Item
1. Unaudited Condensed Consolidated Financial Statements
OPTEX
SYSTEMS HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Optex
Systems Holdings, Inc.
Condensed
Consolidated Balance Sheets
The
accompanying notes are an integral part of these condensed consolidated financial statements
Optex
Systems Holdings, Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
The
accompanying notes are an integral part of these condensed consolidated financial statements
Optex
Systems Holdings, Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
The accompanying notes are an integral part of these condensed consolidated financial statements
Optex
Systems Holdings, Inc.
Condensed
Consolidated Statements of Stockholders’ Equity
(Thousands,
except share data)
(Unaudited)
| | |
Three months ended April 3, 2022 | |
| | |
Common | | |
| | |
| | |
| | |
Additional | | |
| | |
Total | |
| | |
Shares | | |
Treasury | | |
Common | | |
Treasury | | |
Paid in | | |
Retained | | |
Stockholders | |
| | |
Issued | | |
Shares | | |
Stock | | |
Stock | | |
Capital | | |
Earnings | | |
Equity | |
| Balance at January 2, 2022 | |
| 8,546,920 | | |
| 72,793 | | |
$ | 9 | | |
$ | (143 | ) | |
$ | 25,809 | | |
$ | (9,949 | ) | |
$ | 15,726 | |
| Stock Compensation Expense | |
| - | | |
| - | | |
| - | | |
| - | | |
| 35 | | |
| - | | |
| 35 | |
| Taxes on Shares Issued for Vested Restricted Stock Units | |
| - | | |
| - | | |
| - | | |
| - | | |
| (19 | ) | |
| - | | |
| (19 | ) |
| Common Stock Repurchase (2) | |
| - | | |
| 78,733 | | |
| - | | |
| (148 | ) | |
| - | | |
| - | | |
| (148 | ) |
| Cancellation of Treasury Shares | |
| (151,526 | ) | |
| (151,526 | ) | |
| (1 | ) | |
| 291 | | |
| (291 | ) | |
| - | | |
| (1 | ) |
| Net Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (151 | ) | |
| (151 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at April 3, 2022 | |
| 8,395,394 | | |
| - | | |
$ | 8 | | |
$ | - | | |
$ | 25,534 | | |
$ | (10,100 | ) | |
$ | 15,442 | |
| | |
Six months ended April 2, 2023 | |
| | |
Common | | |
| | |
| | |
| | |
Additional | | |
| | |
Total | |
| | |
Shares | | |
Treasury | | |
Common | | |
Treasury | | |
Paid in | | |
Retained | | |
Stockholders | |
| | |
Issued | | |
Shares | | |
Stock | | |
Stock | | |
Capital | | |
Earnings | | |
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 | |
| | |
Six months ended April 3, 2022 | |
| | |
Common | | |
| | |
| | |
| | |
Additional | | |
| | |
Total | |
| | |
Shares | | |
Treasury | | |
Common | | |
Treasury | | |
Paid in | | |
Retained | | |
Stockholders | |
| | |
Issued | | |
Shares | | |
Stock | | |
Stock | | |
Capital | | |
Earnings | | |
Equity | |
| Balance at October 3, 2021 | |
| 8,523,704 | | |
| 35,555 | | |
$ | 9 | | |
$ | (69 | ) | |
$ | 25,752 | | |
$ | (9,978 | ) | |
| 15,714 | |
| Balance | |
| 8,523,704 | | |
| 35,555 | | |
$ | 9 | | |
$ | (69 | ) | |
$ | 25,752 | | |
$ | (9,978 | ) | |
| 15,714 | |
| Stock Compensation Expense | |
| - | | |
| - | | |
| - | | |
| - | | |
| 92 | | |
| - | | |
| 92 | |
| Vested Restricted Stock Units Issued Net of Tax Withholding | |
| 23,216 | | |
| - | | |
| - | | |
| - | | |
| (19 | ) | |
| - | | |
| (19 | ) |
| Common Stock Repurchase (2) | |
| - | | |
| 115,971 | | |
| - | | |
| (222 | ) | |
| - | | |
| - | | |
| (222 | ) |
| Cancellation of Treasury Shares | |
| (151,526 | ) | |
| (151,526 | ) | |
| (1 | ) | |
| 291 | | |
| (291 | ) | |
| - | | |
| (1 | ) |
| Net Loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (122 | ) | |
| (122 | ) |
| Net Income (Loss) | |
| - | | |
| - | | |
| - | | |
| | | |
| - | | |
| (122 | ) | |
| (122 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance at April 3, 2022 | |
| 8,395,394 | | |
| - | | |
$ | 8 | | |
$ | - | | |
$ | 25,534 | | |
$ | (10,100 | ) | |
$ | 15,442 | |
| Balance | |
| 8,395,394 | | |
| - | | |
$ | 8 | | |
$ | - | | |
$ | 25,534 | | |
$ | (10,100 | ) | |
$ | 15,442 | |
| (1) |
Common
unvested restricted shares which were forfeited and cancelled in February 2023. |
| (2) |
Common
shares repurchased in the open market through April 3, 2022 shares were held in treasury stock using the cost method and subsequently
cancelled prior to April 3, 2022. |
The
accompanying notes are an integral part of these condensed consolidated financial statements
Note
1 - Organization and Operations
Optex
Systems Holdings, Inc. (the “Company”) manufactures optical sighting systems and assemblies for the U.S. Department of Defense,
foreign military applications and commercial markets. Its products are installed on a variety of U.S. military land vehicles, such as
the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the
Stryker family of vehicles. The Company also manufactures and delivers numerous periscope configurations, rifle and surveillance sights
and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that
are delivered both directly to the military and to other defense prime contractors or commercial customers. The Company’s consolidated
revenues for the six months ended April 2, 2023 were derived from the U.S. government (20%), two major U.S. defense contractors (16%
and 5%, respectively), one major commercial customer (33%) and all other customers (26%). Approximately 96% of the total company revenue
is generated from domestic customers and 4% is derived from foreign customers, primarily in Canada. Optex Systems Holdings’ operations
are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of April 2, 2023, Optex Systems Holdings
operated with 97 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 2, 2022 and other reports filed
with the SEC.
The
accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature which
are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of Optex
Systems Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or
indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required
for interim financial reporting purposes has been omitted.
Inventory:
As of April 2, 2023 and October 2, 2022, inventory included:
Schedule of Inventory
| | |
| | | |
| | |
| | |
(Thousands) | |
| | |
April 2, 2023 | | |
October 2, 2022 | |
| Raw Material | |
$ | 6,637 | | |
$ | 6,953 | |
| Work in Process | |
| 4,594 | | |
| 2,722 | |
| Finished Goods | |
| 872 | | |
| 348 | |
| Gross Inventory | |
$ | 12,103 | | |
$ | 10,023 | |
| Less: Inventory Reserves | |
| (811 | ) | |
| (811 | ) |
| Net Inventory | |
$ | 11,292 | | |
$ | 9,212 | |
Concentration
of Credit Risk: Optex Systems Holdings’ accounts receivables as of April 2, 2023 consist of U.S. government agencies (9%),
five major U.S. defense contractors (13%, 13%, 10%, 10% and 8%, respectively), one commercial customer (25%) and all other customers
(12%). The Company does not believe that this concentration results in undue credit risk because of the financial strength of the customers
and the Company’s long history with these customers.
Accrued
Warranties: Optex Systems Holdings accrues product warranty liabilities based on the historical return rate against period shipments
as they occur and reviews and adjusts these accruals quarterly for any significant changes in estimated costs or return rates. The accrued
warranty liability includes estimated costs to repair or replace returned warranty backlog units currently in-house plus estimated costs
for future warranty returns that may be incurred against warranty covered products previously shipped as of the period end date. As of
April 2, 2023, and October 2, 2022, the Company had warranty reserve balances of $266 and $169 thousand, respectively.
