Unvested Shares Forfeited (1)   (40,000 )   -     -    -    - 
Net Income   -     -     -    256    256 
                            
Balance at April 2, 2023   6,723,070    $7    $21,091   $(8,439)  $12,659 

 

(1) Common unvested restricted shares which were forfeited and cancelled in February 2023.

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

F-5
 

 

Note 1 - Organization and Operations

 

Optex Systems Holdings, Inc. (together with its subsidiaries, the “Company,” “Optex Systems Holdings,” “we,” “us,” and “our”) manufactures optical sighting systems and assemblies for the U.S. Department of Defense, foreign military applications and commercial markets. Its products are installed on a variety of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. The Company also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that are delivered both directly to the military and to other defense prime contractors or commercial customers. The Company’s consolidated revenues for the six months ended March 31, 2024 were derived from the U.S. government (21%), two major U.S. defense contractors (26% and 9%, respectively), one major commercial customer (16%) and all other customers (28%). Approximately 94% of the total company revenue is generated from domestic customers and 6% is derived from foreign customers, primarily in Canada and Israel. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of March 31, 2024, Optex Systems Holdings operated with 115 full-time equivalent employees.

 

Note 2 - Accounting Policies

 

Basis of Presentation

 

Principles of Consolidation: The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.

 

The condensed consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

 

These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Optex Systems Holdings’ Form 10-K for the year ended October 1, 2023 and other reports filed with the SEC.

 

The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of Optex Systems Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required for interim financial reporting purposes has been omitted.

 

F-6
 

 

Inventory: As of March 31, 2024 and October 1, 2023, inventory included:

 

   March 31, 2024   October 1, 2023 
   (Thousands) 
   March 31, 2024   October 1, 2023 
Raw Material  $8,568   $8,211 
Work in Process   5,454    4,460 
Finished Goods   668    489 
Gross Inventory  $14,690   $13,160 
Less: Inventory Reserves   (1,007)   (1,007)
Net Inventory  $13,683   $12,153 

 

Concentration of Credit Risk: The Company’s accounts receivables as of March 31, 2024 consist of U.S. government agencies (11%), four major U.S. defense contractors (25%, 14%, 8% and 5%, respectively), one commercial customer (11%) and all other customers (26%). The Company does not believe that this concentration results in undue credit risk because of the financial strength of the customers and the Company’s long history with these customers.

 

Accrued Warranties: The Company accrues product warranty liabilities based on the historical return rate against period shipments as they occur and reviews and adjusts these accruals quarterly for any significant changes in estimated costs or return rates. The accrued warranty liability includes estimated costs to repair or replace returned warranty backlog units currently in-house plus estimated costs for future warranty returns that may be incurred against warranty covered products previously shipped as of the period end date. As of March 31, 2024, and October 1, 2023, the Company had warranty reserve balances of $69 and $75, respectively.

 

   March 31,
2024
   April 2,
2023
   March 31,
2024
   April 2,
2023
 
   Three months ended   Six Months ended 
   March 31,
2024
   April 2,
2023
   March 31,
2024
   April 2,
2023
 
Beginning balance  $48   $229   $75   $169 
                     
Incurred costs for warranties satisfied during the period   (5)   (16)   (37)   (16)
                     
Warranty Expenses:                    
Warranties reserved for new product shipped during the period(1)   26    60    64    119 
Change in estimate for pre-existing warranty liabilities(2)   -    (7)   (33)   (6)
Warranty Expense   26    53    31    113 
                     
Ending balance  $69   $266   $69   $266 

 

(1) Warranty expenses accrued to cost of sales (based on current period shipments and historical warranty return rate.)
   
(2) Changes in estimated warranty liabilities recognized in cost of sales associated with: the period end customer returned warranty backlog, or the actual costs of repaired/replaced warranty units which were shipped to the customer during the current period.

 

F-7
 

 

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.

 

Fair Value of Financial Instruments: Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of the financial statement presentation date.

 

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are carried at, or approximate, fair value as of the reporting date because of their short-term nature. The credit facility is reported at fair value as it bears market rates of interest.

 

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.

 

The accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement. Fair value estimates are reviewed at the origination date and again at each applicable measurement date and interim or annual financial reporting dates, as applicable for the financial instrument, and are based upon certain market assumptions and pertinent information available to management at those times.

 

Revenue Recognition: The majority of the Company’s contracts and customer orders originate with fixed determinable unit prices for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the specific due date for the transfer of control and title of each of those deliverables to the customer at pre-established payment terms, which are generally within thirty to sixty days from the transfer of title and control. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. In addition, the Company has one ongoing service contract which relates to optimized weapon system support (OWSS) and includes ongoing program maintenance, repairs and spare inventory support for the customer’s existing fleet units in service during the duration of the contract. Revenue recognition for this program has been recorded by the Company, and compensated by the customer, at fixed monthly increments over time, consistent with the defined contract maintenance period. During the three and six months ended March 31, 2024, we recognized $115 thousand and $231 thousand in service contract revenue. During the three and six months ended April 2, 2023, we recognized $112 thousand and $226 thousand in service contract revenue.

 

During the three and six-month periods ended March 31, 2024, we recognized revenue from customer deposit liabilities (deferred contract revenue) of zero. During the three and six-month periods ended April 2, 2023, we recognized revenue from customer deposit liabilities (deferred contract revenue) of $1 thousand and $223 thousand. As of March 31, 2024 and October 1, 2023 we had $481 thousand in customer deposit liabilities.

