Attached files
file | filename |
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EX-16 - Optex Systems Holdings Inc | v191088_ex16.htm |
EX-23.1 - Optex Systems Holdings Inc | v191088_ex23-1.htm |
EX-10.17 - Optex Systems Holdings Inc | v191088_ex10-17.htm |
EX-10.23 - Optex Systems Holdings Inc | v191088_ex10-23.htm |
EX-10.22 - Optex Systems Holdings Inc | v191088_ex10-22.htm |
EX-10.18 - Optex Systems Holdings Inc | v191088_ex10-18.htm |
EX-10.24 - Optex Systems Holdings Inc | v191088_ex10-24.htm |
As
filed with the Securities and Exchange Commission on July 22,
2010
|
Registration
Statement No.
333-159334
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 5 TO REGISTRATION STATEMENT
ON
FORM S-1 UNDER
THE
SECURITIES ACT OF 1933
OPTEX
SYSTEMS HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
33-143215
|
3795
|
(State or other jurisdiction of
|
(I.R.S. Identification Number)
|
(Primary Standard Industrial
|
incorporation or organization)
|
|
Classification Code Number)
|
1420
Presidential Drive
Richardson,
TX 75081-2439
Telephone
(972) 644-0722
(Address,
including zip code, and telephone number, including
area
code, of registrant’s principal executive offices)
Stanley
A. Hirschman
1420
Presidential Drive
Richardson,
TX 75081-2439
Telephone
(972) 644-0722
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Jolie
G. Kahn, Esq.
61
Broadway
Suite
2820
New
York, NY 10006
Telephone
(212) 422-4910
Approximate Date of Commencement of
Proposed Sale to the Public: At such time or times after the effective
date of this registration statement as the selling stockholders shall
determine.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. þ
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “small
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
|
Non-accelerated
filer o
(Do not check if a smaller reporting company)
|
Smaller
reporting
company
x
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
|
|
Amount to be
Registered
|
|
|
Proposed
Maximum
Offering Price
per unit(1)
|
|
|
Proposed
Maximum
Aggregate
Offering Price
|
|
|
Amount of
Registration Fee
|
|
||||
Common
Stock, par value $0.001 per share
|
11,784,177
|
$
|
$0.375
|
$
|
4,419,066
|
$
|
246.58
|
(1)
|
Estimated for the purpose of
determining the registration fee pursuant to Rule 457(c), based on the
average of the high and low price as of May 11,
2009.
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until this registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in the prospectus is not complete and may be changed. The selling
stockholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell and is not soliciting an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
Subject
to Completion, dated July 22, 2010
PROSPECTUS
OPTEX
SYSTEMS HOLDINGS, INC.
11,784,177
Shares of Common Stock
This
prospectus relates to the offer and sale of up 11,784,177 shares of common stock
of Optex Systems Holdings, Inc., a Delaware corporation, issued to certain
selling stockholders identified in this prospectus pursuant to subscription
agreements between the selling stockholders and Optex Systems, Inc., a
subsidiary of Optex Systems Holdings, Inc., and that may be offered and sold
from time to time by the selling stockholders.
The
selling stockholders may offer their shares from time to time directly or
through one or more underwriters, broker-dealers or agents, in the
over-the-counter market at market prices prevailing at the time of sale, in one
or more negotiated transactions at prices acceptable to the selling
stockholders, or otherwise.
We will
not receive any proceeds from the sale of shares by the selling stockholders. In
connection with any sales of the common stock offered hereunder, the selling
stockholders, any underwriters, agents, brokers or dealers participating in such
sales may be deemed to be “underwriters” within the meaning of the Securities
Act of 1933, as amended.
We will
pay the expenses related to the registration of the shares covered by this
prospectus. The selling stockholders will pay any commissions and selling
expenses they may incur.
On May
1, 2009, our common stock received a symbol change from FINRA and now trades on
the Over the Counter Bulletin Board under the symbol “OPXS.OB”. The closing sale
price on the OTC Bulletin Board on July 20, 2010, was $0.038 per
share.
Investing
in the common stock offered by this prospectus is speculative and involves a
high degree of risk. See “Risk Factors” commencing on p. 7 in this
prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is July 22, 2010
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
|
5
|
|
RISK
FACTORS
|
7
|
|
USE
OF PROCEEDS
|
16
|
|
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
16
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
17
|
|
BUSINESS
|
37
|
|
LEGAL
PROCEEDINGS
|
49
|
|
MANAGEMENT
|
49
|
|
EXECUTIVE
COMPENSATION
|
53
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
57
|
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
|
59
|
|
THE
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
|
62
|
|
DESCRIPTION
OF SECURITIES
|
66
|
|
LEGAL
MATTERS
|
68
|
|
EXPERTS
|
68
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
69
|
|
OPTEX
SYTEMS HOLDINGS INC. INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 28, 2010 AND MARCH 29, 2009
|
F-1
|
|
OPTEX
SYTEMS HOLDINGS INC. INDEX TO FINANCIAL STATEMENTS AS OF SEPTEMBER 27,
2009 AND SEPTEMBER 28, 2008
|
F-20
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-21
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|
OTHER
EXPENSES
|
70
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|
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
|
70
|
|
RECENT
SALES OF UNREGISTERED SECURITIES
|
70
|
|
EXHIBITS
|
72
|
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UNDERTAKINGS
|
73
|
|
SIGNATURES
|
75
|
4
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission using the Commission’s registration rules for a delayed
or continuous offering and sale of securities. Under the registration rules,
using this prospectus and, if required, one or more prospectus supplements, the
selling stockholders named herein may distribute the shares of common stock
covered by this prospectus. This prospectus also covers any shares of common
stock that may become issuable as a result of stock splits, stock dividends or
similar transactions.
A
prospectus supplement may add, update or change information contained in this
prospectus. We recommend that you read carefully this entire prospectus,
especially the section entitled “Risk Factors” and any supplements before making
a decision to invest in our common stock.
PROSPECTUS
SUMMARY
This
summary highlights important information about this offering and our business.
It does not include all information you should consider before investing in our
common stock. Please review this prospectus in its entirety, including the risk
factors and our financial statements and the related notes, before you decide to
invest.
Our
Company
Organizational
History
On March
30, 2009, Optex Systems Holdings, Inc. (formerly known as Sustut Exploration,
Inc.), a Delaware corporation, along with Optex Systems, Inc. (Delaware), which
was a privately held Delaware corporation that has since become Optex Systems
Holdings’ wholly-owned subsidiary, entered into a reorganization agreement and
plan of reorganization, pursuant to which Optex Systems, Inc. (Delaware) was
acquired by Optex Systems Holdings in a share exchange transaction. At the
closing of the reorganization, the registrant changed its name from Sustut
Exploration Inc. to Optex Systems Holdings, Inc. and its year end from December
31 to a fiscal year ending on the Sunday nearest September 30. Optex
Systems, Inc. (Delaware) has remained a wholly-owned subsidiary of Optex Systems
Holdings, and Optex Systems, Inc. (Delaware)’s shareholders are now shareholders
of Optex Systems Holdings.
Immediately
prior to the closing under this reorganization agreement and plan of
reorganization, as of March 30, 2009, Optex Systems, Inc. (Delaware) accepted
subscriptions from accredited investors for a total of $1,219,750 in gross
proceeds and $874,529 in net proceeds.
Previously,
on October 14, 2008, in a transaction that was consummated via public auction,
Optex Systems, Inc. (Delaware) purchased all of the assets of Optex Systems,
Inc. (Texas) in exchange for $15 million of Irvine Sensors Corporation debt and
the assumption of approximately $3.8 million of certain liabilities of Optex
Systems, Inc. (Texas). Optex Systems, Inc. (Delaware) was formed by
the Longview Fund, LP and Alpha Capital Antstalt, former secured creditors of
Irvine Sensors Corporation, to consummate the October 2008 transaction, and
subsequently, on February 20, 2009, Longview Fund conveyed its ownership
interest in Optex Systems Holdings to Sileas Corporation, an entity owned by
three of Optex Systems Holdings’ officers (one of whom is also one of Optex
Systems Holdings’ three directors).
Our
Business
Optex
Systems Holdings manufactures optical sighting systems and assemblies primarily
for United States Department of Defense applications. Optical
sighting systems are used to enable a soldier to have improved vision and in
some cases, protected vision. One type of system would be a binocular
which would have a special optical filter applied to the external lens which
would block long wave length light (from a laser) from reaching the soldier’s
eyes. Another type of system would be a periscope where the soldier
inside an armored vehicle needs to view the external environment outside of the
tank. In this case, the visual path is reflected at two 90 degree
angles enabling the soldier to be at a different plane than that of the external
lens.
5
The
following table describes the approximate percentage of revenue represented by
the types of systems mentioned in the third and fourth sentences of the above
paragraph. The table below reflects approximate product revenues and is a
balanced overview of our business based on the percentages.
% of Revenue
|
||||
Howitzer
Programs
|
21.0 | % | ||
Periscope
Programs
|
52.0 | % | ||
Sighting
Systems
|
8.0 | % | ||
All
Other
|
19.0 | % | ||
Total
|
100.0 | % |
Optex
Systems Holdings’ products consist primarily of build-to-customer print products
that are delivered both directly to the armed services and to other
defense prime contractors. Build-to-customer print products are
those devices where the customer completes the design of the product and then
brings these drawings to the supplier for production. In this case,
the supplier would procure the piece parts from suppliers, build the final
assembly, and then supply this product back to the original customer who
designed it.
Our
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 Holdings also manufactures and delivers
numerous periscope configurations, rifle and surveillance sights and night
vision optical assemblies. Approximately 44% of our current revenue
is in support of Abrams vehicles, 12% in support of Stryker vehicles, and 3% in
support of Bradley vehicles. The products that we produce can be used
on other vehicles; however, they were originally designed for the Abrams, the
Bradley, and the Stryker vehicles. In addition, some of the periscopes
that we produce can be used on both the Bradley and the Stryker vehicle.
Finally, some customers combine their volumes for new vehicles with those
requirements for replacement parts for vehicles coming back from the
field. At this time, no vehicle generates more revenues than the Stryker
vehicle other than the Abrams and Bradley vehicles.
Optex
Systems, Inc. (Delaware), and its predecessor, Optex Systems, Inc. (Texas), have
been in business since 1987. Optex Systems Holdings is located in
Richardson, TX and is ISO 9001:2008 certified.