Schedule
of Warranty Reserves
| | |
| | | |
| | | |
| | | |
| | |
| | |
Three months ended | | |
Six Months ended | |
| | |
April 2,
2023 | | |
April 3,
2022 | | |
April 2,
2023 | | |
April 3,
2022 | |
| Beginning balance | |
$ | 229 | | |
$ | 122 | | |
$ | 169 | | |
$ | 78 | |
| | |
| | | |
| | | |
| | | |
| | |
| Incurred costs for warranties satisfied during the period | |
| (16 | ) | |
| - | | |
| (16 | ) | |
| (2 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Warranty Expenses: | |
| | | |
| | | |
| | | |
| | |
| Warranties reserved for new product shipped during the period(1) | |
| 60 | | |
| 33 | | |
| 119 | | |
| 79 | |
| Change in estimate for pre-existing warranty liabilities(2) | |
| (7 | ) | |
| - | | |
| (6 | ) | |
| - | |
| Warranty Expense | |
| 53 | | |
| 33 | | |
| 113 | | |
| 79 | |
| | |
| | | |
| | | |
| | | |
| | |
| Ending balance | |
$ | 266 | | |
$ | 155 | | |
$ | 266 | | |
$ | 155 | |
| (1) |
Warranty
expenses accrued to cost of sales (based on current period shipments and historical warranty return rate.) |
| |
|
| (2) |
Changes
in estimated warranty liabilities recognized in cost of sales associated with: the period end customer returned warranty backlog,
or the actual costs of repaired/replaced warranty units which were shipped to the customer during the current period. |
Use
of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
Fair
Value of Financial Instruments: Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of the financial statement presentation date.
The
carrying value of cash and cash equivalents, accounts receivable, 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 April 2, 2023, we recognized $112 thousand
and $226 thousand
in service contract revenue. During the three and six months ended April 3, 2022, we recognized $120 thousand and $240 thousand in service contract
revenue.
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. During the three- and six-month periods ended April 3, 2022, we recognized revenue from customer deposit liabilities
(deferred contract revenue) of $30
and $30
thousand. As of April 2, 2023, we had
$131
thousand in customer deposit liabilities.
As of October 2, 2022 and April 2, 2023,
there was zero and
$336 thousand in accrued
selling expenses and zero
and $336
thousand in contract assets related to a new $3.4
million contract booked in November 2022. The costs will be amortized against the revenue for the contract deliveries expected to begin
in the fourth quarter of fiscal year 2023 and extend through fiscal year 2024.
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. Some of these long-term contracts have option year ordering periods ending
in February 2025 with deliveries that may extend into February 2026. As of April 2, 2023 and October 2, 2022, the accrued contract loss
reserves were $113 thousand and $289 thousand, respectively. During the three and six months ended April 2, 2023, the Company recognized
a gain on changes in estimates for the contract loss reserves of $57 thousand and $5 thousand and applied reserves of $112 thousand $171
thousand to cost of sales against revenues booked during the periods, respectively.
Income
Tax/Deferred Tax: As of April 2, 2023 and October 2, 2022, Optex Systems, Inc. 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 April
2, 2023, our deferred tax assets decreased by $69 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 months ended April 2, 2023, 80,000 shares of unvested restricted stock (which convert to 25,847 incremental shares) were included
in the diluted earnings per share calculation. For the three months ended April 3, 2022, 66,000 unvested restricted stock units and 180,000
shares of unvested restricted stock (which convert to an aggregate of 70,007 incremental shares) were excluded from the diluted earnings
per share calculation due to the antidilutive effect of the net loss during the period.
For
the six months ended April 2, 2023, 80,000 shares of unvested restricted stock (which convert to an aggregate of 30,946 incremental shares)
were included in the diluted earnings per share calculation. For the six months ended April 3, 2022, 66,000 unvested restricted stock
units and 180,000 shares of unvested restricted stock (which convert to an aggregate of 61,434 incremental shares) were excluded from
the diluted earnings per share calculation due to the antidilutive effect of the net loss.
Note
3 - Segment Reporting
The
Company’s two reportable segments, Applied Optics Center and Optex Systems – Richardson (“Optex Systems”), 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 Systems segment. Intersegment sales and transfers are accounted for at annually
agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general and administrative
costs, but exclude profits that would apply to third party external customers.
Optex
Systems (OPX) – Richardson, Texas
Optex
Systems revenues are primarily in support of prime and subcontracted military customers. Military sales to prime and subcontracted
customers represented approximately 94%
and sales to commercial customers represented approximately 6%
of the external segment revenue for the six months ended April 2, 2023. The Optex Systems segment revenue is comprised of
approximately 85%
domestic military customers and 9%
foreign military customers. For the six months ended April 2, 2023, Optex Systems – Richardson represented 45%
of the Company’s total consolidated revenue and consisted of revenue from the U.S. government (17%),
one major U.S. defense contractor (13%),
and all other customers (15%).
Optex
Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100
square feet. As of April 2, 2023, the Richardson facility operated with 52
full time equivalent employees in a single shift operation. The facilities at Optex Systems, Richardson serve as the home office
for both the Optex Systems and Applied Optics Center segments.
Applied
Optics Center (AOC) – Dallas, Texas
The
Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represented approximately 59%
and military sales to prime and subcontracted customers represented approximately 41%
of the external segment revenue for the six months ended April 2, 2023. Approximately
96% of the AOC revenue was derived from external customers and approximately 4%
was related to intersegment sales to Optex Systems in support of military contracts. For the six months ended April 2, 2023, AOC
represented 55%
of the Company’s total consolidated revenue and consisted of revenue from one major defense contractor (5%),
one commercial customer (31%),
and all other customers (19%).
The
Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of
April 2, 2023, AOC operated with 45 full time equivalent employees in a single shift operation.
The
financial tables below present information on the reportable segments’ profit or loss for each period, as well as segment assets
as of each period end. The Company does not allocate interest expense, income taxes or unusual items to segments.
Schedule
of Segment Reporting Information
| | |
Reportable Segment Financial Information
(thousands) | |
| | |
As of and for the three months ended April 2, 2023 | |
| | |
Optex Systems
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 | |
$ | ) | |
$ | | |
$ | ) | |
$ | |
| | |
| | | |
| | | |
| | | |
| | |
| 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 three months ended April 3, 2022 | |
| | |
Optex Systems
Richardson | | |
Applied Optics Center
Dallas | | |
Other
(non-allocated costs and intersegment eliminations) | | |
Consolidated
Total | |
| | |
| | |
| | |
| | |
| |
| Revenues from external customers | |
$ | 2,078 | | |
$ | 3,058 | | |
$ | - | | |
$ | 5,136 | |
| Intersegment revenues | |
| - | | |
| 255 | | |
| (255 | ) | |
| - | |
| Total revenue | |
$ | 2,078 | | |
$ | 3,313 | | |
$ | (255 | ) | |
$ | 5,136 | |
| | |
| | | |
| | | |
| | | |
| | |
| Interest expense | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Depreciation and amortization | |
$ | 10 | | |
$ | 65 | | |
$ | - | | |
$ | 75 | |
| | |
| | | |
| | | |
| | | |
| | |
| Income (loss) before taxes | |
$ | ) | |
$ | | |
$ | ) | |
$ | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Other significant noncash items: | |
| | | |
| | | |
| | | |
| | |
| Allocated home office expense | |
$ | (298 | ) | |
$ | 298 | | |
$ | - | | |
$ | - | |
| Stock compensation expense | |
$ | - | | |
$ | - | | |
$ | 35 | | |
$ | 35 | |
| Warranty expense | |
$ | - | | |
$ | 33 | | |
$ | - | | |
$ | 33 | |
| | |
| | | |
| | | |
| | | |
| | |
| Segment assets | |
$ | 14,457 | | |
$ | 6,777 | | |
$ | - | | |
$ | 21,234 | |
| Expenditures for segment assets | |
$ | (19 | ) | |
$ | 47 | | |
$ | - | | |
$ | 28 | |
| | |
Reportable Segment Financial Information
(thousands) | |
| | |
As of and for the six months ended April 2, 2023 | |
| | |
Optex Systems
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 | |
$ | ) | |
$ | | |
$ | ) | |
$ | |
| | |
| | | |
| | | |
| | | |
| | |
| 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 | |
| | |
Reportable Segment Financial Information
(thousands) | |
| | |
As of and for the six months ended April 3, 2022 | |
| | |
Optex Systems
Richardson | | |
Applied Optics Center
Dallas | | |
Other
(non-allocated costs and intersegment eliminations) | | |
Consolidated
Total | |
| | |
| | |
| | |
| | |
| |
| Revenues from external customers | |
$ | 3,934 | | |
$ | 5,541 | | |
$ | - | | |
$ | 9,475 | |
| Intersegment revenues | |
| - | | |
| 435 | | |
| (435 | ) | |
| - | |
| Total revenue | |
$ | 3,934 | | |
$ | 5,976 | | |
$ | (435 | ) | |
$ | 9,475 | |
| | |
| | | |
| | | |
| | | |
| | |
| Interest expense | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Depreciation and amortization | |
$ | 20 | | |
$ | 127 | | |
$ | - | | |
$ | 147 | |
| | |
| | | |
| | | |
| | | |
| | |
| Income (loss) before taxes | |
$ | ) | |
$ | | |
$ | ) | |
$ | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Other significant noncash items: | |
| | | |
| | | |
| | | |
| | |
| Allocated home office expense | |
$ | (534 | ) | |
$ | 534 | | |
$ | - | | |
$ | - | |
| Stock compensation expense | |
$ | - | | |
$ | - | | |
$ | 92 | | |
$ | 92 | |
| Warranty expense | |
$ | - | | |
$ | 79 | | |
$ | - | | |
$ | 79 | |
| | |
| | | |
| | | |
| | | |
| | |
| Segment assets | |
$ | 14,457 | | |
$ | 6,777 | | |
$ | - | | |
$ | 21,234 | |
| Expenditures for segment assets | |
$ | 6 | | |
$ | 112 | | |
$ | - | | |
$ | 118 | |
Note
4 - Commitments and Contingencies
Non-cancellable
Operating Leases
Optex
Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc., Richardson location and the Applied Optics
Center Dallas location. The Company also leases certain office equipment under non-cancellable operating leases.