 

As of March 31, 2024 and October 1, 2023, there was $258 and $336 thousand in accrued selling expenses and $250 and $336 thousand in contract assets related to a new $3.1 million contract booked in November 2022. The costs will be amortized against the revenue for the contract deliveries which began in the fourth quarter of fiscal year 2023 and extend into fiscal year 2025.

 

Contract Loss Reserves: The Company records loss provisions in the event that the current estimated total revenue against a contract and the total estimated cost remaining to fulfill the contract indicate a loss upon completion. When the estimated costs indicate a loss, we record the entire value of the loss against the contract loss reserve in the period the determination is made. The Company has several long-term fixed price contracts that are currently indicative of a loss condition due to recent inflationary pressures on material and labor, combined with increased manufacturing overhead costs. One of these long-term contracts has an option year ordering period ending in February 2025 with deliveries that may extend into February 2026. As of March 31, 2024 and October 1, 2023, the accrued contract loss reserves were $150 thousand and $243 thousand, respectively. During the three and six months ended March 31, 2024, the Company recognized a gain on changes in estimates for the contract loss reserves of $120 thousand and $30 thousand and applied reserves of $38 thousand $63 thousand to cost of sales against revenues booked during the periods, respectively.

 

F-8
 

 

Income Tax/Deferred Tax: As of March 31, 2024 and October 1, 2023, the Company had a deferred tax asset valuation allowance of ($0.8) million against deferred tax assets of $1.7 million for a net deferred tax asset of $0.9 million. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2011 through 2016 which cannot be fully recognized due to an IRS Section 382 limitation related to a change in control. During the six months ended March 31, 2024, our deferred tax assets decreased by $47 thousand related to temporary tax adjustments.

 

Earnings per Share: Basic earnings per share is computed by dividing income available for common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

The Company has potentially dilutive securities outstanding, which include unvested restricted stock units and unvested shares of restricted stock. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Unvested restricted stock units and shares of restricted stock that are anti-dilutive are excluded from the calculation of diluted earnings per common share.

 

For the three and six months ended March 31, 2024, 60,000 shares of unvested restricted stock and 39,000 unvested restricted stock units (which convert to 54,919 and 56,950 incremental shares after tax withholdings), respectively, were included in the diluted earnings per share calculation. For the three and six months ended March 31, 2024, 27,000 performance shares were excluded from diluted earnings per share as they were below the target share price. For the three and six months ended April 2, 2023, 80,000 shares of unvested restricted stock (which convert to an aggregate of 25,847 and 30,946 incremental shares after tax withholdings), respectively, were included in the diluted earnings per share calculation.

 

Note 3 - Segment Reporting

 

The Company’s two reportable segments, Applied Optics Center and Optex Richardson, are strategic businesses offering similar products to similar markets and customers; however, they are operated and managed separately due to differences in manufacturing technology, equipment, geographic location, and specific product mix. Applied Optics Center was acquired as a unit, and management at the time of the acquisition was retained.

 

The Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies for the Optex Richardson segment. Intersegment sales and transfers are accounted for at annually agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general and administrative costs, but exclude profits that would apply to third party external customers.

 

Optex Richardson – Richardson, Texas

 

Optex Richardson revenues are primarily in support of prime and subcontracted military customers. Military sales to prime and subcontracted customers represented approximately 98% and sales to commercial customers represented approximately 2% of the external segment revenue for the six months ended March 31, 2024. The Optex Richardson segment revenue is comprised of approximately 86% domestic military customers and 12% foreign military customers. For the six months ended March 31, 2024, Optex Richardson represented 50% of the Company’s total consolidated revenue and consisted of revenue from the U.S. government (15%), one major U.S. defense contractor (23%), and all other customers (12%).

 

Optex Richardson is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of March 31, 2024, the Richardson facility operated with 69 full-time equivalent employees in a single shift operation. The facilities at Optex Richardson serve as the home office for both the Optex Richardson and Applied Optics Center segments.

 

F-9
 

 

Applied Optics Center (AOC) – Dallas, Texas

 

The Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represented approximately 31% and military sales to prime and subcontracted customers represented approximately 69% of the external segment revenue for the six months ended March 31, 2024. Approximately 95% of the AOC revenue was derived from external customers and approximately 5% was related to intersegment sales to Optex Richardson in support of military contracts. For the six months ended March 31, 2024, AOC represented 50% of the Company’s total consolidated revenue and consisted of revenue from one major defense contractor (9%), one commercial customer (15%), and all other customers (26%).

 

The Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of March 31, 2024, AOC operated with 46 full-time equivalent employees in a single shift operation.

 

The financial tables below present information on the reportable segments’ profit or loss for each period, as well as segment assets as of each period end. The Company does not allocate interest expense, income taxes or unusual items to segments.

 

  

Reportable Segment Financial Information

(thousands)

 
   As of and for the three months ended March 31, 2024 
   Optex
Richardson
   Applied Optics Center
Dallas
   Other
(non-allocated costs and intersegment eliminations)
   Consolidated
Total
 
                 
Revenues from external customers  $4,274   $4,249   $-   $8,523 
Intersegment revenues   -    231    (231)   - 
Total revenue  $4,274   $4,480   $(231)  $8,523 
                     
Interest expense  $-   $-   $9   $9 
                     
Depreciation and amortization  $38   $79   $-   $117 
                     
Income before taxes  $393   $1,120   $(166)  $1,347 
                     
Other significant noncash items:                    
Allocated home office expense  $(337)  $337   $-   $- 
Stock compensation expense  $-   $-   $157   $157 
Warranty expense  $-   $26   $-   $26 
                     