The
Offering
Common
stock offered by the selling stockholders:
|
11,784,177 shares of common
stock, par value $0.001 per share.
|
|
Offering
prices:
|
The
shares offered by this prospectus may be offered and sold at prevailing
market prices or such other prices as the selling stockholders may
determine.
|
|
Common
stock outstanding:
|
139,444,940
shares as of July 20, 2010.
|
|
Dividend
policy:
|
Dividends
on our common stock may be declared and paid when and as determined by our
board of directors. We have not paid and do not expect to pay dividends on
our common stock.
|
|
OTCBB
symbol:
|
OPXS.OB
|
6
Use
of proceeds:
|
We
are not selling any of the shares of common stock being offered by this
prospectus and will receive no proceeds from the sale of the shares by the
selling stockholders. All of the proceeds from the sale of common stock
offered by this prospectus will go to the selling stockholders at the time
they sell their shares.
|
Risk
Factors
See “Risk
Factors” for a discussion of factors you should carefully consider before
deciding to invest in our common stock.
Our
Address
Our
principal executive offices are located at 1420 Presidential Drive, Richardson,
TX 75081-2439.
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. Prospective investors should
carefully consider the risks described below, together with all of the other
information included or referred to in this prospectus, before purchasing shares
of our common stock. There are numerous and varied risks, known and unknown,
that may prevent us from achieving our goals. The risks described below are not
the only risks we will face. If any of these risks actually occurs, our
business, financial condition or results of operations may be materially
adversely affected. In such case, the trading price of our common stock could
decline and investors in our common stock could lose all or part of their
investment. The risks and uncertainties described below are not exclusive and
are intended to reflect the material risks that are specific to us, material
risks related to our industry and material risks related to companies that
undertake a public offering or seek to maintain a class of securities that is
registered or traded on any exchange or over-the-counter market.
Risks Related to our
Business
We
expect that we will need to raise additional capital in the future; additional
funds may not be available on terms that are acceptable to us, or at
all.
We
anticipate we will have to raise additional capital in the future to service our
debt and to finance our future working capital needs. We cannot assure you that
any additional capital will be available on a timely basis, on acceptable terms,
or at all. Future equity or debt financings may be difficult to obtain. If we
are not able to obtain additional capital as may be required, our business,
financial condition and results of operations could be materially and adversely
affected.
We
anticipate that our capital requirements will depend on many factors,
including:
|
·
|
our ability to fulfill
backlog;
|
|
·
|
our ability to procure additional
production contracts;
|
|
·
|
our ability to control
costs;
|
|
·
|
the timing of payments and
reimbursements from government and other contracts, including but not
limited to changes in federal government military spending and the federal
government procurement process;
|
|
·
|
increased sales and marketing
expenses;
|
7
|
·
|
technological advancements and
competitors’ response to our
products;
|
|
·
|
capital improvements to new and
existing facilities;
|
|
·
|
our relationships with customers
and suppliers; and
|
|
·
|
general economic conditions
including the effects of future economic slowdowns, acts of war or
terrorism and the current international
conflicts.
|
Even if
available, financings may involve significant costs and expenses, such as legal
and accounting fees, diversion of management’s time and efforts, and substantial
transaction costs. If adequate funds are not available on acceptable terms, or
at all, we may be unable to finance our operations, develop or enhance our
products, expand our sales and marketing programs, take advantage of future
opportunities or respond to competitive pressures.
Current
economic conditions may adversely affect our ability to continue
operations.
Current
economic conditions may cause a decline in business and consumer spending and
capital market performance, which could adversely affect our business and
financial performance. Our ability to raise funds, upon which we are
fully dependent to continue to expand our operations, may be adversely affected
by current and future economic conditions, such as a reduction in the
availability of credit, financial market volatility and economic
recession.
Our
ability to fulfill our backlog may have an effect on our long term ability to
procure contracts and fulfill current contracts.
Our
ability to fulfill our backlog may be limited by our ability to devote
sufficient financial and human capital resources and limited by available
material supplies. If we do not fulfill our backlog in a timely
manner, we may experience delays in product delivery which would postpone
receipt of revenue from those delayed deliveries. Additionally, if we
are consistently unable to fulfill our backlog, this may be a disincentive to
customers to award large contracts to us in the future until they are
comfortable that we can effectively manage our backlog.
Our
historical operations depend on government contracts and subcontracts. We
face risks related to contracting with the federal government, including federal
budget issues and fixed price contracts.
Future
general political and economic conditions, which cannot be accurately predicted,
may directly and indirectly affect the quantity and allocation of expenditures
by federal agencies. Even the timing of incremental funding commitments to
existing, but partially funded, contracts can be affected by these factors.
Therefore, cutbacks or re-allocations in the federal budget could have a
material adverse impact on our results of operations. Obtaining government
contracts may also involve long purchase and payment cycles, competitive
bidding, qualification requirements, delays or changes in funding, budgetary
constraints, political agendas, extensive specification development, price
negotiations and milestone requirements. In addition, our government contracts
are primarily fixed price contracts, which may prevent us from recovering costs
incurred in excess of budgeted costs. Fixed price contracts require us to
estimate the total project cost based on preliminary projections of the
project’s requirements. The financial viability of any given project depends in
large part on our ability to estimate such costs accurately and complete the
project on a timely basis. Some of those contracts are for products that
are new to our business and are thus subject to unanticipated impacts to
manufacturing costs. Given the current economic conditions, it is also
possible that even if our estimates are reasonable at the time made, that prices
of materials are subject to unanticipated adverse fluctuation. In the
event our actual costs exceed fixed contractual costs of our product contracts,
we will not be able to recover the excess costs which could have a material
adverse effect on our business and results of operations. We examine these
contracts on a regular basis and accrue for anticipated losses on these
contracts, if necessary. As of March 28, 2010, we had approximately $1.1
million of loss provision accrued for these fixed price
contracts.
8
Approximately
95% of our contracts contain contract termination clauses for convenience.
In the event these clauses should be invoked by our customers, future revenues
against these contracts could be affected, however these clauses allow for a
full recovery of any incurred contract cost plus a reasonable fee up through and
as a result of the contract termination. We are currently unaware of any
pending terminations on our existing contracts. In some cases, contract
awards may be issued that are subject to renegotiation at a date (up to 180
days) subsequent to the initial award date. Generally, these subsequent
negotiations have had an immaterial impact (zero to 5%) on the contract price of
the affected contracts. Currently, none of our awarded contracts are
subject to renegotiation.
If
we fail to scale our operations appropriately in response to growth and changes
in demand, we may be unable to meet competitive challenges or exploit potential
market opportunities, and our business could be materially and adversely
affected.
Our past
growth has placed, and any future growth in our historical business is expected
to continue to place, a significant strain on our management personnel,
infrastructure and resources. To implement our current business and product
plans, we will need to continue to expand, train, manage and motivate our
workforce, and expand our operational and financial systems, as well as our
manufacturing and service capabilities. All of these endeavors will require
substantial management effort and additional capital. If we are unable to
effectively manage our expanding operations, we may be unable to scale our
business quickly enough to meet competitive challenges or exploit potential
market opportunities, and our current or future business could be materially and
adversely affected.
We
do not have long-term employment agreements with our key personnel, other than
our Chief Operating Officer. If we are not able to retain our key personnel or
attract additional key personnel as required, we may not be able to implement
our business plan and our results of operations could be materially and
adversely affected.
We depend
to a large extent on the abilities and continued participation of our executive
officers and other key employees. The loss of any key employee could have a
material adverse effect on our business. We currently have only one employment
agreement, with our Chief Operating Officer, and we do not presently maintain
“key man” insurance on any key employees. We believe that as our activities
increase and change in character, additional, experienced personnel will be
required to implement our business plan. Competition for such personnel is
intense, and we cannot assure you that they will be available when required, or
that we will have the ability to attract and retain them. In addition, we do not
presently have depth of staffing in our executive, operational and financial
management areas. Until additional key personnel can be successfully integrated
into our operations, the timing or success of which we cannot currently predict,
our results of operations and ultimate success will be vulnerable to challenges
associated with recruiting additional key personnel and difficulties associated
with the loss of any key personnel in the future.
Our
intangible assets or goodwill may suffer impairment in the future.
Goodwill
represents the cost of acquired businesses in excess of fair value of the
related net assets at acquisition. Valuation of intangible assets, such as
goodwill, requires us to make significant estimates and assumptions including,
but not limited to, estimating future cash flows from product sales, developing
appropriate discount rates, maintaining customer relationships and renewing
customer contracts, and approximating the useful lives of the intangible assets
acquired. To the extent actual results differ from these estimates, our
intangible assets or goodwill may suffer impairment in the future that will
impact our results of operations. We reviewed the fair market value of our
goodwill and intangible assets as of March 28, 2010, and determined that no
impairment of goodwill had occurred. There have been no material changes
to our assumptions or estimates that would result in impairment. However,
we intend to continue to monitor the value of our intangible assets and goodwill
in order to identify any impairment that may occur in the
future.
9
Certain
of our products are dependent on specialized sources of supply that are
potentially subject to disruption which could have a material, adverse impact on
our business.
Optex
Systems Holdings has selectively single-sourced some of our material components
in order to mitigate excess procurement costs associated with significant
tooling and startup costs. Furthermore, because of the nature of
government contracts, we are often required to purchase selected items from U.S.
government approved suppliers, which may further limit our ability to utilize
multiple supply sources for these key components.
To the
extent any of these single sourced or government approved suppliers should have
disruptions in deliveries due to production, quality, or other issues, Optex
Systems Holdings may also experience related production delays or unfavorable
cost increases associated with retooling and qualifying alternate
suppliers. The impact of delays resulting from disruptions in supply
for these items could negatively impact our revenue, our customer reputation,
and our results of operations. In addition, significant price
increases from single-source suppliers could have a negative impact on our
profitability to the extent that we are unable to recover these cost increases
on our fixed price contracts.
Each
contract has a specific quantity of material which needs to be purchased,
assembled, and finally shipped. Prior to bidding a contract, Optex Systems
Holdings contacts potential sources of material and receives qualified
quotations for this material. In some cases, the entire volume is given to
a single supplier and in other cases, the volume might be split between several
suppliers. If a contract has a single source supplier and that supplier
fails to meet their obligations (e.g., quality, delivery), then Optex Systems
Holdings would find an alternate supplier and bring this information back to the
final customer. Contractual deliverables would then be re-negotiated
(e.g., specifications, delivery, price). Currently, approximately 28% of
our total material requirements are single-sourced across 21 suppliers
representing approximately 20% of our active supplier base. Single-sourced
component requirements span across all of our major product lines. The
vast majority of these single-sourced components could be provided by another
supplier with minimal interruption in schedule (supply delay of 3 months or
less) or increased costs. We do not believe these single sourced
materials to pose any significant risk to Optex Systems Holdings as other
suppliers are capable of satisfying the purchase requirements in a reasonable
time period with minimal increases in cost. Of these single sourced
components, we have contracts (purchase orders) with firm pricing and delivery
schedules in place with each of the suppliers to supply parts in satisfaction of
our current contractual needs.