The
facility leased by Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space
at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through
March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months,
commencing on April 1, 2021 and ending on May 31, 2028. The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each
year thereafter. The initial term included 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately
$11.9 thousand for additional Common Area Maintenance fees and taxes (“CAM”), to be adjusted annually based on actual expenses
incurred by the landlord.
The
facility leased by 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 included 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 $8.6 thousand for additional CAM, to be adjusted annually based on actual expenses
incurred by the landlord.
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, respectively during the twelve months ended October 2, 2022.
As
of April 2, 2023, the remaining minimum lease and estimated CAM payments under the non-cancelable facility space leases are as follows:
Schedule
of Non-cancellable Operating Leases Minimum Payments
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 | |
| 2023 Base year lease | |
$ | 161 | | |
$ | 145 | | |
$ | 7 | | |
$ | 313 | | |
$ | 125 | |
| 2024 Base year lease | |
| 327 | | |
| 296 | | |
| 15 | | |
| 638 | | |
| 256 | |
| 2025 Base year lease | |
| 336 | | |
| 305 | | |
| 15 | | |
| 656 | | |
| 261 | |
| 2026 Base year lease | |
| 346 | | |
| 313 | | |
| 3 | | |
| 662 | | |
| 266 | |
| 2027 Base year lease | |
| 357 | | |
| 322 | | |
| - | | |
| 679 | | |
| 272 | |
| 2028 Base year lease | |
| 242 | | |
| 330 | | |
| - | | |
| 572 | | |
| 198 | |
| 2029 Base year lease | |
| - | | |
| 83 | | |
| - | | |
| 83 | | |
| 30 | |
| Total base lease payments | |
$ | 1,769 | | |
$ | 1,794 | | |
$ | 40 | | |
$ | 3,603 | | |
$ | 1,408 | |
| Imputed interest on lease payments (1) | |
| (218 | ) | |
| (243 | ) | |
| (2 | ) | |
| (463 | ) | |
| | |
| Total Operating Lease Liability(3) | |
$ | 1,551 | | |
$ | 1,551 | | |
$ | 38 | | |
$ | 3,140 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Right-of-use Asset(2) | |
$ | 1,465 | | |
$ | 1,481 | | |
$ | 38 | | |
$ | 2,984 | | |
| | |
| (1) |
Assumes
a discount borrowing rate of 5.0% on the new lease amendments effective as of January 11, 2021. |
| |
|
| (2) |
Includes
$156 thousand of unamortized deferred rent. |
| |
|
| (3) |
Short-term
and Long-term portion of Operating Lease Liability is $612 thousand and $2,528 thousand, respectively. |
Total
expense under both facility lease agreements for the three months ended April 2, 2023 and April 3, 2022 was $224 and $210 thousand, respectively.
Total office equipment rentals included in operating expenses was $5 and $8 thousand for the three months ended April 2, 2023 and April
3, 2022, respectively.
Total
expense under both facility lease agreements for the six months ended April 2, 2023 and April 3, 2022 was $438 and $419 thousand, respectively.
Total office equipment rentals included in operating expenses was $10 thousand and $10 thousand for the six months ended April 2, 2023
and April 3, 2022, respectively.
Note
5 - Debt Financing
Credit
Facility — PNC Bank (formerly BBVA, USA)
On
April 16, 2020, Optex Systems Holdings, Inc. 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 minus 0.25%, 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 others. |
| |
|
|
| |
● |
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 line of credit was paid in full on March 22, 2023 and replaced with a new line of credit from Texas Capital Bank.
On
November 21, 2022, the Borrowers issued an Amended and Restated Revolving Line of Credit Note (the “PNC Line of Credit Note”)
to PNC in connection with an increase of the PNC Facility from $1.125 million to $2.0 million. Obligations outstanding under the PNC
Facility accrued interest at a rate equal to PNC’s prime rate minus 0.25%.
The
PNC 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 PNC Line of Credit Note and PNC Loan Agreement.
As of October 2, 2022 and April 2, 2023, the outstanding balance under the PNC facility was zero.
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 April
2, 2023 the interest rate was 7.501%
per annum.
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
outstanding balance under the Texas Capital Facility was $1.0
million as of April 2, 2023. For the three months
and six months ended April 2, 2023, the total interest expense under the facilities was $8
thousand. For the three months and six months
ended April 3, 2022, the total interest expense under the facilities was zero.
Note
6 -Stock Based Compensation
2023 Equity Incentive
Plan
On February 16, 2023, the
Company’s shareholders approved the Company’s 2023 Equity Incentive Plan (the “2023 Plan”), under which 600,000
shares of common stock are reserved for issuance. The 2023 Plan permits the grant of stock options, performance shares, performance units,
restricted stock, restricted stock units and stock appreciation rights to officers, other employees, individuals engaged to become officers
or employees, consultants, advisors and non-executive directors of the Company. In connection with the approval of the 2023 Plan, the
Company’s 2016 Restricted Stock Unit Plan and 2009 Stock Option Plan were both canceled.
Restricted
Stock and Restricted Stock Units issued to Officers and Employees
The
following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units,
with the latter granted under the Company’s 2016 Restricted Stock Unit Plan:
Schedule
of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted
| | |
Restricted Stock Units | | |
Weighted Average Grant Date Fair Value | | |
Restricted Stock | | |
Weighted Average Grant Date Fair Value | |
| Outstanding at October 3, 2021 | |
| 99,000 | | |
$ | 1.59 | | |
| 240,000 | | |
$ | 1.75 | |
| Granted | |
| — | | |
| — | | |
| — | | |
| — | |
| Vested | |
| (33,000 | ) | |
| 1.73 | | |
| (60,000 | ) | |
| 1.75 | |
| Forfeited | |
| — | | |
| — | | |
| — | | |
| — | |
| Outstanding at October 2, 2022 | |
| 66,000 | | |
$ | 1.52 | | |
| 180,000 | | |
$ | 1.75 | |
| Granted | |
| - | | |
| - | | |
| - | | |
| - | |
| Vested | |
| (66,000 | ) | |
| 1.52 | | |
| (60,000 | ) | |
| 1.75 | |
| Forfeited | |
| - | | |
| - | | |
| (40,000 | ) | |
| 1.75 | |
| Outstanding at April 2, 2023 | |
| - | | |
$ | - | | |
| 80,000 | | |
$ | 1.75 | |
On
January 2, 2019, the Company granted 150,000 and 50,000 restricted stock units with a January 2, 2019 grant date to Danny Schoening and
Karen Hawkins, respectively, vesting as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34%
in year one, and 33% each year thereafter. The stock price at grant date was $1.32 per share. Effective December 1, 2021, the vesting
terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described 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 April 2, 2023, 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.