Segment assets  $15,155   $8,643   $-   $23,798 
Expenditures for segment assets  $1,139   $-   $-   $1,139 

 

F-10
 

 

  

Reportable Segment Financial Information

(thousands)

 
   As of and for the three months ended April 2, 2023 
   Optex
Richardson
   Applied Optics Center
Dallas
   Other
(non-allocated costs and intersegment eliminations)
   Consolidated
Total
 
                 
Revenues from external customers  $3,053   $3,317   $-   $6,370 
Intersegment revenues   -    130    (130)   - 
Total revenue  $3,053   $3,447   $(130)  $6,370 
                     
Interest expense  $-   $-   $8   $8 
                     
Depreciation and amortization  $13   $72   $-   $85 
                     
Income (loss) before taxes  $(45)  $677   $(25)  $607 
                     
Other significant noncash items:                    
Allocated home office expense  $(312)  $312   $-   $- 
Stock compensation expense  $-   $-   $17   $17 
Warranty expense  $-   $53   $-   $53 
                     
Segment assets  $11,283   $8,567   $-   $19,850 
Expenditures for segment assets  $25   $31   $-   $56 

 

  

Reportable Segment Financial Information

(thousands)

 
   As of and for the six months ended March 31, 2024 
   Optex
Richardson
   Applied Optics Center
Dallas
   Other
(non-allocated costs and intersegment eliminations)
   Consolidated
Total
 
                 
Revenues from external customers  $7,669   $7,823   $-   $15,492 
Intersegment revenues   -    418    (418)   - 
Total revenue  $7,669   $8,241   $(418)  $15,492 
                     
Interest expense  $-   $-   $16   $16 
                     
Depreciation and amortization  $48   $161   $-   $209 
                     
Income before taxes  $409   $1,770   $(286)  $1,893 
                     
Other significant noncash items:                    
Allocated home office expense  $(680)  $680   $-   $- 
Stock compensation expense  $-   $-   $270   $270 
Warranty expense  $17   $14   $-   $31 
                     
Segment assets  $15,155   $8,643   $-   $23,798 
Expenditures for segment assets  $1,172   $25   $-   $1,197 

 

F-11
 

 

  

Reportable Segment Financial Information

(thousands)

 
   As of and for the six months ended April 2, 2023 
   Optex
Richardson
   Applied Optics Center
Dallas
   Other
(non-allocated costs and intersegment eliminations)
   Consolidated
Total
 
                 
Revenues from external customers  $4,672   $5,738   $-   $10,410 
Intersegment revenues   -    245    (245)   - 
Total revenue  $4,672   $5,983   $(245)  $10,410 
                     
Interest expense  $-   $-   $8   $8 
                     
Depreciation and amortization  $24   $142   $-   $166 
                     
Income (loss) before taxes  $(468)  $854   $(61)  $325 
                     
Other significant noncash items:                    
Allocated home office expense  $(592)  $592   $-   $- 
Stock compensation expense  $-   $-   $53   $53 
Warranty expense  $-   $113   $-   $113 
                     
Segment assets  $11,283   $8,567   $-   $19,850 
Expenditures for segment assets  $25   $121   $-   $146 

 

Note 4 - Commitments and Contingencies

 

Non-cancellable Operating Leases

 

The Company leases its office and manufacturing facilities for the Optex Richardson location and the Applied Optics Center Dallas location. The Company also leases certain office equipment under non-cancellable operating leases.

 

The leased facility under Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months, commencing on April 1, 2021 and ending on May 31, 2028. The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each year thereafter. The initial term included 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately $12 thousand for additional Common Area Maintenance fees and taxes (“CAM”), to be adjusted annually based on actual expenses incurred by the landlord.

 

The leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet of space at the premises. The previous lease term for this location expired on October 31, 2021 and the monthly base rent was $21.9 thousand through the end of the lease. On January 11, 2021 the Company executed a first amendment extending the terms of the lease for eighty-six (86) months, commencing on November 1, 2021 and ending on December 31, 2028. The initial base rent is set at $23.6 thousand as of January 1, 2022 and escalates 2.75% on January 1 each year thereafter. The initial term includes 2 months of rent abatement for November and December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing rental rate” or the then current base rental rate. Our obligations to make payments under the lease are secured by a $125,000 standby letter of credit. The monthly rent includes approximately $9 thousand for additional CAM, to be adjusted annually based on actual expenses incurred by the landlord.

 

F-12
 

 

The Company had one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease cost for the equipment was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November 18, 2021 for an additional 48 months at a cost of $1.2 thousand per month. The start of the lease was delayed until April 2022 due to temporary equipment shortages. The lease renewal resulted in the recognition of an additional right of use asset and a lease liability of $51 thousand during the twelve months ended October 2, 2022.

 

As of March 31, 2024, the remaining minimum base lease and estimated common area maintenance (CAM) payments under the non-cancellable office equipment and facility space leases are as follows:

 

Non-cancellable Operating Leases Minimum Payments

 

Fiscal Year 

Facility Lease

Payments

  

Facility Lease

Payments

  

Lease

Payments

  

Total Lease

Payments

  

Total Variable

CAM Estimate

 
   (Thousands)     
  

Optex

Richardson

  

Applied Optics

Center

  

Office

Equipment

   Consolidated 
Fiscal Year 

Facility Lease

Payments

  

Facility Lease

Payments

  

Lease

Payments

  

Total Lease

Payments

  

Total Variable

CAM Estimate

 
2024 Base year lease  $166   $149   $7   $322   $150 
2025 Base year lease   336    305    15    656    306 
2026 Base year lease   346    313    3    662    312 
2027 Base year lease   357    322    -    679    318 
2028 Base year lease   242    330    -    572    249 
2029 Base year lease   -    83    -    83    43 
Total base lease payments  $1,447   $1,502   $25   $2,974   $1,378 
Imputed interest on lease payments (1)   (146)   (171)   -    (317)     
Total Operating Lease Liability(2)  $1,301   $1,331   $25   $2,657      
                          
Right-of-use Asset(3)  $1,211   $1,254   $25   $2,490      

 

(1) Assumes a discount borrowing rate of 5.0% on the new lease amendments effective as of January 11, 2021.
   