We
consider only those specialized single source suppliers where a disruption in
the supply chain would result in a period of three months or longer for Optex
Systems Holdings to identify and qualify a suitable replacement to present a
material financial or schedule risk. In the table below we identify
only those specialized single source suppliers and the product lines supported
by those materials.
Product Line
|
Supplier
|
Supply Item
|
Risk
|
Purchase Orders
|
||||
Periscopes
|
TSP,
Inc.
|
Window
used on all glass & plastic periscopes
|
Proprietary
coatings would take in excess of 6 months to identify and qualify an
alternative source
|
Current
firm fixed price & quantity purchase orders are in place with the
supplier to meet all contractual requirements. Supplier is on
schedule.
|
||||
Periscopes
|
Spartec
Polycast
|
Acrylic
raw material used on plastic periscope assemblies
|
This
material has quality characteristics which would take in excess of 6
months to identify and qualify an alternative source.
|
Current
firm fixed price & quantity purchase orders are in place with the
supplier to meet all contractual requirements. Supplier is on
schedule.
|
||||
Howitzers
|
Danaher
Controls
|
Counter
Assembly for M137 & M187 Howitzer programs
|
Critical
assembly would take in excess of 6 months to identify and qualify an
alternative source. Currently, the only U.S. government approved
supplier.
|
Current
firm fixed price & quantity purchase orders are in place with the
supplier to meet all contractual requirements. Supplier is on
schedule.
|
||||
Other
|
SWS
Trimac
|
Subcontracted
Electron Beam Welding
|
Subcontracted
welder that is the only qualified supplier for General Dynamics Land
Systems muzzle reference system collimator assemblies. This
operation would take in excess of 6 months to identify and qualify an
alternative supplier.
|
Current
firm fixed price & quantity purchase orders are in place with the
supplier to meet all contractual requirements. Supplier is on
schedule.
|
10
The
defense technology supply industry is subject to technological change and if we
are not able to keep up with our competitors and/or they develop advanced
technology as response to our products, we may be at a competitive
disadvantage.
The
market for our products is generally characterized by technological
developments, evolving industry standards, changes in customer requirements,
frequent new product introductions and enhancements, short product life cycles
and severe price competition. Our competitors could also develop new, more
advanced technologies in reaction to our products. Currently accepted
industry standards may change. Our success depends substantially on our ability,
on a cost-effective and timely basis, to continue to enhance our existing
products and to develop and introduce new products that take advantage of
technological advances and adhere to evolving industry standards. An unexpected
change in one or more of the technologies related to our products, in market
demand for products based on a particular technology or of accepted industry
standards could materially and adversely affect our business. We may or may not
be able to develop new products in a timely and satisfactory manner to address
new industry standards and technological changes, or to respond to new product
announcements by others. In addition, new products may or may not achieve market
acceptance.
Unexpected
warranty and product liability claims could adversely affect our business and
results of operations.
The
possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products. Some of our
customers require that we warrant the quality of our products to meet customer
requirements and be free of defects for up to fifteen months subsequent to
delivery. Approximately 50% of our current contract deliveries are covered
by these warranty clauses. We establish reserves for warranty claims based on
our historical rate of less than one percent of returned shipments against these
contracts. There can be no assurance that this reserve will be
sufficient if we were to experience an unexpectedly high incidence of problems
with our products. Significant increases in the incidence of such
claims may adversely affect our sales and our reputation with
consumers. Costs associated with warranty and product liability
claims could materially affect our financial condition and results of
operations.
We
derive almost all of our revenue from three customers and the loss of
either customer or both customers could have a material adverse effect on our
revenues.
At
present, we derive approximately 90% of the gross business revenue from three
customers, with 47% from General Dynamics Land Systems Divisions, 33% from
Tank-automotive and Armaments Command and 10% from NorcaTec
LLC. Procuring new customers and contracts may partially mitigate
this risk.
A
decision by either General Dynamics Land System Division or Tank-automotive and
Armaments Command to cease issuing contracts could have a significant material
impact on our business and results of operations. There can be no
assurance that we could replace these customers on a timely basis or at
all.
11
We
have approximately 90 discrete contracts with General Dynamics Land System
Division and Tank-automotive and Armaments Command. If they choose to
terminate these contracts, Optex Systems Holdings is entitled to fully recover
all contractual costs and reasonable profits incurred up to or as a result of
the terminated contract.
We
do not possess any patents and rely solely on trade secrets to protect our
intellectual property.
We
utilize several highly specialized and unique processes in the manufacture of
our products, for which we rely solely on trade secrets to protect our
innovations. We cannot assure you that we will be able to maintain
the confidentiality of our trade secrets or that our non-disclosure agreements
will provide meaningful protection of our trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or other disclosure. The confidentiality agreements that are designed
to protect our trade secrets could be breached, and we might not have adequate
remedies for the breach.
It is
also possible that our trade secrets will otherwise become known or
independently developed by our competitors, many of which have substantially
greater resources, and these competitors may have applied for or obtained, or
may in the future apply for or obtain, patents that will prevent, limit or
interfere with our ability to make and sell some of our products. Although based
upon our general knowledge (and we have not conducted exhaustive patent
searches), we believe that our products do not infringe on the patents or other
proprietary rights of third parties; however, we cannot assure you that third
parties will not assert infringement claims against us or that such claims will
not be successful.
In
the future, we may look to acquire other businesses in our industry and the
acquisitions will require us to use substantial resources, among other
things.
At some
time in the future, we may decide to pursue a consolidation strategy with other
businesses in our industry. In order to successfully acquire other
businesses, we would be forced to spend significant resources in both
acquisition and transactional costs, which could divert substantial resources in
terms of both financial and personnel capital from our current
operations. Additionally, we might assume liabilities of the acquired
business, and the repayment of those liabilities could have a material adverse
impact on our cash flow. Furthermore, when a new business is
integrated into our ongoing business, it is possible that there would be a
period of integration and adjustment required which could divert resources from
ongoing business operations.
Conversion
of our Series A preferred stock could cause substantial dilution to our existing
common stock holders, and certain other rights of the preferred stock holders
present other risks to our existing common stock holders.
As of
July 20, 2010, we had 139,444,940
shares of our common stock issued and outstanding, as well as 1,027 shares of
our Series A preferred stock issued and outstanding. The Series A
preferred stock is convertible into 41,080,000 shares of our common stock, and
upon conversion, the Series A preferred stock would represent 21.7% of our
outstanding common stock. This would greatly dilute the holdings of our
existing common stockholders. In addition, the preferred shareholders vote
on a one-to-one basis with our common shareholders on an as converted
basis.
Furthermore,
in the event of a liquidation, the holders of our Series A preferred stock would
receive priority liquidation payments before payments to common shareholders
equal to the amount of the stated value of the preferred stock before any
distributions would be made to our common shareholders. The total stated
value of our preferred stock is $6,162,000, so the preferred shareholders would
be entitled to receive that amount before any distributions could be made to
common shareholders. Our assets with liquidation value are exceeded by our
liabilities on our balance sheet; therefore, upon a liquidation, there
would be no assets remaining for distribution to common
shareholders.
12
Lastly,
the preferred shareholders have the right, by majority vote of the shares of
preferred stock, to generally approve any issuances by us of equity and/or
indebtedness, which is not ordinary course trade indebtedness. Therefore,
the preferred shareholders can effectively bar us from entering into a
transaction which they feel is not in their best interests even if the
transaction would otherwise be in the best interests of Optex Systems Holdings
and its common shareholders.
Risks
Relating to the Reorganization
One of our directors, who is also one
of our executive officers, beneficially owns a substantial percentage of
Optex Systems Holdings’ outstanding common stock, which gives him control over
certain major decisions on which Optex Systems Holdings’ stockholders may vote,
which may discourage an acquisition of Optex Systems Holdings
.
As a
result of the reorganization, Sileas Corp., which is owned by Optex Systems
Holdings’ three officers (one of whom is also one of Optex Systems Holdings’
three directors), beneficially owns, in the aggregate, 73.52% of Optex Systems
Holdings’ outstanding common stock. One director who is also an
executive officer, Stanley Hirschman, owns the majority equity interest in
Sileas. The interests of Optex Systems Holdings’ management may
differ from the interests of other stockholders. As Optex Systems Holdings’
executive management has the right and ability to control virtually all
corporate actions requiring stockholder approval, irrespective of how Optex
Systems Holdings’ other stockholders may vote, including the following
actions:
|
·
|
confirming or defeating the
election of directors;
|
|
·
|
amending or preventing amendment
of Optex Systems Holdings’ certificate of incorporation or
bylaws;
|
|
·
|
effecting or preventing a
reorganization, sale of assets or other corporate transaction;
and
|
|
·
|
controlling the outcome of any
other matter submitted to the stockholders for
vote.
|
Optex
Systems Holdings’ management’s beneficial stock ownership may discourage a
potential acquirer from seeking to acquire shares of Optex Systems Holdings’
common stock or otherwise attempting to obtain control of Optex Systems
Holdings, which in turn could reduce the stock price or prevent Optex Systems
Holdings’ stockholders from realizing a premium over Optex Systems Holdings’
stock price.
If
Sileas is unable to meet its obligations under the purchase money note to the
party from which it purchased its stock holdings in Optex Systems Holdings,
there could be a change in control in Optex Systems Holdings.
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview Fund, L.P., representing 90% of Optex Systems, Inc. (Delaware), in a
private transaction. The purchase price for the acquisition of Longview’s
position was $13,524,405, and the consideration was paid in the form of a
promissory note. The obligations of Sileas under the promissory note
are secured by a security interest in Optex Systems Holdings’ common
and preferred stock owned by Sileas. As Sileas has no operations or
business activities other than holding the purchased assets, Sileas is depending
upon the value of its common stock and preferred stock holdings in Optex Systems
Holdings to increase over time in order to pay its obligations under the
promissory note. If the value of the holdings does not sufficiently
increase, and Sileas is unable to meet its payment obligations, Longview could
exercise its remedies with respect to its security interest and take control of
the pledged stock, and thus there would be a change in control of Optex Systems
Holdings, as Sileas is currently the majority owner of Optex Systems
Holdings. There can be no guarantee that the investment objectives of
Longview will be the same as those of Sileas or our other shareholders. In the
event that control shifts to Longview from Sileas, Longview may vote its shares
differently than Sileas would have voted under similar
circumstances. Merrick Okamoto, a director of Optex Systems Holdings,
is a control person of Viking Asset Management, which controls Longview
Fund.
13
Public company compliance may make it
more difficult to attract and retain officers and directors
.