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 market value for the 300,000 shares was $525 thousand based on the stock price of $ as of April 30, 2020. The Company amortizes
the grant date fair value to stock compensation expense on a straight-line basis across the five-year vesting period beginning on 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, 2022, 40,000 of the unvested restricted shares were forfeited and cancelled when one of the independent directors departed the Board.
As of April 2, 2023, there were 80,000 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, 2022, the Company issued 23,216 common shares to Karen Hawkins, CFO, and Bill Bates (AOC GM), net of tax withholding of $19
thousand, in settlement of 33,000 restricted stock units which vested on January 1, 2022.
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. As of April 2, 2023, there are zero unvested
restricted stock units outstanding.
See
also “Note 8 – Subsequent Events.”
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 | |
| | |
April 2, 2023 | | |
April 3,
2022 | | |
April 2, 2023 | | |
April 3, 2022 | | |
April 2, 2023 | | |
October 2, 2022 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Restricted Shares | |
$ | 17 | | |
$ | 26 | | |
$ | 44 | | |
$ | 53 | | |
$ | 123 | | |
$ | 236 | |
| Restricted Stock Units | |
| - | | |
| 9 | | |
| 9 | | |
| 39 | | |
| - | | |
| 9 | |
| Total Stock Compensation | |
$ | 17 | | |
$ | 35 | | |
$ | 53 | | |
$ | 92 | | |
$ | 123 | | |
$ | 245 | |
Note
7 - Stockholders’ Equity
Dividends
No dividends were declared or paid during the three and six months ended April 2, 2023 and the twelve months ended October 2, 2022.
Common
stock
On
September 22, 2021, the Company announced authorization for 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 April 2, 2023, there were zero common
shares repurchased under the program. A summary of the purchases under the program through October 2, 2022 follows (All shares purchased have been cancelled):
Summary of Purchases Under Plan
| Fiscal Period | |
Total number of shares purchased | | |
Total purchase cost
(thousands) | | |
Average price paid per share (with commission) | | |
Maximum dollar value that may yet be purchased under the plan
(thousands) | |
| October 4, 2021 through October 31, 2021 | |
| 18,265 | | |
$ | 37 | | |
| 2.01 | | |
$ | 894 | |
| November 1, 2021 through November 28, 2021 | |
| 4,415 | | |
| 9 | | |
| 2.04 | | |
| 885 | |
| November 29, 2021 through January 2, 2022 | |
| 14,558 | | |
| 28 | | |
| 1.93 | | |
| 857 | |
| January 3, 2022 through January 30, 2022 | |
| 15,585 | | |
| 29 | | |
| 1.89 | | |
| 828 | |
| January 31, 2022 through February 27, 2022 | |
| 27,618 | | |
| 49 | | |
| 1.75 | | |
| 779 | |
| February 28, 2022 through April 3, 2022 | |
| 35,530 | | |
| 70 | | |
| 1.98 | | |
| 709 | |
| April 4, 2022 through May 1, 2022 | |
| 12,304 | | |
| 27 | | |
| 2.22 | | |
| 682 | |
| May 2, 2022 through May 29, 2022 | |
| 10,482 | | |
| 22 | | |
| 2.11 | | |
| 660 | |
| May 30, 2022 through July 3, 2022 | |
| 49,657 | | |
| 95 | | |
| 1.90 | | |
| 565 | |
| July 4, 2022 through July 25,2022 | |
| 610 | | |
| 1 | | |
| 2.10 | | |
| 564 | |
| July 26, 2022 through August 13, 2022 | |
| 1,930 | | |
| 4 | | |
| 2.09 | | |
| 560 | |
| Total shares repurchased period ended October 2, 2022 | |
| 190,954 | | |
$ | 371 | | |
$ | 1.94 | | |
$ | 560 | |
Furthermore,
on August 18, 2022, the Company announced the commencement of a tender offer to purchase up to $4.25 million in value of shares of its
common stock. On September 15, 2022, the Company’s “modified Dutch auction” tender offer expired. In accordance with
the terms and conditions of the tender offer, the Company accepted for purchase 1,603,773 shares of common stock at a price of $2.65
per share, for an aggregate cost of approximately $4.25 million, excluding fees and expenses relating to the tender offer. The transaction
cost associated with the tender offer was $0.1 million. The shares were immediately cancelled upon completion of the transaction.
As
of April 2, 2023 and October 2, 2022, total outstanding common shares were 6,723,070 and 6,716,638, respectively. As of April 2, 2023
and October 2, 2022, there were zero shares held in Treasury.
Note
8 - Subsequent Events
On
May 1, 2023, 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. As of the grant date, the aggregate value of the restricted stock units was $117
thousand which will be amortized across the three-year period on a straight-line basis.
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, yet to be determined, will be amortized across the performance
period based on a Monte Carlo or binomial valuation model.
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.
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 2, 2022 and our
unaudited consolidated financial statements and notes thereto for the quarter ended April 2, 2023, prepared in accordance with U.S. generally
accepted accounting principles (GAAP). You are encouraged to review our consolidated financial statements in conjunction with your review
of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In
addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position. We use these
non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning purposes. We
will also report non-GAAP financial results as supplemental information, as we believe their use provides more insight into our performance.
When a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP measure and reconciled to the most closely corresponding
GAAP measure.
The
following discussion highlights the principal factors that have affected our financial condition and results of operations as well as
our liquidity and capital resources for the periods described. The operating results for the periods presented were not significantly
affected by inflation.
Cautionary
Note Regarding Forward-Looking Information
This
Quarterly Report on Form 10-Q, in particular the MD&A, contains certain “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not
statements of historical fact may be deemed to be forward-looking statements. When used in this Quarterly Report on Form 10-Q and other
reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”),
in our press releases, presentations to securities analysts or investors, or in oral statements made by or with the approval of an executive
officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,”
“continue,” “anticipates,” “intends,” “will likely result,” “estimates,”
“projects” or similar expressions and variations thereof are intended to identify such forward-looking statements.
These
forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not
limited to, any statements regarding growth strategy; product and development programs; financial performance (including revenue and
net income); backlog; expected timing of shipments; increases in the cost of materials and labor; labor shortages; follow-on orders;
the impact of the COVID-19 pandemic; supply chain challenges; the continuation of historical trends; the sufficiency of our cash balances
for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations,
financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future
of the defense industry.
We
caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results
may differ materially depending on a variety of important factors. Some of these risks and uncertainties are identified in 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.
We
do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors
described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.
Background
Optex
Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies, primarily for Department of Defense applications. Its
products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored
and armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems, Inc. (Delaware)
also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies.
Optex Systems, Inc. (Delaware) products consist primarily of build-to-customer print products that are delivered both directly to the
armed services and to other defense prime contractors. Less than 1% of today’s revenue is related to the resale of products substantially
manufactured by others. In this case, the product would likely be a simple replacement part of a larger system previously produced by
Optex Systems, Inc. (Delaware).
We
are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense
contractors such as General Dynamics Land Systems, Raytheon Corp., BAE, ADS Inc. and others. We are also a military supplier to foreign
governments such as Israel, Australia and 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 Optex Systems Holdings for materials
and labor required to complete the contracts.
Recent
Events
May
2023 Grants
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.
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, yet to be determined, will be amortized across the performance period based on a Monte Carlo or binomial valuation model.
On
May 1, 2023, 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. As of the grant date, the aggregate value of the
restricted stock units was $117,000, which will be amortized across the three-year period on a straight-line basis.
Texas
Capital Credit Facility
On
March 22, 2023, the Company and its subsidiary, Optex Systems, Inc. (“Optex”, and with the Company, 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 “Credit
Facility”). The commitment period for advances under the Credit 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 Credit 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. The interest rate is currently at 7.501% per annum.
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 Credit Facility is secured by substantially all of the operating assets of the Borrowers as collateral.
The Borrowers’ obligations under the Credit 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 thousand Letter of Credit sublimit.
The
Credit Facility replaced the prior $2 million line of credit with PNC Bank, National Association.
NASDAQ
Listing
On
March 14, 2023, the Company’s shares of common stock were listed on the NASDAQ Capital Market under the ticker symbol “OPXS.”