(2) Includes $167 thousand of unamortized deferred rent.
   
(3) Short-term and Long-term portion of Operating Lease Liability is $630 thousand and $2,027 thousand, respectively.

 

Total expense under both facility lease agreements for the three months ended March 31, 2024 and April 2, 2023 was $241 and $224 thousand, respectively. Total office equipment rentals included in operating expenses was $8 and $5 thousand for the three months ended March 31, 2024 and April 2, 2023, respectively.

 

Total expense under both facility lease agreements for the six months ended March 31, 2024 and April 2, 2023 was $457 and $438 thousand, respectively. Total office equipment rentals included in operating expenses was $13 thousand and $10 thousand for the six months ended March 31, 2024 and April 2, 2023, respectively.

 

F-13
 

 

Note 5 - Debt Financing

 

Credit Facility — PNC Bank (formerly BBVA, USA)

 

On April 16, 2020, the Company and its subsidiary, Optex Systems, Inc. (collectively, the “Borrowers”) entered into a line of credit facility (the “PNC Facility”) with BBVA, USA. In June 2021, PNC Bank completed its acquisition of BBVA, USA and the bank name changed to PNC Bank (“PNC”). The substantive terms were as follows:

 

  The principal amount of the PNC Facility was $2.25 million. The PNC Facility matured on April 15, 2022. The interest rate was variable based on PNC’s Prime Rate plus a margin of -0.250%, initially set at 3% at loan origination, and all accrued and unpaid interest was payable monthly in arrears starting on May 15, 2020; and the principal amount was due in full with all accrued and unpaid interest and any other fees on April 15, 2022.
     
  There were commercially standard covenants including, but not limited to, covenants regarding maintenance of corporate existence, not incurring other indebtedness except trade debt, not changing more than 25% stock ownership of Borrowers, and a Fixed Charge Coverage Ratio of 1.25:1, with the Fixed Charge Coverage Ratio defined as (earnings before taxes, amortization, depreciation, amortization and rent expense less cash taxes, distribution, dividends and fair value of warrants) divided by (current maturities on long term debt plus interest expense plus rent expense).
     
  The PNC Facility contained commercially standard events of default including, but not limited to, not making payments when due; incurring a judgment of $10,000 or more not covered by insurance; not maintaining collateral and the like.
     
  The PNC Facility was secured by a first lien on all of the assets of Borrowers.

 

On April 12, 2022, the Borrowers entered into an Amended and Restated Loan Agreement (the “PNC Loan Agreement”) with PNC, pursuant to which the PNC Facility was decreased from $2.25 million to $1.125 million, and the maturity date was extended from April 15, 2022 to April 15, 2023. The PNC Loan Agreement required the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1.

 

On November 21, 2022, the Borrowers issued an Amended and Restated Revolving Line of Credit Note (the “Line of Credit Note”) to PNC in connection with an increase of the Borrowers’ revolving line of credit facility under the PNC Loan Agreement from $1.125 million to $2.0 million. The maturity date remained April 15, 2023. Obligations outstanding under the credit facility accrued interest at a rate equal to the Lender’s prime rate minus 0.25%.

 

The Line of Credit Note and PNC Loan Agreement contained customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The PNC Facility was secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the PNC Facility were subject to acceleration upon the occurrence of an event of default as defined in the Line of Credit Note and PNC Loan Agreement.

 

The PNC Facility was replaced by the Texas Capital Facility on March 22, 2023.

 

Credit Facility — Texas Capital Bank

 

On March 22, 2023, the Borrowers entered into a Business Loan Agreement (the “Loan Agreement”) with Texas Capital Bank (the “Lender”), pursuant to which the Lender will make available to the Borrowers a revolving line of credit in the principal amount of $3 million (the “Texas Capital Facility”). The Texas Capital Facility replaced the $2 million PNC Facility.

 

The commitment period for advances under the Texas Capital Facility is twenty-six months expiring on May 22, 2025. We refer to the expiration of that time period as the “Maturity Date.” Outstanding advances under the Texas Capital Facility will accrue interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. As of March 31, 2024 the interest rate was 8.08% per annum.

 

F-14
 

 

The Loan Agreement contains customary events of default (including a 25% change in ownership) and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes (including changes in management), investments, and restricted payments (including cash dividends). The Loan Agreement also requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1 and a total leverage ratio of 3.00:1. The Texas Capital Facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the Texas Capital Facility are subject to acceleration upon the occurrence of an event of default as defined in the Loan Agreement. The Loan Agreement further provides for a $125,000 Letter of Credit sublimit. The Company was in compliance with all covenants as of March 31, 2024.

 

The outstanding balance under the Texas Capital Facility was $0.5 million as of March 31, 2024 and $1.0 million as of October 1, 2023.

 

For the three months and nine months ended March 31, 2024, the total interest expense under the above facilities was $9 thousand and $16 thousand, respectively.