The
Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC
have required changes in corporate governance practices of public companies. As
a public entity, Optex Systems Holdings expects these new rules and regulations
to increase compliance costs in 2010 and beyond and to make certain activities
more time consuming and costly. As a public entity, Optex Systems Holdings also
expects that these new rules and regulations may make it more difficult and
expensive for Optex Systems Holdings to obtain director and officer liability
insurance in the future and it may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for Optex Systems Holdings to
attract and retain qualified persons to serve as directors or as executive
officers.
We
did not give separate notice by mailing to then current shareholders of Sustut
of the written consent by Andrey Oks as the majority shareholder of the
reorganization.
Section
228(e) of the Delaware General Corporation Law requires "[p]rompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders . . . who have not consented in
writing.” Prior management of Sustut did not give notice to the other
then existing shareholders of Sustut of the written consent of Andrey Oks in
lieu of a meeting of stockholders approving the reorganization on March 26, 2009
in compliance with Section 228(e). On April 3, 2009, current
management filed a Form 8-K which detailed the transaction although it did not
specifically mention approval of the transaction by Andrey Oks as the majority
shareholder of Sustut. Potential ramifications of this lack of
compliance with Section 228(e) could include possible inquiry or litigation from
then existing shareholders of Sustut for failure of being made aware of the
consent. To the knowledge of current management of Optex Systems
Holdings, there have been no claims or inquiries made and/or any litigation
filed by then current shareholders of Sustut for failure to receive notice under
Section 228(e) of the Delaware General Corporation Law.
Risks
Relating to our Common Stock
Optex Systems Holdings’ stock price
may be volatile.
The
market price of Optex Systems Holdings’ common stock is likely to be highly
volatile and could fluctuate widely in price in response to various factors,
many of which are beyond Optex Systems Holdings’ control, including
the following:
|
·
|
additions or departures of key
personnel;
|
|
·
|
limited “public float” following
the reorganization, in the hands of a small number of persons whose sales
or lack of sales could result in positive or negative pricing pressure on
the market price for the common stock;
|
|
·
|
operating results that fall below
expectations;
|
|
·
|
economic and other external
factors, including but not limited to changes in federal government
military spending and the federal government procurement process;
and
|
|
·
|
period-to-period fluctuations in
Optex Systems Holdings’ financial
results.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of Optex Systems Holdings’ common
stock.
14
There is currently no liquid trading
market for Optex Systems Holdings’ common stock, and Optex Systems Holdings
cannot ensure that one will ever develop or be sustained .
Our
common stock is currently approved for quotation on the OTC Bulletin Board
trading under the symbol OPXS.OB. However, there is limited trading
activity and not currently a liquid trading market. There is no assurance
as to when or whether a liquid trading market will develop, and if such a market
does develop, there is no assurance that it will be maintained.
Furthermore, for companies whose securities are quoted on the
Over-The-Counter Bulletin Board maintained by the National Association of
Securities Dealers, Inc., it is more difficult (1) to obtain accurate
quotations, (2) to obtain coverage for significant news events because major
wire services generally do not publish press releases about such companies, and
(3) to raise needed capital. As a result, purchasers of Optex Systems
Holdings’ common stock may have difficulty selling their shares in the public
market, and the market price may be subject to significant
volatility.
Offers or
availability for sale of a substantial number of shares of Optex Systems
Holdings’ common stock may cause the price of Optex Systems Holdings’ common
stock to decline or could affect Optex Systems Holdings’ ability to raise
additional working capital.
There are
currently 14,999,991 unrestricted shares of Optex Systems Holdings which were
outstanding prior to the March 2009 reorganization. Additionally,
through a combination of the shares available under this registration statement
when it becomes effective, and Rule 144, additional shares will become
available.
Under Rule
144(i)(2), Optex Systems Holdings’ stockholders can avail themselves of Rule 144
and commence selling significant amounts of shares into the market one year
after the filing of “Form 10” information with the SEC as long as the other
requirements of Rule 144(i)(2) are met. While affiliates would be
subject to volume limitations under Rule 144(e), which is one percent of the
shares outstanding as shown by our then most recent report or statement
published, nonaffiliates would then be able to sell their stock without volume
limitations. If Optex Systems Holdings’ current stockholders seek to
sell substantial amounts of common stock in the public market either upon
expiration of any required holding period under Rule 144 or pursuant to an
effective registration statement, it could create a circumstance commonly
referred to as “overhang,” in anticipation of which the market price of Optex
Systems Holdings’ common stock could decrease substantially. The existence
of an overhang, whether or not sales have occurred or are occurring, could also
make it more difficult for Optex Systems Holdings to raise additional financing
in the future through sale of securities at a time and price that Optex Systems
Holdings deems acceptable.
The date
on which current shareholders can sell a substantial amount of shares into the
public market would be the earlier of the date on which the registration
statement is effective and the one year anniversary of the date on which all
Form 10 information is filed with the SEC (which we have determined is September
28, 2009), which would then allow sales under Rule 144. The amount of
shares then available would be 11,784,177 shares (all of those being registered
for resale under this prospectus, when it becomes effective) and 8,131,667
shares (under Rule 144, which are the remaining shares of common stock
underlying warrants purchased in the private placement which took place just
prior to the reorganization). There are also 1,780,000 shares which
were issued in transactions exempt from registration under Rule 144 since the
date of the reorganization which would become available under Rule 144 for
legend removal in September 2010.
The
shares to become available either through this prospectus upon effectiveness and
under Rule 144 are set forth in the following table:
Prospectus
|
11,784,177 | |||
Shares
from warrants issued in the reorganization
|
8,131,677 | |||
Shares
issued since the reorganization, all with restrictive
legends
|
1,780,000 |
15
The elimination of monetary liability
against Optex Systems Holdings’ directors, officers and employees under Delaware
law and the existence of indemnification rights to Optex Systems Holdings’
directors, officers and employees may result in substantial expenditures by
Optex Systems Holdings and may discourage lawsuits against Optex Systems
Holdings’ directors, officers and employees.
Optex
Systems Holdings provides indemnification to its directors and officers to the
extent provided by Delaware law. The foregoing indemnification obligation could
result in Optex Systems Holdings incurring substantial expenditures to cover the
cost of settlement or damage awards against directors and officers, which Optex
Systems Holdings may be unable to recoup. These provisions and resultant costs
may also discourage Optex Systems Holdings from bringing a lawsuit against
directors and officers for breaches of their fiduciary duties and may similarly
discourage the filing of derivative litigation by Optex Systems Holdings’
stockholders against Optex Systems Holdings’ directors and officers even though
such actions, if successful, might otherwise benefit Optex Systems Holdings and
its stockholders.
USE
OF PROCEEDS
We are
not selling any of the shares of common stock being offered by this prospectus
and will receive no proceeds from the sale of the shares by the selling
stockholders. All of the proceeds from the sale of common stock offered by this
prospectus will go to the selling stockholders at the time each offers and sells
such shares.
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Effective
with the start of trading on May 1, 2009, our stock received a ticker symbol
change from “SSTX” to “OPXS” from FINRA and commenced trading under the new
symbol on the OTC Bulletin Board. Trading in our stock has
historically been sporadic, trading volumes have been low, and the market price
has been volatile.
The
following table shows the range of high and low prices for our common stock as
reported by the OTC Bulletin Board for each quarter since the fourth quarter of
2007, as adjusted. All prices through the date of the reorganization
are as reported on Sustut’s periodic filings, as adjusted for the 2.5:1 forward
split of Sustut's common stock authorized on February 27, 2009. All
prices since the reorganization are derived from market information as to OTCBB
prices as reported through the AOL Finance look up system. The quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
may not represent actual transactions.
Period
|
High
|
Low
|
||||||
Commencement
of Trading through Fourth Quarter 2007
|
$ | 0.50 | $ | 0.50 | ||||
First
Quarter 2008
|
$ | 0.50 | $ | 0.50 | ||||
Second
Quarter 2008
|
$ | 0.50 | $ | 0.50 | ||||
Third
Quarter 2008
|
$ | 0.50 | $ | 0.50 | ||||
Fourth
Quarter 2008
|
$ | 0.50 | $ | 0.50 | ||||
First
Quarter 2009
|
$ | 0.50 | $ | 0.50 | ||||
Second
Quarter 2009
|
$ | 0.50 | $ | 0.14 | ||||
Third
Quarter 2009
|
$ | 0.45 | $ | 0.08 | ||||
Fourth
Quarter 2009
|
$ | 0.50 | $ | 0.17 | ||||
First
Quarter 2010
|
$ | 0.50 | $ | 0.09 | ||||
Second
Quarter 2010
|
$ | 0.15 | $ | 0.08 | ||||
Third
Quarter 2010
|
$ | 0.09 | $ | 0.04 |
16
On
July 20, 2010, the sale price for our common stock as reported on the OTCBB was
$0.038 per share.
Securities
outstanding and holders of record
On
July 20, 2010, there were approximately 86
record holders of our common stock and 139,444,940
shares of our common stock issued and outstanding.
Dividend
Policy
We have
not paid and do not expect to pay dividends on our common stock. Any future
decision to pay dividends on our common stock will be at the discretion of our
board and will depend upon, among other factors, our results of operations,
financial condition and capital requirements.
Information
respecting equity compensation plans
Summary Equity Compensation
Plan Information
Optex
Systems Holdings had no equity compensation plans as of September 30, 2008 and
adopted its 2009 Stock Option Plan on March 26, 2009.
Management’s
Discussion and Analysis and Results of Operations
This
management's discussion and analysis reflects information known to management as
at March 28, 2010 and through the date of this filing. This MD&A is intended
to supplement and complement our audited financial statements and notes thereto
for the fiscal year ended September 27, 2009 and the second quarter ended March
28, 2010, prepared in accordance with U.S. generally accepted accounting
principles (GAAP). You are encouraged to review our financial statements in
conjunction with your review of this MD&A. The financial information in this
MD&A has been prepared in accordance with GAAP, unless otherwise indicated.
In addition, we use non-GAAP financial measures as supplemental indicators of
our operating performance and financial position. We use these non-GAAP
financial measures internally for comparing actual results from one period to
another, as well as for planning purposes. We will also report non-GAAP
financial results as supplemental information, as we believe their use provides
more insight into our performance. When non-GAAP measures are used in this
MD&A, they are clearly identified as a non-GAAP measure and reconciled to
the most closely corresponding GAAP measure.
The
following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described. This discussion contains
forward-looking statements. Please see “Special cautionary statement concerning
forward-looking statements” and “Risk factors” for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.