2023
Equity Incentive Plan
On
February 16, 2023, the Company’s shareholders approved the Company’s 2023 Equity Incentive Plan (the “2023 Plan”),
under which 600,000 shares of common stock are reserved for issuance. The 2023 Plan permits the grant of stock options, performance shares,
performance units, restricted stock, restricted stock units and stock appreciation rights to officers, other employees, individuals engaged
to become officers or employees, consultants, advisors and non-executive directors of the Company. In connection with the approval of
the 2023 Plan, the Company’s 2016 Restricted Stock Unit Plan and 2009 Stock Option Plan were both canceled.
Material
Trends
Recent
supply chain disruptions have strained our suppliers and extended supplier delivery lead times, affecting their 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 first six months of fiscal year 2023 and is expected to continue to have a negative effect on our long-term fixed
contracts over the next three years.
We
have experienced significant material shortages during the three months ended October 2, 2022 and extending into the first six months
of fiscal year 2023 from two 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 first half of fiscal
year 2023, have negatively impacted our production levels and have pushed expected customer delivery dates into the second half of fiscal
year 2023. 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. In addition,
one of our major customers for the Applied Optics Center requested a significant schedule delay pushing their laser filter unit deliveries
from the first half into the second half of fiscal year 2023. We are encouraged by recent improvements in supplier performance for the
Optex Richardson segment periscope line which yielded increased revenue performance during the second quarter and anticipate a continuing
trend of higher revenue for the segment in the third and fourth quarters.
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 into the second half of fiscal year 2023. As supplier issues and
labor shortages continue to abate, we anticipate increased revenue and working capital with a recovery expected by fiscal year end
2023. Based on our current backlog, we anticipate an overall increase for fiscal year 2023 revenues as compared to the 2022
levels.
We
refer also to “Item 1. Business – Market Opportunity: U.S. Military” in our annual report on Form 10-K for the
year ended October 2, 2022 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 Systems Richardson segment revenue, all of which is incorporated
herein by reference.
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 April 2, 2023 and April 3, 2022, 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 | |
| | |
April 2, 2023 | | |
April 3, 2022 | | |
April 2, 2023 | | |
April 3, 2022 | |
| | |
| | |
| | |
| | |
| |
| Net Income (Loss) (GAAP) | |
$ | 479 | | |
$ | (151 | ) | |
$ | 256 | | |
$ | (122 | ) |
| Add: | |
| | | |
| | | |
| | | |
| | |
| Federal Income Tax (Benefit) Expense | |
| 128 | | |
| (40 | ) | |
| 69 | | |
| (54 | ) |
| Depreciation | |
| 85 | | |
| 75 | | |
| 166 | | |
| 147 | |
| Stock Compensation | |
| 17 | | |
| 35 | | |
| 53 | | |
| 92 | |
| Interest Expense | |
| 8 | | |
| - | | |
| 8 | | |
| - | |
| Adjusted EBITDA - Non GAAP | |
$ | 717 | | |
$ | (81 | ) | |
$ | 552 | | |
$ | 63 | |
Our net income increased by $630 thousand to $479
thousand for the three months ended April 2, 2023, as compared to a net loss of ($151) thousand for the prior year period. Our adjusted
EBITDA increased by $798 thousand to $717 thousand for the three months ended April 2, 2023, as compared to a loss of ($81) thousand for
the prior year period.
Our net income increased by $378 thousand to $256
thousand for the six months ended April 2, 2023, as compared to a net loss of $(122) thousand for the prior year period. Our adjusted
EBITDA increased by $615 thousand to $552 thousand for the six months ended April 2, 2023, as compared to $63 thousand for the
prior year period.
The
increase in the most recent three and six-month period net income and adjusted EBITDA 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 | |
| | |
April 2, 2023 | | |
April 3, 2022 | |
| | |
Optex Richardson | | |
Applied Optics Center Dallas | | |
Other (non-allocated costs and eliminations) | | |
Consolidated | | |
Optex Richardson | | |
Applied Optics Center Dallas | | |
Other (non-allocated costs and eliminations) | | |
Consolidated | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Revenue from External Customers | |
$ | 3,053 | | |
$ | 3,317 | | |
$ | - | | |
$ | 6,370 | | |
$ | 2,078 | | |
$ | 3,058 | | |
$ | - | | |
$ | 5,136 | |
| Intersegment Revenues | |
| - | | |
| 130 | | |
| (130 | ) | |
| - | | |
| - | | |
| 255 | | |
| (255 | ) | |
| - | |
| Total Segment Revenue | |
| 3,053 | | |
| 3,447 | | |
| (130 | ) | |
| 6,370 | | |
| 2,078 | | |
| 3,313 | | |
| (255 | ) | |
| 5,136 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total Cost of Sales | |
| 2,614 | | |
| 2,333 | | |
| (130 | ) | |
| 4,817 | | |
| 1,903 | | |
| 2,772 | | |
| (255 | ) | |
| 4,420 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Gross Profit | |
| 439 | | |
| 1,114 | | |
| - | | |
| 1,553 | | |
| 175 | | |
| 541 | | |
| - | | |
| 716 | |
| Gross Margin % | |
| 14.4 | % | |
| 32.3 | % | |
| - | | |
| 24.4 | % | |
| 8.4 | % | |
| 16.3 | % | |
| - | | |
| 13.9 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| General and Administrative Expense | |
| 796 | | |
| 125 | | |
| 17 | | |
| 938 | | |
| 716 | | |
| 156 | | |
| 35 | | |
| 907 | |
| Segment Allocated G&A Expense | |
| (312 | ) | |
| 312 | | |
| - | | |
| - | | |
| (298 | ) | |
| 298 | | |
| - | | |
| - | |
| Net General & Administrative Expense | |
| 484 | | |
| 437 | | |
| 17 | | |
| 938 | | |
| 418 | | |
| 454 | | |
| 35 | | |
| 907 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Operating Income (Loss) | |
| (45 | ) | |
| 677 | | |
| (17 | ) | |
| 615 | | |
| (243 | ) | |
| 87 | | |
| (35 | ) | |
| (191 | ) |
| Operating Income (Loss) % | |
| (1.5 | %) | |
| 19.6 | % | |
| - | | |
| 9.7 | | |
| (11.7 | )% | |
| 2.6 | % | |
| - | | |
| (3.7 | )% |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest Expense | |
| - | | |
| - | | |
| (8 | ) | |
| (8 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net Income (Loss) before taxes | |
$ | (45 | ) | |
$ | 677 | | |
$ | (25 | ) | |
$ | 607 | | |
$ | (243 | ) | |
$ | 87 | | |
$ | (35 | ) | |
$ | (191 | ) |
| Net Income (Loss) % | |
| (1.5 | %) | |
| 19.6 | % | |
| - | | |
| 9.5 | % | |
| (11.7 | )% | |
| 2.6 | % | |
| - | | |
| (3.7 | )% |
| | |
Results of Operations Selected Financial Info by Segment (Thousands) | |
| | |
Six months ended | |
| | |
April 2, 2023 | | |
April 3, 2022 | |
| | |
Optex Richardson | | |
Applied Optics Center Dallas | | |
Other (non-allocated costs and eliminations) | | |
Consolidated | | |
Optex Richardson | | |
Applied Optics Center Dallas | | |
Other (non-allocated costs and eliminations) | | |
Consolidated | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Revenue from External Customers | |
$ | 4,672 | | |
$ | 5,738 | | |
$ | - | | |
$ | 10,410 | | |
$ | 3,934 | | |
$ | 5,541 | | |
$ | - | | |
$ | 9,475 | |
| Intersegment Revenues | |
| - | | |
| 245 | | |
| (245 | ) | |
| - | | |
| - | | |
| 435 | | |
| (435 | ) | |
| - | |
| Total Segment Revenue | |
| 4,672 | | |
| 5,983 | | |
| (245 | ) | |
| 10,410 | | |
| 3,934 | | |
| 5,976 | | |
| (435 | ) | |
| 9,475 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total Cost of Sales | |
| 4,073 | | |
| 4,312 | | |
| (245 | ) | |
| 8,140 | | |
| 3,569 | | |
| 4,802 | | |
| (435 | ) | |
| 7,936 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Gross Profit | |
| 599 | | |
| 1,671 | | |
| - | | |
| 2,270 | | |
| 365 | | |
| 1,174 | | |
| - | | |
| 1,539 | |
| Gross Margin % | |
| 12.8 | % | |
| 27.9 | % | |
| - | | |
| 21.8 | % | |
| 9.3 | % | |
| 19.6 | % | |
| - | | |
| 16.2 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| General and Administrative Expense | |
| 1,659 | | |
| 225 | | |
| 53 | | |
| 1,937 | | |
| 1,359 | | |
| 264 | | |
| 92 | | |
| 1,715 | |
| Segment Allocated G&A Expense | |
| (592 | ) | |
| 592 | | |
| - | | |
| - | | |
| (534 | ) | |
| 534 | | |
| - | | |
| - | |
| Net General & Administrative Expense | |
| 1,067 | | |
| 817 | | |
| 53 | | |
| 1,937 | | |
| 825 | | |
| 798 | | |
| 92 | | |
| 1,715 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Operating Income (Loss) | |
| (468 | ) | |
| 854 | | |
| (53 | ) | |
| 333 | | |
| (460 | ) | |
| 376 | | |
| (92 | ) | |
| (176 | ) |
| Operating Income (Loss) % | |
| (10.0 | %) | |
| 14.3 | % | |
| - | | |
| 3.2 | % | |
| (11.7 | )% | |
| 6.3 | % | |
| - | | |
| (1.9 | )% |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest Expense | |
| - | | |
| - | | |
| (8 | ) | |
| (8 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Income (Loss) before taxes | |
$ | (468 | ) | |
$ | 854 | | |
$ | (61 | ) | |
$ | 325 | | |
$ | (460 | ) | |
$ | 376 | | |
$ | (92 | ) | |
$ | (176 | ) |
| Income (loss) before taxes % | |
| (10.0 | %) | |
| 14.3 | % | |
| - | | |
| 3.1 | % | |
| (11.7 | )% | |
| 6.3 | % | |
| - | | |
| (1.9 | )% |
For
the three months ended April 2, 2023, our total revenues increased by $1.2 million, or 24.0%, compared to the prior year period. The
increase in revenue was primarily driven by increased deliveries at both the Optex Systems Richardson segment of $1.0 million and
the Applied Optics Center segment of $0.2 million.