 

Note 6 -Stock Based Compensation

 

Restricted Stock and Restricted Stock Units issued to Officers and Employees

 

The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units and performance shares:

 

   Restricted Stock Units   Weighted Average Grant Date Fair Value   Restricted Shares   Weighted Average Grant Date Fair Value   Performance Shares   Weighted Average Grant Date Fair Value 
Outstanding at October 2, 2022   66,000   $1.52    180,000   $1.75         
Granted   42,000    3.05    40,000    3.09    135,000    2.37 
Vested   (66,000)   1.52    (60,000)   1.75         
Forfeited   (3,000)   3.00    (40,000)   1.75         
Outstanding at October 1, 2023   39,000   $3.06    120,000   $2.20    135,000    2.37 
Granted   -    -    -    -    -    - 
Vested   -    -    (60,000)   2.20    (108,000)   2.48 
Forfeited   -    -    -    -    -    - 
Outstanding at March 31, 2024   39,000   $3.06    60,000   $2.20    27,000   $1.93 

 

On January 2, 2019, the Company granted 150,000 and 50,000 restricted stock units with a January 2, 2019 grant date to Danny Schoening and Karen Hawkins, respectively, vesting as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34% in year one, and 33% each year thereafter. The stock price at grant date was $1.32 per share. Effective December 1, 2021, the vesting terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described below. The Company amortizes the grant date fair value of $264 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019. As of March 31, 2024, there was no unrecognized compensation cost relating to this award.

 

On February 17, 2020, the Company granted 50,000 restricted stock units to Bill Bates, General Manager of the Applied Optics Center. The restricted stock units vest as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34% in year one, and 33% each year thereafter. The stock price at grant date was $2.13 per share. The Company amortized the grant date fair value of $107 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February 17, 2020.

 

F-15
 

 

On April 30, 2020, the Board of Directors held a meeting and voted to increase the annual board compensation for the three independent directors from $22,000 to $36,000 with an effective date of January 1, 2020, in addition to granting 100,000 shares of restricted stock to each independent director which vest at a rate of 20% per year (20,000 shares) each January 1st through January 1, 2025. The total fair value for the 300,000 shares was $525 thousand based on the stock price of $1.75 as of April 30, 2020. On each of January 1, 2021, January 1, 2022, and January 1, 2023, 60,000 of the restricted director shares vested. On February 16, 2023, 40,000 of the unvested restricted shares were forfeited and cancelled when one of the independent directors departed the Board. On May 9, 2023, the Board of Directors approved a grant of 40,000 shares of restricted stock to independent board member Dayton Judd. The shares vest 50% on each of January 1, 2024 and January 1, 2025. As of the grant date, the fair value of the shares was $124 thousand, to be amortized on a straight-line basis through December 31, 2024. The Company amortizes the grant date fair value to stock compensation expense on a straight-line basis across the five-year and two-year vesting periods beginning on April 30, 2020 and May 9, 2023, respectively. As of March 31, 2024, there were 60,000 unvested restricted shares outstanding.

 

The Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021.The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,” that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.

 

As of the December 1, 2021 modification date related to the third and final vesting date of the 49,500 unvested restricted stock units held by Danny Schoening, there was no change in the fair value of the modified award as compared to the original award immediately prior to the modification date. The restricted stock units initially were certain to vest on January 1, 2022, but due to the modification, they were less certain to vest, contingent on a “change in control” occurring, which change in control, in case Mr. Schoening was terminated by the Company without cause or he resigns with good reason prior to such change in control, was required to occur prior to March 13, 2023. As of the modification date, there was $5 thousand of unrecognized compensation cost associated with the original award. As a matter of expediency, the unrecognized compensation expense as of the modification date was fully expensed through January 1, 2022. There is no additional compensation expense associated with the modification of the restricted stock unit agreement.

 

On November 28, 2022, the Company entered into a new employment agreement with Danny Schoening which amended Mr. Schoening’s RSU Agreement, dated January 2, 2019, which had been previously amended as of December 1, 2021, by changing the third and final vesting date for the restricted stock units granted under such agreement from the “change of control date” to January 1, 2023.

 

On January 4, 2023, the Company issued 46,432 common shares to Danny Schoening, CEO, and Bill Bates (AOC GM), net of tax withholding of $58 thousand, in settlement of 66,000 restricted stock units which vested on January 1, 2023.

 

On May 1, 2023, the Company granted an aggregate of 39,000 restricted stock units to eleven employees under its 2023 Equity Incentive Plan. As of the grant date, assuming a 23.1% forfeiture rate based on expected turnover across the three years, the aggregate value of the restricted stock units is $90 thousand which will be amortized across the three-year period on a straight-line basis. During the twelve months ended October 1, 2023, there were 3,000 restricted stock units forfeited. On August 14, 2023 there was an additional grant of 3,000 restricted stock units to one new employee with a fair value of $11 thousand. The restricted stock units will vest at a rate of 33.33% annually on the anniversary date of the grant and any unvested restricted stock units will be forfeited if employment terminates prior to the relevant vesting date. As of October 1, 2023 and March 31, 2024, there were 39,000 unvested restricted stock units outstanding.

 

F-16
 

 

On May 3, 2023, the Board of Directors approved a grant of 100,000 and 35,000 performance shares to Danny Schoening, CEO, and Karen Hawkins, CFO, respectively. Each performance share represents a contingent right to receive one share of common stock. The performance shares vest in five equal increments if, in each case and during a five-year performance period beginning on October 2, 2023, the average VWAP per share of common stock over a 30 consecutive trading day period equals or exceeds $3.70, $4.45, $5.35, $6.40, or $7.70. The fair value of the shares, as of the grant date, is $320 thousand and will be amortized through December 31, 2025 based on the derived service periods using a Monte Carlo simulation valuation model.