Background
On March
30, 2009, a reorganization was consummated pursuant to which the then existing
shareholders of Optex Systems, Inc. (Delaware) exchanged their shares of common
stock for shares of common stock of Optex Systems Holdings as
follows: (i) the outstanding 85,000,000 shares of Optex Systems,
Inc. (Delaware) common stock were exchanged by Optex Systems Holdings
for 113,333,282 shares of Optex Systems Holdings common stock, (ii) the
outstanding 1,027 shares of Optex Systems, Inc. (Delaware) Series A preferred
stock were exchanged by Optex Systems Holdings for 1,027 shares of Optex
Systems Holdings Series A preferred stock, and (iii) the 8,131,667 shares
of Optex Systems, Inc. (Delaware) common stock purchased in the private
placement were exchanged by Optex Systems Holdings for 8,131,667 shares of Optex
Systems Holdings common stock. Optex Systems, Inc. (Delaware) has
remained a wholly-owned subsidiary of Optex Systems Holdings.
17
As a
result of the reorganization, Optex Systems Holdings changed its name from
Sustut Exploration Inc. to Optex Systems Holdings, Inc., and its year end from
December 31 to a fiscal year ending on the Sunday nearest September
30.
Immediately
prior to the closing under the reorganization agreement (and the exchange of
shares referenced above), as of March 30, 2009, Optex Systems, Inc. (Delaware)
accepted subscriptions from accredited investors for a total 27.1 units, at a
purchase price of $45,000 per unit, with each unit consisting of 300,000 shares
of common stock, no par value, of Optex Systems, Inc. (Delaware) and warrants to
purchase 300,000 shares of common stock for $0.45 per share for a period of five
(5) years from the initial closing, which were issued by Optex Systems, Inc.
(Delaware) after the closing referenced above. Gross proceeds to
Optex Systems, Inc. (Delaware) were $1,219,750, and after deducting (i) a cash
finder’s fee of $139,555, (ii) non-cash consideration of indebtedness owed to an
investor of $146,250, and (iii) stock issuance costs of $59,416, the net
proceeds were $874,529. The finder also received five year warrants
to purchase 2.39 units, at an exercise price of $49,500 per unit.
Optex
Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies,
primarily for Department of Defense applications. Its products are installed on
various types of U.S. military land vehicles, such as the Abrams and Bradley
fighting vehicles, light armored and armored security vehicles and have been
selected for installation on the Stryker family of vehicles. Optex Systems, Inc.
(Delaware) also manufactures and delivers numerous periscope configurations,
rifle and surveillance sights and night vision optical
assemblies. Optex Systems, Inc. (Delaware) products consist primarily
of build-to-customer print products that are delivered both directly to the
armed services and to other defense prime contractors. Less than
1% of today’s revenue is related to the resale of products “substantially
manufactured by others”. In this case, the product would likely be a
simple replacement part of a larger system previously produced by Optex Systems,
Inc. (Delaware).
Many of
our contracts allow for government contract financing in the form of contract
progress payments pursuant to Federal Acquisition Regulation
52.232-16, “Progress Payments”. As a small business, and subject
to certain limitations, this clause provides for government payment of up to 90%
of incurred program costs prior to product delivery. To the extent
our contracts allow for progress payments, we intend to utilize this benefit,
thereby minimizing the working capital impact on Optex Systems Holdings for
materials and labor required to complete the contracts.
Optex
Systems Holdings also anticipates the opportunity to integrate some of its night
vision and optical sights products into commercial
applications. Optex Systems Holdings plans to carry on the business
of Optex Systems, Inc. (Delaware) as its sole line of business, and all of Optex
Systems Holdings’ operations are expected to be conducted by and through
Optex Systems, Inc. (Delaware).
The
business which is now carried on through Optex Systems, Inc. (Delaware) differs
from the business of Irvine Sensors Corporation, which was the former owner of
the assets through its subsidiary, Optex Systems, Inc.
(Texas). Optex Systems, Inc. (Delaware) delivers high volume
products, under multi-year contracts, to large defense
contractors. It has the reputation and credibility with those
customers as a strategic supplier. Irvine Sensors Corporation is predominately a
research and design company with capabilities enabling only prototype or low
quantity volumes. Optex Systems, Inc. (Delaware) is predominately a high
volume manufacturing company. Therefore the systems and processes needed
to meet customer’s needs are quite different. While both companies serve
the military market, the customers within these markets are different. For
example, two of the largest customers for Optex are General Dynamics Land
Systems and U.S. Army Tank-armaments and Automotive Command. Irvine
Sensors Corporation did not have any contracts or business relations with either
of these two customers. Therefore, the separation has allowed Optex
Systems, Inc. (Delaware) to focus on high volume manufacturing and the use
of the six sigma manufacturing methodology. This shift in priorities has
allowed Optex Systems, Inc. (Delaware) to improve delivery performance and
reduce operational costs.
18
The
successful completion of the separation from Irvine Sensors
Corporation, which was accomplished by Optex Delaware’s acquisition of all
of the assets and assumption of certain liabilities of Optex Systems, Inc.
(Texas), eliminated the general and administrative costs allocated by Irvine
Sensors Corporation. These costs represented services paid by Irvine Sensors
Corporation for expenses incurred on Optex Texas’ behalf such as legal,
accounting and audit, consulting fees and insurance costs in addition to
significant amounts of Irvine Sensors Corporation’s general overhead allocated
to Optex Systems, Inc. (Texas).
The
estimated total general and administrative expenses assuming Optex Systems, Inc.
(Texas) was operated on a stand-alone basis during the 2008 fiscal year
are:
Accounting
and Auditing Fees
|
$ | 250,000 | ||
Legal
Fees
|
60,000 | |||
Consulting
Fees
|
60,000 | |||
Workers
Comp and General Insurance
|
70,000 | |||
Total
|
$ | 440,000 |
As a
result of the purchase of the assets of Optex Systems, Inc. (Texas) on October
14, 2008, these general and administrative costs are incurred and paid directly
by Optex Systems, Inc. (Delaware) and have been reflected in the 2009 and 2010
financial results to the extent incurred for the periods presented
herein.
The
liabilities of Optex Systems, Inc. (Texas) not assumed by Optex Systems, Inc.
(Delaware) relate to costs that would not have been incurred by Optex Systems,
Inc. (Texas) if they were operated on a stand-alone basis. Among
those liabilities not assumed by Optex Systems, Inc. (Delaware) was a note due
to Tim Looney. The 2007 Looney promissory note had a principal amount
of $2,000,000 together with accrued interest unpaid aggregating to approximately
$2,300,000. The note was an amendment to Looney’s earn-out agreement
which was the consideration for Irvine Sensors Corporation’s purchase of Optex
Systems, Inc. (Texas).
The 2007
Looney promissory note was not assumed by Optex Systems, Inc. (Delaware) in the
October 2008 transaction. The note and accrued interest was reported
on the Optex Systems, Inc. (Texas) financial statements as of September 28, 2008
as a result of push down accounting for the acquisition of Optex Systems, Inc.
(Texas) by Irvine Sensors Corporation. These costs would not be
incurred by Optex Systems, Inc. (Texas) if operated as a stand-alone entity
because it relates to Irvine Sensors Corporation’s consideration for their
purchase of Optex Systems, Inc. (Texas). Since this was not an operating cost
associated with Optex Systems, Inc. (Texas) which would not incur these costs if
operating as a stand-alone entity, we expect no impact to the future operating
results or liquidity of Optex Systems, Inc. (Delaware).
Additionally,
as of September 28, 2008, Optex Systems, Inc. (Texas) reported $4.3 million of
liabilities attributable to corporate expenses allocated to Optex Systems, Inc.
(Texas) through an intercompany payable account “Due to Parent”. The
outstanding “Due to Parent” balance was not acquired by Optex Systems, Inc.
(Delaware) in the acquisition from Irvine Sensors Corporation.
To the
extent that Optex Systems, Inc. (Delaware) has incurred these similar costs on
an ongoing basis, these amounts have been funded from Optex Systems Inc.
(Delaware)’s own operating cash flow.
Plan
of Operation
Through a
private placement offering completed prior to consummation of the reorganization
agreement, Optex Systems, Inc. (Delaware) raised $1,219,750 ($874,529, net of
finders fees, issuance costs and non cash consideration resulting from
satisfaction of indebtedness owed to an investor) to fund
operations. The proceeds have been used as follows:
19
Description
|
Offering
|
|||
Additional
Personnel
|
$ | 150,000 | ||
Legal
and Accounting Fees
|
$ | 100,000 | ||
Investor
Relations Fees
|
96,000 | |||
Working
Capital
|
$ | 528,529 | ||
Totals:
|
$ | 874,529 |
Results
of Operations
During
the quarter ended March 28, 2010, we experienced reductions in forecasted sales
volume due to changes in incremental funding commitments by federal agencies.
We are currently evaluating the impact that anticipated reductions in
government defense spending budgets will have on Optex Systems Holdings. Due to
new periscope orders from non-traditional sources and an aggressive pursuit of
increased market share for all of our existing product lines, we expect to
mitigate some of the decreased U.S. government requirements with other new
business.
The table
below summarizes our quarterly and year to date operating results in terms of
both a GAAP net income measure and a non GAAP EBITDA measure. We use EBITDA as
an additional measure for evaluating the performance of our business as “net
income” includes the significant impact of noncash intangible amortization on
our income performance. Consequently, in order to have a meaningful measure of
our operating performance on a continuing basis, we need to evaluate an income
measure which does not take into account this intangible amortization. We have
summarized the quarterly revenue and margin below along with a reconciliation of
the GAAP net loss to the non GAAP EBITDA calculation for comparative purposes
below. We believe that including both measures allows the reader to have a
“complete picture” of our overall performance.
Successor
Qtr 1, 2010
|
Successor
Qtr 2, 2010
|
Successor - Six
months ended March
28, 2010
|
Predecessor
Qtr1, 2009
(September 29, 2008
through October 14, 2008)
|
Successor
Qtr1, 2009
(October 15, 2008 through
December 27, 2008)
|
Successor
Qtr2, 2009
|
Combined - Six months
ended March 29, 2009
|
||||||||||||||||||||||
Net
Loss Applicable to Common Shareholders - GAAP
|
$ | - | $ | (0.1 | ) | $ | (0.1 | ) | $ | (0.1 | ) | $ | 0.1 | $ | (0.3 | ) | $ | (0.3 | ) | |||||||||
Add:
|
||||||||||||||||||||||||||||
Interest
Expense
|
- | - | - | - | 0.1 | 0.1 | 0.2 | |||||||||||||||||||||
Preferred
Stock Dividend
|
0.1 | 0.1 | 0.2 | - | - | - | - | |||||||||||||||||||||
Federal
Income Taxes (Benefit)
|
- | (0.1 | ) | (0.1 | ) | - | 0.2 | 0.1 | 0.3 | |||||||||||||||||||
Depreciation
& Amortization
|
0.3 | 0.3 | 0.6 | - | 0.6 | 0.5 | 1.1 | |||||||||||||||||||||
EBITDA
- Non GAAP
|
$ | 0.4 | $ | 0.2 | $ | 0.6 | $ | (0.1 | ) | $ | 1.0 | $ | 0.4 | $ | 1.3 |
Our
EBITDA declined by $0.7 million in the six months ended March 28, 2010 as
compared to the prior year performance for the same period. The
EBITDA reduction for the period was primarily attributable to the lower sales
revenue of $1.7 million, lower product margins related to the mix of product
lines shipped, and higher general and administrative spending of $0.1
million. We continue to pursue cost efficiencies in our production
and general and administrative areas.