For
the six months ended April 2, 2023, our total revenues increased by $0.9 million, or 9.9%, compared to the prior year period. The
increase in revenue was primarily driven by increased deliveries at both the Optex Systems Richardson segment of $0.7 million and
the Applied Optics Center segment of $0.2 million.
Consolidated
gross profit for the three months ended April 2, 2023 increased by $0.8 million, or 116.9%, compared to the prior year period. Consolidated
gross profit for the six months ended April 2, 2023 increased by $0.7 million, or 47.5%, compared to the prior year period.
The
increase in the most recent three and six-month period gross margin was primarily attributable to higher revenue spread across a fixed
manufacturing cost base in both operating segments combined with changes in product mix and improved pricing and operating performance
on our Applied Optics optical assembly line.
Our
operating income for the three months ended April 2, 2023 increased by $0.8 million compared to the prior year period. The
increase in operating income was primarily driven by higher gross profit during the current three-month period.
Our
operating income for the six months ended April 2, 2023 increased by $0.5 million compared to the prior year period.
The increase in operating income was primarily driven by increased gross profit of $0.7 million offset by increased general and
administrative costs of ($0.2) million during the current six-month period.
New
Orders and Backlog
Product backlog represents the value
of unfulfilled customer manufacturing orders yet to be recognized as revenue. While backlog is
not a non-GAAP financial measure, it is also not defined by GAAP. Therefore, our methodology for calculating backlog may not be
consistent with methodologies used by other companies. The booked backlog by period may also not be fully indicative of the
predicted revenues for those periods as many of our orders provide for accelerated delivery without penalty and may additionally
provide customers the option to adjust schedules to meet their most recent projected demand quantities. However, we provide customer order and backlog information as we believe it provides significant insight into
forward demand, with some predictive power to short term future revenues.
During
the six months ended April 2, 2023, the Company booked $19.1 million in new orders, representing a 84% increase over the prior year
period. The increase in orders is primarily attributable to a 139% increase in the Optex Systems – Richardson segment orders
over the prior year period. The Applied Optics Center experienced a 5% increase in orders over the prior year period.
The
following table depicts the new customer orders for the six months ending April 2, 2023 as compared to the prior year period in millions
of dollars by segment and product line:
| | |
(Millions) | | |
| |
| Product
Line | |
Six
months ended April 2, 2023 | | |
Six
months ended April 3, 2022 | | |
Variance | | |
%
Chg | |
| Periscopes | |
$ | 8.5 | | |
$ | 4.6 | | |
$ | 3.9 | | |
| 85 | % |
| Sighting
Systems | |
| 3.9 | | |
| 0.5 | | |
| 3.4 | | |
| 680 | % |
| Howitzer | |
| - | | |
| - | | |
| - | | |
| - | % |
| Other | |
| 2.2 | | |
| 1.0 | | |
| 1.2 | | |
| 120 | % |
| Optex
Systems – Richardson | |
| 14.6 | | |
| 6.1 | | |
| 8.5 | | |
| 139 | % |
| Optical
Assemblies | |
| 1.2 | | |
| 2.4 | | |
| (1.2 | ) | |
| (50 | )% |
| Laser
Filters | |
| 2.4 | | |
| 0.8 | | |
| 1.6 | | |
| 200 | % |
| Day
Windows | |
| 0.1 | | |
| 0.3 | | |
| (0.2 | ) | |
| (67 | )% |
| Other | |
| 0.8 | | |
| 0.8 | | |
| - | | |
| - | % |
| Applied
Optics Center – Dallas | |
| 4.5 | | |
| 4.3 | | |
| 0.2 | | |
| 5 | % |
| Total
Customer Orders | |
$ | 19.1 | | |
$ | 10.4 | | |
$ | 8.7 | | |
| 84 | % |
The
Company has seen significant increases in orders for many of its defense and commercial products during the first six months of fiscal
year 2023 inclusive of two new customers for our sighting systems and filter programs. On November 1, 2022, the Company announced it
has been awarded a $3.4 million order to repair and refurbish night vision equipment for the Government of Israel. The order represents
a significant increase in our Optex Richardson sighting systems business base for a new customer and includes an additional potential
award value with a 100% optional award quantity clause. In October 2022, the Company booked a $0.9 million award for Applied Optics Center
laser interface filters for a new defense customer in addition to increased purchase orders for our commercial optical assemblies for
our existing customer. During the six months ended April 2, 2023, the Optex Systems Richardson segment has received additional task order
releases of $6.2 million in periscopes, $1.4 million in other products and $0.4 million in sighting systems against our long running
IDIQ periscope contracts.
Backlog
as of April 2, 2023 was $41.6 million, compared to a backlog of $28.2 million as of April 3, 2022, representing an increase of $13.4
million or 48%. Backlog as compared to October 2, 2022 increased by $8.7 million, or 26%, from
$32.9 million. The following table depicts the current expected delivery by period of all contracts awarded as of April 3, 2023
in millions of dollars:
| Product
Line |
|
Q3
2023 |
|
|
Q4
2023 |
|
|
2023
Delivery |
|
|
2024+
Delivery |
|
|
Total
Backlog
4/2/2023 |
|
|
Total
Backlog
4/3/2022 |
|
|
Variance |
|
|
%
Chg |
|
| Periscopes
|
|
$ |
2.5 |
|
|
$ |
2.9 |
|
|
$ |
5.4 |
|
|
$ |
7.2 |
|
|
$ |
12.6 |
|
|
$ |
7.7 |
|
|
$ |
4.9 |
|
|
|
64 |
% |
| Sighting
Systems |
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
4.6 |
|
|
|
5.3 |
|
|
|
1.9 |
|
|
|
3.4 |
|
|
|
179 |
% |
| Howitzer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
2.2 |
|
|
|
0.1 |
|
|
|
5 |
% |
| Other
|
|
|
0.4 |
|
|
|
1.5 |
|
|
|
1.9 |
|
|
|
3.1 |
|
|
|
5.0 |
|
|
|
1.4 |
|
|
|
3.6 |
|
|
|
257 |
% |
| Optex
Systems - Richardson |
|
|
3.5 |
|
|
|
4.5 |
|
|
|
8.0 |
|
|
|
17.2 |
|
|
|
25.2 |
|
|
|
13.2 |
|
|
$ |
12.0 |
|
|
|
91 |
% |
| Optical
Assemblies |
|
|
1.4 |
|
|
|
1.5 |
|
|
|
2.9 |
|
|
|
1.9 |
|
|
|
4.8 |
|
|
|
5.4 |
|
|
|
(0.6 |
) |
|
|
(11 |
)% |
| Laser
Filters |
|
|
2.1 |
|
|
|
2.3 |
|
|
|
4.4 |
|
|
|
4.6 |
|
|
|
9.0 |
|
|
|
8.2 |
|
|
|
0.8 |
|
|
|
10 |
% |
| Day
Windows |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
1.6 |
|
|
|
1.9 |
|
|
|
0.7 |
|
|
|
1.2 |
|
|
|
171 |
% |
| Other
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
- |
|
|
|
- |
% |
| Applied
Optics Center - Dallas |
|
|
3.7 |
|
|
|
4.2 |
|
|
|
7.9 |
|
|
|
8.5 |
|
|
|
16.4 |
|
|
|
15.0 |
|
|
|
1.4 |
|
|
|
9 |
% |
| Total
Backlog |
|
$ |
7.2 |
|
|
$ |
8.7 |
|
|
$ |
15.9 |
|
|
$ |
25.7 |
|
|
$ |
41.6 |
|
|
$ |
28.2 |
|
|
$ |
13.4 |
|
|
|
48 |
% |
Optex
Systems Richardson backlog as of April 2, 2023 was $25.2 million as compared to a backlog of $13.2 million as of April 3, 2022, representing
an increase of $12.0 million or 91%.