 

On October 2, 2023, 27,000 performance shares vested for reaching the 30-day VWAP for Tranche 1. The Company issued a total of 21,060 shares on October 24, 2023 in settlement of the vested shares, net of tax withheld of $27 thousand.

 

On December 22, 2023 and December 29, 2023, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 2 and Tranche 3. On January 8, 2024 the Company issued a total of 39,563 shares in settlement of the vested shares, net of tax withheld of $91 thousand.

 

On March 11, 2024, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 4. The Company issued a total of 20,669 shares on March 13, 2024 in settlement of the vested shares, net of tax withheld of $46 thousand.

 

As of March 31, 2024, there were 27,000 performance shares remaining to vest.

 

The assumptions and results for the Monte Carlo simulation are as follows:

 

 Schedule of Assumptions and Results for the Monte Carlo Simulation

   Assumptions 
Performance Period Start   10/2/2023 
Performance Period End   10/1/2028 
Term of simulation (1)   5.42 years 
Time steps in simulation   1,365 
Time steps per year   252 
Common share price at valuation date (2)  $3.04 
Dividend yield (3)   0.0%
Volatility (annual) (4)   50.0%
Risk-free rate (annual) (5)   3.37%
Cost of equity (6)   11.5%

 

   Tranche 1   Tranche 2   Tranche 3   Tranche 4   Tranche 5 
Number of performance shares in the Tranche (1)   27,000    27,000    27,000    27,000    27,000 
Fair Value of One Performance share (7)  $2.75   $2.58   $2.39   $2.18   $1.93 
Total Fair Value of Tranche  $74,345   $69,742   $64,446   $58,819   $52,238 
Derived Service Period (Years) (7)   0.71    1.13    1.60    2.06    2.48 

 

  (1) Based on the terms of the Performance Shares agreement issued by the Company on May 3, 2023.
  (2) Closing price of OPXS shares on the Valuation Date, as obtained via S&P Capital IQ.
  (3) Expected dividends provided by management.
  (4) Based on historical volatility of OPXS and comparable public companies.
  (5)

Interest rate for US Treasury commensurate with the Performance Shares holding period, as of the Valuation Date, as obtained via S&P Capital IQ.

  (6) Estimated cost of equity for OPXS as of the Valuation Date.
  (7) Based on Monte Carlo simulation.

 

F-17
 

 

Stock Based Compensation Expense

 

Equity compensation is amortized based on a straight-line basis across the vesting or service period as applicable. The recorded compensation costs for options and shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized in the table below:

 

 Schedule of Unrecognized Compensation Costs

   Stock Compensation 
   (thousands) 
   Recognized Compensation Expense   Unrecognized Compensation Expense 
   Three months ended   Six months ended   As of period ended 
  

March 31,

2024

   April 2,
2023
  

March 31,

2024

   April 2, 2023   March 31, 2024   October 1, 2023 
                         
Restricted Shares  $33   $17   $73   $44   $99   $173 
Performance Shares   116    -    180    -    33    212 
Restricted Stock Units   8    -    17    9    71    77 
Total Stock Compensation  $157   $17   $270   $53   $203   $462 

 

Note 7 – Asset Purchase of Intellectual Property

 

On January 18, 2024, Optex Systems Holdings, Inc., through its wholly-owned subsidiary Optex Systems, Inc. (collectively, the “Company”), entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. (“RUB”). Under the agreements, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line, which is primarily used for firearm projectile speed detection, measuring and tracking. RUB will continue to manufacture Speedtracker Mach products on behalf of the Company. The Company acquired the assets using $1 million in cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement is one year, subject to additional one-year renewal terms to which both parties must agree.

 

The acquisition included transaction costs of $30 thousand for legal fees and a contingent liability for payment against an earnout agreement based on meeting certain revenue milestones. As of January 18, 2024, the fair value of the contingent liability was $83 thousand. As of March 31, 2024, the fair value of the contingent liability was $86 thousand. Pursuant to the asset purchase agreement, the total earnout payment will be $238 thousand only if the earnout revenue milestone is achieved during the earnout period, otherwise the earnout will be zero. The asset will be amortized on a straight-line basis over seven years and reviewed annually at each fiscal year end for possible impairment.

 

As of March 31, 2024 the value of intangible assets is:

 

  

March 31,

2024

   April 2,
2023
 
         
Intangible Assets – Intellectual Property  $1,113   $- 
Change in Fair Value of Contingent Liability   3    - 
Amortization of Intangible Assets   (27)   - 
Net Intangible Assets  $1,089   $- 

 

F-18
 

 

The fair value of the contingent liability was determined using the Black-Scholes option pricing model based on the management projected earnout units sold for the earnout period term in conjunction with the earnout units defined pursuant to the asset purchase agreement. The additional assumptions used for the option pricing model for the initial measurement period of January 18, 2024 and the period ended March 31, 2024 are included below.