20
Product
mix is dictated by customer contracted delivery dates and volume of each product
to be delivered on such delivery dates. Shifts in gross margin from
quarter to quarter are primarily attributable to the differing product mix
recognized as revenues during each respective period. Certain
periscope contracts were awarded January 2003, and due to significant material
price increases subsequent to the contract award date, we are experiencing a
loss on these contracts. We have fully reserved for future contract
losses on this program, thus deliveries against these programs yield a product
margin of zero. During the three and six months ended March 28, 2010,
we recognized revenue of $0.4 and $1.1 million, respectively, from these legacy
periscope programs, with a remaining backlog of $0.1 million, which should be
recognized in the third quarter of 2010. We expect our product
margins on periscopes to increase each quarter as the legacy programs are
completed and are replaced with new awards.
We are
aggressively pursuing additional, potentially higher margin periscope business,
and in May 2009, Optex Systems Holdings was awarded a multi-year Indefinite
Delivery/Indefinite Quantity type contract accompanied by the first
delivery order from U.S. Army Tank-armaments and Automotive Command.
In June 2009, we received an additional $3.4 million dollar award from General
Dynamics Land Systems and in September 2009, we received an additional $1.9
million award to provide product beginning with delivery starting in 2011
at the completion of our current production contract. The total
orders recorded for all product lines in the six months ended March 28, 2010 was
$8.3 million of which $5.5 million related to periscope business from several
customers.
As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), Optex Systems, Inc. (Delaware)’s amortizable intangible
assets increased significantly in 2009 over prior years. We expect the
intangible amortization expense to decline $1.0 million in the year ended
September 27, 2010 from $2.0 million in the year ended September 27,
2009.
Backlog
as of March 28, 2010 was $22.5 million as compared to a backlog of $33.3 million
as of March 29, 2009. The following table depicts the current
expected delivery by quarter of all contracts awarded as of March 28,
2010.
FY2010
|
FY2011
|
FY2012
|
FY2013
|
|||||||||||||||||||||||||||||||||||||||||||||
Program Backlog (millions)
|
Qtr
3
|
Qtr
4
|
Qtr
1
|
Qtr
2
|
Qtr
3
|
Qtr
4
|
Qtr
1
|
Qtr
2
|
Qtr
3
|
Qtr
4
|
Qtr
1
|
Qtr
2
|
||||||||||||||||||||||||||||||||||||
Howitzer
Programs
|
$ | 1.3 | $ | 2.2 | $ | 1.4 | $ | 0.5 | $ | 0.4 | $ | 0.1 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
Periscope
Programs
|
$ | 2.6 | $ | 2.2 | 1.7 | 1.9 | 0.9 | 0.8 | 0.7 | 1.2 | 0.9 | 0.6 | 0.3 | 0.2 | ||||||||||||||||||||||||||||||||||
Sighting
Systems
|
$ | 0.1 | $ | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
All
Other
|
1.1 | 0.5 | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | - | 0.1 | - | - | ||||||||||||||||||||||||||||||||||||
Total
|
$ | 5.1 | $ | 4.9 | $ | 3.4 | $ | 2.5 | $ | 1.4 | $ | 1.0 | $ | 0.8 | $ | 1.3 | $ | 0.9 | $ | 0.7 | $ | 0.3 | $ | 0.2 |
Virtually
all of our contracts are prime or subcontracted directly with the federal
government and, as such, are subject to Federal Acquisition Regulation Subpart
49.5, “Contract Termination Clauses” and more specifically Federal Acquisition
Regulation clauses 52.249-2 “Termination for Convenience of the
Government Fixed-Price)”, and 49.504 “Termination of fixed-price contracts
for default”. These clauses are standard clauses on our prime
military contracts and generally apply to us as subcontractors. It
has been our experience that the termination for convenience is rarely invoked,
except where it is mutually beneficial for both parties. We are
currently not aware of any pending terminations for convenience or for default
on our existing contracts.
By way of
background, the Federal Acquisition Regulation is the principal set of
regulations that govern the acquisition process of government agencies and
contracts with the federal government. In general, parts of the Federal
Acquisition Regulation are incorporated into government solicitations and
contracts by reference as terms and conditions affecting contract awards and
pricing solicitations.
21
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 incurred up to and as a result of the terminated
contract. In the event a termination for default were to occur, we could be
liable for any excess cost incurred by the government to acquire supplies from
another supplier similar to those terminated from us. We would not be
liable for any excess costs if the failure to perform the contract arises from
causes beyond the control and without the fault or negligence of the company as
defined by Federal Acquisition Regulation clause 52.249-8. In addition, the
federal government may require us to transfer title and deliver to the
federal government any completed supplies, partially completed supplies and
materials, parts, tools, dies, jigs, fixtures, plans, drawings, information, and
contract rights that we have specifically produced or acquired for the
terminated portion of this contract. The federal government shall pay contract
price for completed supplies delivered and accepted, and we would negotiate an
agreed upon amount of payment for manufacturing materials delivered and accepted
and for the protection and preservation of the property. Failure to agree on an
amount for manufacturing materials is subject to the Federal Acquisition
Regulation Disputes clause 52.233-1.
In some
cases, we may receive an “undefinitized” (i.e., price, specifications and terms
are not agreed upon before performance commenced) contract award for contracts
that exceed the $650,000, which is the federal government simplified acquisition
threshold. These contracts are considered firm contracts at an
undefinitized, but not to exceed specified limits threshold. Cost
Accounting Standards Board covered contracts are subject to the Truth in
Negotiations Act disclosure requirements and downward only price
negotiation. As of March 28, 2010, none of our outstanding backlog
fell under this criterion.
Three
Months Ended March 28, 2010 (Successor) Compared to the Three Months Ended March
29, 2009 (Successor)
Revenues. In the three
months ended March 28, 2010, revenues decreased by 6.0% from the respective
prior period in 2009:
Product Line
|
Three months ended
03/28/2010
|
Three months ended
03/29/2009
|
Change
|
|||||||||
(Successor)
|
(Combined)
|
|||||||||||
Howitzer
Programs
|
$ | 1.6 | $ | 0.2 | $ | 1.4 | ||||||
Periscope
Programs
|
3.2 | 4.3 | (1.1 | ) | ||||||||
Sighting
Systems
|
0.3 | 1.2 | (0.9 | ) | ||||||||
All
Other
|
1.2 | 1.0 | 0.2 | |||||||||
Total
|
$ | 6.3 | $ | 6.7 | $ | (0.4 | ) | |||||
Percent
increase (decrease)
|
-6.0 | % |
Periscope
revenues decreased 25.6% during the three months ended March 28, 2010 as
compared to the three months ended March 29, 2009. During the first
half of fiscal year 2009, periscope production from one of our major periscope
contracts had been accelerated to compensate for production delays that occurred
during the last quarter of fiscal year 2008. The delay was a result
of a manufacturing control test failure related to the environmental
testing of one of the products. Subsequent to the environmental
control test failure, we implemented a manufacturing process change to eliminate
the potential for future failures and increased the production rate in the first
six months of fiscal 2009 to compensate for the previous delay. Based
on our current backlog demand and a recent decline of new federal government
orders deliverable in the remaining quarters of fiscal 2010, we expect the
periscope product line deliveries to continue to decline an additional 8% to 17%
in the second half of fiscal year 2010 as compared to revenues in the same
period in 2009. We continue to quote and receive awards for
additional periscopes from multiple customers and are aggressively pursuing
increased market share in the periscope market by drawing business away from our
competitors; however, we cannot yet determine if we will be successful in
gaining sufficient new additional periscope business to offset the downturn
caused by the decline in new federal government orders.
Revenues
from the Howitzer programs increased $1.4 million or 700% over the same quarter
in the prior year. During the third quarter of 2009, we worked
aggressively with the federal government to resolve technical field issues
related to two of our Howitzer programs and completed the First Article Testing
and Acceptance requirements on a third program, for which government acceptance
approval was obtained on August 25, 2009. These issues were resolved
through internal engineering change proposals and customer changes to the
statement of work, and contract schedules modified accordingly to implement the
required changes. With the successful implementation of these changes in place,
we are in full scale production on these units and expect deliveries on these
programs to continue at the higher production rates until the second fiscal
quarter of 2011 when production rates will begin to wind down with anticipated
completion by the fourth quarter of fiscal year 2011.
22
Sighting
systems revenues decreased $0.9 million or 75.0% over the three months ended
March 29, 2009 as our federal government delivery order on back up sighting
units was completed in the last fiscal quarter of 2009. We currently
do not have a follow-on delivery order for additional sighting units; however,
the primary contract ordering period does not expire until December 31,
2012. We continue to ship sighting systems pursuant to other
contracts to both U.S. federal government and non-U.S. government customers and
continue to pursue business on several substantial programs for commander weapon
sighting systems and M36 thermal sighting units, which if successfully
consummated, would yield deliveries in fiscal year 2011.
Increases
in the other product line of $0.2 million or 20.0% for the three months ending
March 28, 2010 are a result of increased sales of PVS-4 and TVS-5 night vision
eyepiece and objective lens assemblies to the federal government over the same
period in 2009. Currently, we are experiencing losses on our Howitzer programs
as a result of unanticipated manufacturing costs due to design and technical
data package issues impacting the product manufacturability. These issues
have resulted in increased labor and material costs due to higher scrap and
extensive engineering costs incurred during the start up phase of the
programs. In addition some of our older “legacy” periscope programs are
experiencing losses due to significant material price increases since the
initial five year contract award in 2004. As of March 28, 2010, Optex
Systems Holdings has reserved $1.1 million in contract loss reserves on these
programs with a remaining backlog of $5.9 million. We are expecting to
ship $3.6 million of the existing loss contract backlog in fiscal year 2010,
with the remaining $2.3 million expected to ship in early fiscal year
2011. As these losses have been previously recognized to the extent
identified, future margins on these revenues are expected to be
zero.