Applied
Optics Center backlog as of April 2, 2023, was $16.4 million as compared to a backlog of $15.0 million as of April 3, 2022, representing
an increase of $1.4 million or 9%.
Please
refer to “Material Trends” above or “Liquidity and Capital Resources” below for more information
on recent developments and trends with respect to our orders and backlog, which information is incorporated herein by reference.
The
Company continues to aggressively pursue international and commercial opportunities in addition to maintaining its current footprint
with U.S. vehicle manufactures, with existing as well as new product lines. We are also reviewing potential products, outside our traditional
product lines, which could be manufactured using our current production facilities in order to capitalize on our existing excess capacity.
Three
Months Ended April 2, 2023 Compared to the Three Months Ended April 3, 2022
Revenues.
For the three months ended April 2, 2023, revenues increased by $1.2 million or 24.0% compared to the prior year period as set forth
in the table below:
| | |
Three months ended | |
| | |
(Thousands) | |
| Product Line | |
April 2,
2023 | | |
April 3,
2022 | | |
Variance | | |
% Chg | |
| Periscopes | |
$ | 2,137 | | |
$ | 1,564 | | |
$ | 573 | | |
| 36.6 | |
| Sighting Systems | |
| 138 | | |
| 176 | | |
| (38 | ) | |
| (21.6 | ) |
| Other | |
| 778 | | |
| 338 | | |
| 440 | | |
| 130.2 | |
| Optex Systems - Richardson | |
| 3,053 | | |
| 2,078 | | |
| 975 | | |
| 46.9 | |
| Optical Assemblies | |
| 1,493 | | |
| 830 | | |
| 663 | | |
| 79.9 | |
| Laser Filters | |
| 1,562 | | |
| 1,524 | | |
| 38 | | |
| 2.5 | |
| Day Windows | |
| 69 | | |
| 420 | | |
| (351 | ) | |
| (83.6 | ) |
| Other | |
| 193 | | |
| 284 | | |
| (91 | ) | |
| (32.0 | ) |
| Applied Optics Center - Dallas | |
| 3,317 | | |
| 3,058 | | |
| 259 | | |
| 8.5 | |
| Total Revenue | |
$ | 6,370 | | |
$ | 5,136 | | |
$ | 1,234 | | |
| 24.0 | |
Optex
Systems Richardson revenue increased by $1.0 million or 46.9% for the three months ended April 2, 2023 as compared to the prior year
period on higher customer demand for periscopes and other products, including a new program for optical wedge assemblies not reflected in the prior year period of $0.3 million and a $0.1 million
revenue increase from sales of big eye binocular assemblies.
Applied
Optics Center revenue increased by $0.2 million or 8.5% for the three months ended April 2, 2023 as compared to the prior year
period. The revenue increase was primarily driven by increases in sales of optical assemblies driven by a mix of improved pricing and higher customer demand, partially offset by decreased
revenues in day windows and other products.
Gross
Profit. The gross margin during the three-month period ended April 2, 2023 was 24.4% of revenue as compared to a gross margin of
13.9% of revenue for the prior year period. The gross profit increased by $0.8 million to $1.5 million for the three months ended
April 2, 2023 as compared to $0.7 million in the prior year three months. The increase in gross profit is primarily attributable to
higher revenue, changes in product mix, and increased absorption of fixed overhead across a higher revenue mix. Cost of sales
increased to $4.8 million for the current period as compared to the prior year period of $4.4 million on higher revenue.
G&A
Expenses. During the three months ended April 2, 2023 and April 3, 2022, we recorded operating expenses of $0.9. Operating expenses
remained flat in the current year period as compared with the prior year period as increased labor and office expenses were offset by
reductions in other expenses including stock compensation, selling expenses, investor relations expenses, and bad debt expenses.
Operating
Income/(Loss). During the three months ended April 2, 2023, we recorded an operating income of $0.6 million, as compared to an operating
loss of ($0.2) million during the three months ended April 3, 2022. The $0.8 million increase in operating income for the current year
period from the prior year period is primarily due to higher revenue and gross profit during the current year period.
Six
Months Ended April 2, 2023 Compared to the Six Months Ended April 3, 2022
Revenues.
For the six months ended April 2, 2023, revenues increased by $0.9 million or 9.9% compared to the prior year period as set forth in
the table below:
| | |
Six months ended | |
| | |
(Thousands) | |
| Product Line | |
April 2,
2023 | | |
April 3,
2022 | | |
Variance | | |
% Chg | |
| Periscopes | |
$ | 3,462 | | |
$ | 2,629 | | |
$ | 833 | | |
| 31.7 | |
| Sighting Systems | |
| 327 | | |
| 449 | | |
| (122 | ) | |
| (27.2 | ) |
| Howitzers | |
| - | | |
| - | | |
| - | | |
| - | |
| Other | |
| 883 | | |
| 856 | | |
| 27 | | |
| 3.2 | |
| Optex Systems - Richardson | |
| 4,672 | | |
| 3,934 | | |
| 738 | | |
| 18.8 | |
| Optical Assemblies | |
| 2,986 | | |
| 1,975 | | |
| 1,011 | | |
| 51.2 | |
| Laser Filters | |
| 2,118 | | |
| 2,461 | | |
| (343 | ) | |
| (13.9 | ) |
| Day Windows | |
| 230 | | |
| 640 | | |
| (410 | ) | |
| (64.1 | ) |
| Other | |
| 404 | | |
| 465 | | |
| (61 | ) | |
| (13.1 | ) |
| Applied Optics Center - Dallas | |
| 5,738 | | |
| 5,541 | | |
| 197 | | |
| 3.6 | |
| Total Revenue | |
$ | 10,410 | | |
$ | 9,475 | | |
$ | 935 | | |
| 9.9 | |
Optex
Systems Richardson revenue increased by $0.7 million or 18.8% for the six months ended April 2, 2023 as compared to the prior year period
primarily on higher customer demand for periscopes.
Applied
Optics Center revenue increased by $0.2 million or 3.6% for the six months ended April 2, 2023 as compared to the prior year period.
The revenue increase is primarily attributable to increased customer demand for optical assemblies, partially offset by decreased
demand for filters, window and other product lines as compared to the prior year period.
Gross
Profit. The gross margin during the six-month period ended April 2, 2023 was 21.8% of revenue as compared to a gross margin of
16.2% of revenue for the prior year period. The gross profit increased by $0.8 million to $2.3 million for the six months ended
April 2, 2023 as compared to $1.5 million for the prior year period. The increase in gross profit is primarily attributable to
higher revenue, changes in product mix and increased fixed cost absorption across a higher revenue base. Cost of sales increased to
$8.1 million for the six months ended April 2, 2023 as compared to the prior year period of $7.9 million on higher period
revenue.