 

   Initial Date   Period Ended 
   Measurement Date 
   Initial Date   Period Ended 
Assumptions  January 18, 2024   March 31, 2024 
         
Earnout Unit Discount Rate   12.01%   12.38%
Period End Date   7/18/2025    7/18/2025 
Term to Expiry (years)   1.5    1.3 
Volatility   30.0%   30.0%
Risk Free Rate   5.00%   5.27%
Dividend Yield   -    - 
Payoff Discount Rate   6.35%   6.10%
Expected Payment Date   8/2/2025    8/2/2025 
           
Indicated Fair Value of Earnout (rounded)  $83,000   $86,000 

 

Note 8 - Stockholders’ Equity

 

Dividends

 

No dividends were declared or paid during the three and six months ended March 31, 2024 and the twelve months ended October 2, 2022.

 

Common Stock

 

On September 22, 2021, the Company announced authorization of a $1 million stock repurchase program. The shares authorized to be repurchased under the repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC.

 

During the three and six months ended March 31, 2024 and April 2, 2023, there were zero common shares repurchased under the program.

 

During the three and six months ended March 31, 2024, the Company issued 20,669 and 81,292 shares to Danny Schoening and Karen Hawkins in settlement of 27,000 and 108,000 performance shares which vested during the three and six months, respectively. The shares were issued net of 6,331 and 26,708 shares withheld for taxes.

 

As of March 31, 2024, and October 1, 2023, the total outstanding common shares were 6,844,362 and 6,763,070, respectively.

 

Note 9 - Subsequent Events

 

On May 1, 2024, the Company granted an aggregate of 39,000 restricted stock units to eleven employees under its 2023 Equity Incentive Plan. The restricted stock units will vest at a rate of 33.33% annually on the anniversary date of the grant and any unvested restricted stock units will be forfeited if employment terminates prior to the relevant vesting date.

 

On May 1, 2024, there were 12,000 shares vested under its 2023 Equity Incentive Plan for restricted stock units granted on May 1, 2023. On May 3, 2024, 8,446 shares were issued to ten employees, net of tax withholding.

 

F-19
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to supplement and complement our audited condensed consolidated financial statements and notes thereto for the fiscal year ended October 1, 2023 and our unaudited consolidated financial statements and notes thereto for the quarter ended March 31, 2024, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to review our consolidated financial statements in conjunction with your review of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial results as supplemental information, as we believe their use provides more insight into our performance. When a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP measure and reconciled to the most closely corresponding GAAP measure.

 

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. The operating results for the periods presented were not significantly affected by inflation.

 

Cautionary Note Regarding Forward-Looking Information

 

This Quarterly Report on Form 10-Q, in particular the MD&A, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Quarterly Report on Form 10-Q and other reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”), in our press releases, presentations to securities analysts or investors, or in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements.

 

These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding growth strategy; product and development programs; financial performance and financial condition (including revenue, net income, profit margins and working capital); orders and backlog; expected timing of contract deliveries to customers and corresponding revenue recognition; increases in the cost of materials and labor; costs remaining to fulfill contracts; contract loss reserves; labor shortages; follow-on orders; supply chain challenges; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the defense industry.

 

We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Such risks and uncertainties include, but are not limited to, continued funding of defense programs and military spending, the timing of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in the U.S. Government’s interpretation of federal procurement rules and regulations, changes in spending due to policy changes in any new federal presidential administration, market acceptance of the Company’s products, shortages in components, production delays due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, changes in the market for microcap stocks regardless of growth and value and various other factors beyond our control. Some of these risks and uncertainties are identified in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the section “Risk Factors” in our Annual Report on Form 10-K and you are urged to review those sections. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.

 

3
 

 

We do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.

 

Background

 

Optex Systems Holdings, Inc. (together with its subsidiaries, the “Company,” “we,” “us” and “our”) 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. We also manufacture and deliver numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Our 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 us.

 

We are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE Systems plc, ADS Inc. and others. We are also a military supplier to foreign governments such as Israel, Australia and South American countries and as a subcontractor for several large U.S. defense companies serving foreign governments.

 

The Federal Acquisition Regulation is the principal set of regulations that govern the acquisition process of government agencies and contracts with the U.S. government. In general, parts of the Federal Acquisition Regulation are incorporated into government solicitations and contracts by reference as terms and conditions effecting contract awards and pricing solicitations.

 

Many of our contracts are prime or subcontracted directly with the Federal government and, as such, are subject to Federal Acquisition Regulation Subpart 49.5, “Contract Termination Clauses” and more specifically Federal Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the Government (Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for default”. These clauses are standard clauses on our prime military contracts and generally apply to us as subcontractors. It has been our experience that the termination for convenience is rarely invoked, except where it is mutually beneficial for both parties. We are currently not aware of any pending terminations for convenience or for default on our existing contracts.

 

In the event a termination for convenience were to occur, Federal Acquisition Regulation clause 52.249-2 provides for full recovery of all contractual costs and profits reasonably occurred up to and as a result of the terminated contract. In the event a termination for default were to occur, we could be liable for any excess cost incurred by the government to acquire supplies from another supplier similar to those terminated from us. We would not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Company as defined by Federal Acquisition Regulation clause 52.249-8.

 

In addition, some of our contracts allow for government contract financing in the form of contract progress payments pursuant to Federal Acquisition Regulation 52.232-16, “Progress Payments”. As a small business, and subject to certain limitations, this clause provides for government payment of up to 90% of incurred program costs prior to product delivery. To the extent our contracts allow for progress payments, we intend to utilize this benefit, thereby minimizing the working capital impact on us for materials and labor required to complete the contracts.