Cost of Goods Sold. During
the quarter ended March 28, 2010, we recorded cost of goods sold of $5.6 million
as opposed to $6.2 million during the quarter ended March 29, 2009 (Combined
Predecessor and Successor), a decrease of $0.6 million or 9.7%. This decrease in
cost of goods sold was primarily associated with decreased revenue on our glass
periscope line from the prior year quarter, in addition to decreased intangible
amortization in the second quarter of fiscal 2010 as compared to the second
quarter of fiscal 2009 associated with the Optex Systems, Inc. (Texas)
acquisition on October 14, 2008. The gross margin during the quarter ended March
28, 2010 was 11.6% of revenues as compared to a gross margin of 8.3% for the
quarter ended March 29, 2009. Product margins decreased to 14.3% for the
quarter ended March 28, 2010 versus 16.4% for the quarter ended March 29, 2009
due to a shift in revenue mix toward less profitable contracts. Gross
margins were favorably impacted by a decrease in intangible amortization
allocable to cost of goods sold of $0.2 million, and lower reserves for
valuations and warranties of $0.1 million. Amortization of intangibles and
inventory reserve adjustments accounted for 3.6% of cost of goods sold in the
quarter ended March 28, 2010 as compared to 8.1% in quarter ended March 29,
2009.
G&A Expenses. During the
three months ended March 28, 2010, we recorded operating expenses of $0.74
million as opposed to $0.70 million during the three months ended March 29,
2009, an increase of $0.04 million or 5.7%. The bulk of the increased
general and administrative costs is related to increased investor relations
fees.
Operating Income (Loss).
During the three months ended March 28, 2010, we recorded an operating loss of
$0.01 million, as compared to an operating loss of $0.15 million during the
three months ended March 29, 2009. The operating loss is lower in the
quarter ended March 28, 2010 as compared to the prior year quarter due to higher
gross margin of $0.2 million attributable to lower intangible amortization,
inventory and warranty reserves, partially offset by higher general and
administrative spending of $0.1 million for investor relations
costs.
23
Net Income (Loss) applicable to
common shareholders. During the three months ended March 28, 2010, we
recorded a net loss of $0.09 million, as compared to a net loss of $0.33 million
for three months ended March 29, 2009, representing a reduction in net loss of
$0.24 million or 72.7%. The decrease in net loss is primarily attributable
to improved gross margins and reduced income taxes for the effect of temporary
and permanent timing differences related to intangible amortization and changes
in reserve balances. The intangible amortization expense is amortized over 5
years for book purposes and over 15 years for income tax purposes.
Six
Months Ended March 28, 2010 (Successor) Compared to the Six Months Ended March
29, 2009 (Combined Predecessor and Successor)
Revenues. In the six
months ended March 28, 2010, revenues decreased by 12.9% from the respective
prior period in 2009:
Product Line
|
Six months ended
03/28/2010
|
Six months ended
03/29/2009
|
Change
|
|||||||||
(Successor)
|
(Combined)
|
|||||||||||
Howitzer
Programs
|
$ | 2.6 | $ | 0.7 | $ | 1.9 | ||||||
Periscope
Programs
|
6.4 | 9.1 | (2.7 | ) | ||||||||
Sighting
Systems
|
0.7 | 2.2 | (1.5 | ) | ||||||||
All
Other
|
2.5 | 2.0 | 0.5 | |||||||||
Total
|
$ | 12.2 | $ | 14.0 | $ | (1.8 | ) | |||||
Percent
increase (decrease)
|
-12.9 | % |
Revenues
decreased by $2.7 million, or 29.7%, on our periscope line during the six months
ended March 28, 2010 as compared to the six months ended March 29, 2009.
During the first six months of fiscal year 2009, periscope production from one
of our major periscope contracts had been accelerated to compensate for
production delays that occurred during the last six months of fiscal year
2008. The delay was a result of a manufacturing control test failure
related to the environmental testing of one of the products. Subsequent to
the environmental control test failure, Optex Systems Holdings implemented a
manufacturing process change to eliminate the potential for future failures and
increased the production rate in the first six months of fiscal 2009 to
compensate for the previous delay. Based on our current backlog
demand and a recent decline of new U.S. government orders deliverable in the
remaining quarters of fiscal 2010, we expect the periscope product line
deliveries to continue to decline an additional 8% to 17% in the second half of
fiscal year 2010 as compared to the same period in 2009. We continue
to quote and receive awards for additional periscopes from multiple customers
and are aggressively pursuing increased market share of the periscopes business
from our competitors.
Revenues
from the Howitzer programs increased $1.9 million, or 271.4%, over the same six
months in the prior year. During the first six months of 2009, we worked
aggressively with the federal government to resolve technical field issues
related to two of our Howitzer programs and completed the First Article Testing
and Acceptance requirements on a third program, for which government acceptance
approval was obtained on August 25, 2009. These issues were resolved
through our initiated engineering change proposals and customer changes to the
statement of work, and contract schedules modified accordingly to implement the
required changes. With the successful implementation of these changes in place,
Optex Systems Holdings is in full scale production on these units and expects to
program deliveries on these programs to continue at the higher production rates
until the second fiscal quarter of 2011 when production rates will begin to wind
down with anticipated completion by the fourth quarter of fiscal year
2011.
Sighting
systems revenues decreased $1.5 million, or 68.2%, over the six months ended
March 29, 2009 as our U.S. government delivery order on back up sighting units
was completed in the last fiscal six months of 2009. We currently do not
have a follow-on delivery order for additional sighting units; however, the
primary contract ordering period does not expire until December 31, 2012.
Thus, we expect additional volume awards for the contract in the next
year. We continue to ship sighting systems pursuant to other
contracts to both federal government and non-U.S. government customers and
continue to pursue business on several substantial programs for commander weapon
sighting systems and M36 thermal sighting units, which if successfully
consummated, would yield deliveries in fiscal year 2011.
24
Increases
in the other product line of $0.5 million, or 25.0%, for the six months ending
March 28, 2010 are a result of increased sales of PVS-4 and TVS-5 night vision
eyepiece and objective lens assemblies to the federal government. We
expect revenues to continue at the same level in the next quarter and then
decline in the fourth quarter of fiscal 2010 as the current federal government
contract on these units completes.
Currently,
we are experiencing losses on our Howitzer programs as a result of unanticipated
manufacturing costs due to design and technical data package issues impacting
the product manufacturability. These issues have resulted in increased
labor and material costs due to higher scrap and extensive engineering costs
incurred during the start up phase of the programs. In addition some of
our older “legacy” periscope programs are experiencing losses due to significant
material price increases since the initial 5 year contract award in 2004.
As of March 28, 2010, Optex Systems Holdings has reserved $1.1 million in
contract loss reserves on these programs with a remaining backlog of $5.9
million. We are expecting to ship $3.6 million of the existing loss
contract backlog in 2010, with the remaining $2.3 million expected to ship in
early fiscal year 2011. As these losses have been previously recognized to
the extent identified, future margins on these revenues are expected to be
zero.
Cost of Goods Sold. During
the six months ended March 28, 2010, we recorded cost of goods sold of $10.7
million as opposed to $12.5 million during the six months ended March 29, 2009
(Combined Predecessor and Successor), a decrease of $1.8 million or 14.4%. This
decrease in cost of goods sold was primarily associated with decreased revenue
on our glass periscope and sighting system product lines from the prior year six
months, in addition to decreased intangible amortization in the second six
months of fiscal 2010 as compared to the second six months of fiscal 2009
associated with the Optex Systems, Inc. (Texas) acquisition on October 14, 2008.
The gross margin during the six months ended March 28, 2010 (Successor) was
12.3% of revenues as compared to a gross margin of 10.7% for the six months
ended March 29, 2009 (Combined Predecessor and Successor). Product margins
decreased to 15.6% for the six months ended March 28, 2010 (Successor) versus
17.9% for the six months ended March 29, 2009 (Combined Predecessor and
Successor) due to a shift in first six months revenue mix toward less profitable
contracts. Gross margins were favorably impacted by a decrease in
intangible amortization allocable to cost of goods sold of $0.5 million, and
lower reserves for valuations and warranties of $0.1 million. Amortization
of intangibles and inventory reserve adjustments accounted for 4.7% of cost of
goods sold in the six months ended March 28, 2010 as compared to 8.0% in six
months ended March 29, 2009.
G&A Expenses. During the
six months ended March 28, 2010, we recorded operating expenses of $1.4 million
as opposed to $1.3 million (Combined Predecessor and Successor) during the six
months ended March 29, 2009, an increase of $0.1 million or 7.7%. The bulk
of the increased general and administrative costs was related to increased
investor relations fees.
Operating Income (Loss).
During the six months ended March 28, 2010, we recorded operating income of $0.1
million, as compared to operating income of $0.2 million during the six months
ended March 29, 2009. Operating income is lower in the current six months
as compared to the prior year six months due to lower revenues of $1.8 million,
combined with changes in product mix and intangible allocations affecting the
current six months gross margin and higher general and administrative spending
of $0.1 million for investor relations costs.
Net Income (Loss) applicable to
common shareholders. During the six months ended March 28, 2010, we
recorded a net loss of $0.1 million, as compared to $0.4 million for the six
months ended March 29, 2009, a reduction in net loss of $0.3 million or
75.0%. The decrease in net loss is primarily attributable to reduced
income taxes for the effect of temporary and permanent timing differences
related to intangible amortization and changes in reserve balances. The
intangible amortization expense is amortized over 5 years for book purposes and
over 15 years for income tax purposes.
For
the 12 months ended September 27, 2009(combined Successor Predecessor) as
compared to the 12 months ended September 28, 2008
(Predecessor)
25
The
Revenue, Expenses and Income for the fourteen day period of Optex Systems, Inc.
(Texas) prior to the acquisition by Optex Systems, Inc. (Delaware) are
summarized below (in millions).
Optex Systems – Texas
(Predecessor)
|
||||
Revenue
|
$ | 0.9 | ||
Cost
of Sales
|
0.7 | |||
Gross
Margin
|
0.2 | |||
General
& Administrative
|
0.1 | |||
Operating
Income
|
$ | 0.1 | ||
Net
Income
|
$ | 0.1 |
The table
below summarizes our quarterly and full year operating results in terms of both
a GAAP net income measure and a non-GAAP EBITDA measure. We use
EBITDA as an additional measure for evaluating the performance of our business
as “net income” includes the significant impact of noncash intangible
amortization on our income performance. Consequently, in order to
have a meaningful measure of our operating performance on a continuing basis, we
need to also consider an income measure which does not take into account this
intangible amortization. We have summarized the quarterly revenue and
margin below along with a reconciliation of the GAAP net loss to the non-GAAP
EBITDA calculation for comparative purposes below. We believe that
including both measures allows the reader to have a “complete picture” of our
overall performance.