G&A
Expenses. During the six months ended April 2, 2023 and April 3, 2022, we recorded operating expenses of $1.9 million and $1.7 million,
respectively. Operating expenses increased by 13% comparing the respective periods primarily due to increased labor, office and legal
expenses.
Operating
Income/(Loss). During the six months ended April 2, 2023, we recorded operating income of $0.3 million, as compared to an operating
loss of ($0.2) million during the six months ended April 3, 2022. The $0.5 million increase in operating income is primarily due to higher
gross profit, which was only partially offset by increased general and administrative expenses.
Liquidity
and Capital Resources
As
of April 2, 2023, the Company had working capital of $11.4 million, as compared to $10.0 million as of October 2, 2022.
During
the six months ended April 2, 2023, we used operating cash of ($1.1) million, borrowed $1.0 million against our line of credit
and spent $146 thousand on acquisitions of property and equipment. During the period, our inventory increased $2.1 million in support
of new program awards and increasing revenues anticipated over the next twelve months.
The
Company has capital commitments of $213 thousand for the purchase of property and equipment consisting of an ultrasonic aqueous system
and a reflectometer device during the next sixty days.
Backlog
as of April 2, 2023 was $41.6 million as compared to a backlog of $32.9 million and $28.2 million as of October 2, 2022 and April 3,
2022, respectively, and representing an increase of 26% and 48%, respectively. For further details, see “Results of Operations – New Orders and Backlog” above.
The
Company has historically funded its operations through cash from operations, convertible notes, common and preferred stock offerings
and bank debt. The Company’s ability to generate positive cash flows depends on a variety of factors, including the continued development
and successful marketing of the Company’s products. At April 2, 2023, the Company had approximately $0.7 million in cash and an
outstanding balance of $1.0 million on its line of credit. As of April 2, 2023, our outstanding accounts receivable was $2.3 million.
We expect the accounts to be collected during the third quarter of fiscal 2023.
Recently
experienced supplier delays, labor shortages, and customer schedule changes negatively impacted our revenue during the three and six
months ended April 2, 2023 but are expected to abate during the second half of fiscal year 2023. As described in more detail below, in
March 2023, we entered into a new line of credit, effectively increasing our credit limit from $2.0 million to $3.0 million to facilitate
our working capital requirements due to the delays and increased backlog. We are encouraged by recent improvements in supplier performance
for the Optex Richardson segment periscope line, which yielded increased revenue performance during the second quarter, and anticipate
a continuing trend of higher revenue for the segment in the third and fourth quarters.
In
the short term, the Company plans to utilize its current cash, available line of credit and operating cash flow to fund inventory purchases
in support of the backlog growth and higher anticipated revenue during the next six months. Short term cash in excess of our working
capital needs may be also be used to fund the purchase of property and equipment required to maintain or meet our growing backlog in
addition to repurchasing common stock against our current stock repurchase plan. Longer term, excess cash beyond our operating needs
may be used to fund new product development, company or product line acquisitions, or additional stock purchases as attractive opportunities
present themselves.
In
some instances, new government contract awards may allow for contract financing in the form of progress payments pursuant to Federal
Acquisition Regulation 52.232-16, “Progress Payments.” Subject to certain limitations, this clause provides for government
payment of up to 90% of incurred program costs prior to product delivery for small businesses like us. To the extent any contracts allow
for progress payments and the respective contracts would result in significant preproduction cash requirements for design, process development,
tooling, material or other resources which could exceed our current working capital or line of credit availability, we intend to utilize
this benefit to minimize any potential negative impact on working capital prior to receipt of payment for the associated contract deliveries.
Currently none of our existing contracts allow for progress payments.
We
refer to “Note 4 – Commitments and Contingencies – Non-cancellable Operating Leases” for a tabular depiction
of our remaining minimum lease and estimated CAM payments under such leases as of April 2, 2023, which disclosure is incorporated herein
by reference.
The
Company expects to generate net income and positive cash flow from operating activities over the next six months. To achieve and retain
profitability, we need to maintain a level of revenue adequate to support our cost structure. Management intends to manage operations
commensurate with its level of working capital and line of credit during the next six months and beyond; however, uneven revenue levels
driven by changes in customer delivery demands, first article inspection requirements or other program delays associated with the pandemic,
labor shortages and supply chain issues could create a working capital shortfall. In the event the Company does not successfully implement
its ultimate business plan, certain assets may not be recoverable.
On
March 22, 2023, the Company and its subsidiary, Optex Systems, Inc. (“Optex”, and with the Company, 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 “Credit
Facility”). The commitment period for advances under the Credit 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 Credit 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. The interest rate is currently at 7.501% per annum.
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 Credit Facility is secured by substantially all of the operating assets of the Borrowers as collateral.
The Borrowers’ obligations under the Credit 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. As of April 2, 2023, there
was $1.0 million borrowed under the Credit Facility.
The
Credit Facility replaced the prior $2 million line of credit with PNC Bank, National Association.
On
September 22, 2021 the Company announced authorization for an additional $1 million stock repurchase program. As of April 2, 2023, there
was an authorized balance of $560 thousand remaining to be spent against the repurchase program. During the six months ended April 2,
2023, there were no stock repurchases against the plan.
Critical
Accounting Estimates
A
critical accounting estimate is an estimate that:
| |
● |
is
made in accordance with generally accepted accounting principles, |
| |
● |
involves
a significant level of estimation uncertainty, and |
| |
● |
has
had or is reasonably likely to have a material impact on the company’s financial condition or results of operation. |
Our
significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies
require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies
are described in Note 2 (Accounting Policies) to consolidated financial statements in our Annual Report on Form 10-K for the year ended
October 2, 2022.
Our
critical accounting estimates include warranty costs, contract losses and the deferred tax asset valuation. Future warranty costs are
based on the estimated cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage
of warranty covered sales. Our warranty covered sales primarily include the Applied Optics Center optical assemblies. While our warranty
period is 12 months, our reserve balances assume a general 90-day return period for optical assemblies previously delivered plus any
returned backlog in-house that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly
exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around
times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our
warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty
costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of April 2, 2023, the Company had
accrued warranty costs of $266 thousand, as compared to $169 thousand as of October 2, 2022. The primary reason for the $97thousand increase
in reserve balances relates to higher revenue on the optical assemblies combined with an increase in customer returned backlog pending
repair or replacement to our customer during the six months ended April 2, 2023.
As
of April 2, 2023 and October 2, 2022, we had $113 thousand, and $289 thousand, respectively, of contract loss reserves included in
our balance sheet accrued expenses. These loss contracts are related to some of our older legacy periscope IDIQ contracts which were
priced in 2018 through early 2020, prior to Covid-19 and the significant downturn in defense spending on ground system vehicles. Due
to inflationary price increases on component parts and higher internal manufacturing costs (as a result of escalating labor costs
and higher burden rates on reduced volume), some of these contracts are in a loss condition, or at marginal profit rates. These
contracts are typically three-year IDIQ contracts with two optional award years, and as such, we are obligated to accept new task
awards against these contracts until the contract expiration. Should contract costs continue to increase above the negotiated
selling price, or in the event the customer should release substantial quantities against these existing loss contracts, the losses
could be material. For contracts currently in a loss status based on the estimated per unit contract costs, losses are booked
immediately on new task order awards. Some of these long-term contracts have option year
ordering periods ending in February 2025 with deliveries that may extend into February 2026. During the six months ended April 2,
2023, the Company recognized a gain on change in estimates for contract loss reserves of ($5) thousand due to improvements to the
projected manufacturing overhead rates on higher revenue and applied $171 thousand of the reserves against revenues booked during
the six-month period. There is no way to reasonably estimate future inflationary impacts, or customer awards on the existing
loss contracts.
As
of April 2, 2023 and October 2, 2022, our deferred tax assets consisted of $1.7 million, partially offset by a valuation reserve of ($0.8)
million against those assets for a net deferred tax asset of $0.9 million. The valuation allowance covers certain deferred tax assets
where we believe we will be unlikely to recover those tax assets through future operations. The valuation reserve includes assumptions
related to future taxable income which would be available to cover net operating loss carryforward amounts. Because of the uncertainties
of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are subject to change over time.
While we believe our current estimate to be reasonable, changing market conditions and profitability, changes in equity structure and
changes in tax regulations may impact our estimated reserves in future periods.