 

4
 

 

Recent Events

 

January 2024 Asset Acquisition

 

On January 18, 2024, Optex Systems Holdings, Inc., through its wholly-owned subsidiary Optex Systems, Inc. (collectively, the “Company”), entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. (“RUB”). Under the agreements, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line, which is primarily used for firearm projectile speed detection, measuring and tracking. RUB will continue to manufacture Speedtracker Mach products on behalf of the Company. The Company acquired the assets using $1 million in cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement is one year, subject to additional one-year renewal terms to which both parties must agree.

 

The acquisition included transaction costs of $30 thousand for legal fees and a contingent liability for payment against an earnout agreement based on meeting certain revenue milestones. As of March 31, 2024, the fair value of the contingent liability was $86 thousand. Pursuant to the asset purchase agreement, the total earnout payment will be $238 thousand only if the earnout revenue milestone is achieved during the earnout period, otherwise the earnout will be zero. The asset will be amortized on a straight-line basis over a seven-year period.

 

Material Trends

 

Recent supply chain disruptions have strained our suppliers and extended supplier delivery lead times, affecting our ability to sustain operations. We anticipate market wide material shortages for paint and resin products as well as critical epoxies and chemicals used in our manufacturing process. In addition, we are seeing substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected our net income in the year ended October 1, 2023 and the three and six months ended March 31, 2024, and is expected to continue to have a negative effect on the margins expected to be generated under our long-term fixed contracts over the next three years. See also “Item 1A. Risk Factors – Risks Related to Our Business - Certain of our products are dependent on specialized sources of supply potentially subject to disruption which could have a material, adverse impact on our business” in our Annual Report on Form 10-K for the year ended October 1, 2023.

 

We have experienced significant material shortages during the year ended October 1, 2023 and extending into the first six months of fiscal year 2024 from several significant suppliers of our periscope covers and housings. These shortages affect several of our periscope products at the Optex Richardson segment. The delays in key components, combined with labor shortages during the year ended October 1, 2023 and continuing into the first six months of fiscal year 2024, have negatively impacted our production levels and continue to push back expected delivery dates. We are aggressively seeking alternative sources and actively expediting our current suppliers for these components as well as increasing employee recruitment initiatives and overtime to attempt to mitigate any continuing risks to the periscope line. We are seeing some recent improvements in the local labor market and are adding to our direct labor force in concert with improvements in our supplier delivery performance. While we are encouraged by improvements in supplier performance for the Optex Richardson segment periscope line which yielded increased revenue performance during fiscal year 2023 and into the first six months of fiscal 2024, our suppliers have yet to ramp up deliveries sufficiently to keep pace with our current customer demands. As such, we cannot give any assurances that expected customer delivery dates for our periscope products will not experience further delays.

 

In March 2023, we moved our line of credit from PNC Bank to Texas Capital Bank and increased our available line of credit to $3.0 million from the previous $2.0 million line with PNC. The increase in credit limit helps us meet our working capital requirements in light of the increased backlog and delay of revenues from the fiscal year 2023.

 

We refer also to “Item 1. Business – Market Opportunity: U.S. Militaryin our Annual Report on Form 10-K for the year ended October 1, 2023 for a description of current trends in U.S. government military spending and its potential impact on Optex, which may be material, including particularly the tables included in that section and disclosure on the significant reduction in spending for U.S. ground system military programs, which has a direct impact on the Optex Richardson segment revenue, all of which is incorporated herein by reference.

 

5
 

 

Results of Operations

 

Non-GAAP Adjusted EBITDA

 

We use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the performance of our business as “net income” includes the significant impact of noncash valuation gains and losses on warrant liabilities, noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest expenses and federal income taxes. We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because it permits period-over-period comparisons of our ongoing core operations before the excluded items, which we do not consider relevant to our operations. Adjusted EBITDA is a financial measure not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).

 

Adjusted EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative measure.

 

The table below summarizes our three and six-month operating results for the periods ended March 31, 2024 and April 2, 2023, in terms of both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both measures allows the reader better to evaluate our overall performance.

 

   (Thousands) 
   Three months ended   Six months ended 
   March 31, 2024   April 2, 2023   March 31, 2024   April 2, 2023 
                 
Net Income (GAAP)  $1,062   $479   $1,493   $256 
Add:                    
Federal Income Tax Expense   285    128    400    69 
Depreciation and Amortization   117    85    209    166 
Stock Compensation   157    17    270    53 
Interest Expense   9    8    16    8 
Adjusted EBITDA - Non GAAP  $1,630   $717   $2,388   $552 

 

Our net income increased by $0.6 million to $1.1 million for the three months ended March 31, 2024, as compared to net income of $0.5 million for the prior year period. Our adjusted EBITDA increased by $0.9 million to $1.6 million for the three months ended March 31, 2024, as compared to adjusted EBITDA of $0.7 million for the prior year period.

 

Our net income increased by $1.2 million to $1.5 million for the six months ended March 31, 2024, as compared to net income of $0.3 million for the prior year period. Our adjusted EBITDA increased by $1.8 million to $2.4 million for the six months ended March 31, 2024, as compared to adjusted EBITDA of $0.6 million for the prior year period.

 

6
 

 

The increase in net income and adjusted EBITDA for the most recent three and six-month periods compared to the prior year periods is primarily driven by higher revenue and improved gross profit performance across both operating segments. Operating segment performance is discussed in greater detail throughout the following sections.

 

  

Results of Operations Selective Financial Information

(Thousands)

 
   Three months ended 
   March 31, 2024   April 2, 2023 
  

Optex

Richardson

  

Applied Optics Center

Dallas

  

Other

(non-allocated costs and eliminations)

   Consolidated  

Optex

Richardson

  

Applied Optics Center

Dallas

  

Oth