September 29, 2008 through September 27, 2009
|
Predecessor - Fiscal Year 2008
|
|||||||||||||||||||||||||||||||||||||||||||
Predecessor - Qtr 1
(Sept 29, 2008
through Oct 14,
2008)
|
Successor - Qtr 1
(Oct 15, 2008
through Dec 27,
2008)
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
12 months ended
September 27, 2009
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
12 months ended
September 28, 2008
|
||||||||||||||||||||||||||||||||||
Net
Loss Applicable to Common Shareholders
|
$ | (0.1 | ) | $ | 0.1 | $ | (0.3 | ) | $ | (0.3 | ) | $ | 0.4 | $ | (0.2 | ) | $ | (0.7 | ) | $ | (0.7 | ) | $ | (0.2 | ) | $ | (3.2 | ) | $ | (4.8 | ) | |||||||||||||
Add:
|
||||||||||||||||||||||||||||||||||||||||||||
Interest
Expense
|
- | 0.1 | 0.1 | - | - | 0.2 | 0.1 | 0.1 | - | - | 0.2 | |||||||||||||||||||||||||||||||||
Preferred
Stock Dividend
|
- | - | - | - | 0.2 | 0.2 | - | - | - | - | ||||||||||||||||||||||||||||||||||
Federal
Income Taxes (Benefit)
|
- | 0.2 | 0.1 | 0.1 | (0.7 | ) | (0.3 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||||
Goodwill
Impairment
|
- | - | - | - | - | - | - | - | - | 1.6 | 1.6 | |||||||||||||||||||||||||||||||||
Depreciation
& Amortization
|
- | 0.6 | 0.5 | 0.5 | 0.6 | 2.2 | 0.3 | 0.2 | 0.1 | 0.2 | 0.8 | |||||||||||||||||||||||||||||||||
EBITDA
- Non GAAP
|
$ | (0.1 | ) | $ | 1.0 | $ | 0.4 | $ | 0.3 | $ | 0.5 | $ | 2.1 | $ | (0.3 | ) | $ | (0.4 | ) | $ | (0.1 | ) | $ | (1.4 | ) | $ | (2.2 | ) |
We have
experienced substantial improvement in our EBITDA during fiscal year 2009 as
compared to our prior fiscal year performance. We have increased our
EBITDA by $4.3 million in the year ending September 27, 2009 as compared to the
year ending September 28, 2008 (Predecessor), primarily as a result of increased
revenue, higher gross margins and lower general and administrative costs.
As of the end of the 2009 fiscal year, we had expected this trend to
continue over the next 12 months as our product mix shifts towards more
profitable programs and we continue to pursue cost reductions in our production
and general and administrative areas.
26
Product
mix is dictated by customer contracted delivery dates and volume of each product
to be delivered on such delivery dates. Shifts in gross margin
from quarter to quarter are primarily attributable to the differing product
mix recognized as revenues during each respective period. During the
year ended September 27, 2009, our revenues on legacy periscope programs
increased significantly over the prior year while margins significantly
decreased. The legacy periscope contracts were awarded January 2003,
and due to significant material price increases subsequent to the contract award
date, we are experiencing a loss on these contracts. We have fully
reserved for future contract losses on this program, thus deliveries against
these programs yield a product margin of zero. During 2009, we
recognized revenue of $5.4 million from these legacy periscope programs, with a
remaining backlog of $1.2 million which we expect to ship in the first three
quarters of 2010. We expect our product margins on periscopes to
increase in fiscal year 2010 as the legacy programs are completed and are
replaced with new awards.
We have
aggressively pursued additional, potentially higher margin periscope business
from various customers, and in May 2009, Optex Systems Holdings was awarded a
multi-year Indefinite Delivery/Indefinite Quantity type
contract accompanied by the first delivery order from Tank-automotive
and Armaments Command. If all government forecasted delivery orders
against this Indefinite Delivery/Indefinite Quantity contract are awarded and if
we were to share equally with the other supplier in the awarded releases, the
total value of the contract to us could be valued at approximately $7.5 million
over the next three years. In June 2009, we received an
additional $3.4 million dollar award from General Dynamics Land Systems
Division and in September 2009, an additional $1.9 million award to provide
product beginning with delivery starting in 2011 at the completion of our
current production contract. Subsequent to the 2009 fiscal year end, we have
booked additional orders of $4.4 million from several customers, primarily in
our periscopes product line with deliveries occurring during 2010 and
2011.
As a
result of the October 14, 2008 acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor), our amortizable intangible assets increased significantly
over the prior year. The non cash amortization of intangible assets has
negatively impacted our gross margin for 2009 as compared to 2008. In
2009, our intangible amortization expense was $2 million, and it is expected to
decline to $1 million in 2010.
Backlog
as of September 27, 2009 was $26.5 million as compared to a backlog of $44.1
million as of September 28, 2008. The following table depicts the
current expected delivery by quarter of all contracts awarded as of September
27, 2009.
2010
|
2011
|
2012
|
2013
|
|||||||||||||||||||||||||||||||||||||||||||||||||
Program Backlog
(millions)
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
Qtr 1
|
Qtr 2
|
Qtr 3
|
Qtr 4
|
Qtr 1
|
|||||||||||||||||||||||||||||||||||||||
Howitzer
Programs
|
$ | 0.6 | $ | 1.7 | $ | 1.9 | $ | 2.6 | $ | 1.7 | $ | 0.1 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||
Periscope
Programs
|
2.1 | 2.1 | 2.0 | 1.3 | 1.3 | 0.6 | 0.7 | 0.5 | 0.5 | 0.9 | 0.8 | - | - | |||||||||||||||||||||||||||||||||||||||
Sighting
Systems
|
0.4 | 0.2 | 0.1 | 0.1 | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
All
Other
|
1.7 | 1.1 | 0.4 | 0.2 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||||||||||||||||||||
Total
|
$ | 4.8 | $ | 5.1 | $ | 4.4 | $ | 4.2 | $ | 3.1 | $ | 0.8 | $ | 0.8 | $ | 0.6 | $ | 0.6 | $ | 1.0 | $ | 0.9 | $ | 0.1 | $ | 0.1 |
Virtually
all of our contracts are prime or subcontracted directly with the federal
government and, as such, are subject to Federal Acquisition Regulation Subpart
49.5, “Contract Termination Clauses” and more specifically Federal Acquisition
Regulation clauses 52.249-2 “Termination for Convenience of the
Government Fixed-Price)”, and 49.504 “Termination of fixed-price contracts
for default”. These clauses are standard clauses on our prime
military contracts and generally apply to us as subcontractors. It
has been our experience that the termination for convenience is rarely invoked,
except where it is mutually beneficial for both parties. We are
currently not aware of any pending terminations for convenience or for default
on our existing contracts.
By way of
background, the Federal Acquisition Regulation is the principal set of rules and
regulations that govern the acquisition process of government agencies and
contracts with the U.S. government. In general, parts of the Federal Acquisition
Regulation are incorporated into government solicitations and contracts by
reference as terms and conditions effecting contract awards and pricing
solicitations.
27
In the
event a termination for convenience were to occur, Federal Acquisition
Regulation clause 52.249-2 provides for full recovery of all
contractual costs and profits reasonably occurred up to and as a result of the
terminated contract. In the event a termination for default were to
occur, we could be liable for any excess cost incurred by the government to
acquire supplies from another supplier similar to those terminated from
us. We would not be liable for any excess costs if the failure to perform
the contract arises from causes beyond the control and without the fault or
negligence of the company as defined by Federal Acquisition Regulation clause
52.249-8. In addition, the government may require us to transfer title and
deliver to the government any completed supplies, partially completed supplies
and materials, parts, tools, dies, jigs, fixtures, plans, drawings, information,
and contract rights that we have specifically produced or acquired for
the terminated portion of this contract. The government shall pay contract price
for completed supplies delivered and accepted, and we and the government
would negotiate an agreed upon amount of payment for manufacturing materials
delivered and accepted and for the protection and preservation of the property.
Failure to agree on an amount for manufacturing materials is subject to the
Federal Acquisition Regulation Disputes clause 52.233-1.
In some
cases, we may receive an “undefinitized” (i.e., price, specifications and terms
are not agreed upon before performance commenced) contract award for contracts
that exceed the $650,000, which is the federal government simplified acquisition
threshold. These contracts are considered firm contracts at an
undefinitized, but not to exceed specified limits threshold. Cost
Accounting Standards Board covered contracts are subject to the Truth in
Negotiations Act disclosure requirements and downward only price
negotiation. As of September 27, 2009, none of our outstanding
backlog fell under this criterion. Our experience has been that the
historically negotiated price differentials have been minimal (5% or less) and
accordingly, we do not anticipate any significant downward adjustments on these
booked orders.
Predecessor
period of September 29, 2008 through October 14, 2008 and Successor period of
October 15, 2008 through September 27, 2009 compared to the Predecessor twelve
month period ended September 28, 2008
Revenues: For the year ended
September 27, 2009 (Combined) revenues increased by 37.8% over the respective
prior period (Predecessor) per the table below:
Predecessor
|
Successor
|
Combined
|
Predecessor
|
|||||||||||||||||
September 29,
2008 through
October 14,
2008
|
October 15,
2008
through
September 27,
2009
|
12 mos.
ended
September 27,
2009
|
12 mos. ended
September 28, 2008
|
Change
|
||||||||||||||||
Revenue
|
$ | 0.9 | $ | 26.7 | $ | 27.6 | $ | 20.0 | $ | 7.6 | ||||||||||
Percent
increase
|
37.8 | % |
The table
below details the revenue changes by product line for the year ended September
27, 2009 as compared to the year ended September 28, 2008.
Product Line
|
Year ended
9/27/2009
(Combined)
|
Year ended
9/28/2008
(Predecessor)
|
Change
|
|||||||||
Howitzer
Programs
|
$ | 2.6 | $ | 2.4 | 0.2 | |||||||
Periscope
Programs
|
$ | 14.9 | $ | 9.6 | 5.3 | |||||||
Sighting
Systems
|
$ | 4.7 | $ | 4.0 | 0.7 | |||||||
All
Other
|
$ | 5.4 | $ | 4.0 | 1.4 | |||||||
Total
|
$ | 27.6 | $ | 20.0 | 7.6 | |||||||
Percent
increase
|
37.8 | % |
28
Revenues
increased significantly in 2009 over 2008, with the most significant increases
experienced in our periscope line. Significant increases in sales of
periscope product lines is attributable to increased demand by General Dynamics
Land Systems Division and U.S. government accelerated schedules, whereby, in
consideration for increased pricing of approximately $1 million, Optex Systems,
Inc. (Delaware) agreed to accelerate the contract delivery schedule and deliver
at higher volumes to support increased military service needs. Of the total
periscope revenue increase of $5.3 million, approximately $4.5 million or 85% is
attributable to increased production volume, as compared to $0.8 million or 15%
due to higher pricing. The ramp up included the addition of direct
labor headcount of approximately 8 employees, combined with dual sourcing of
material on several key components needed to meet the increased production
requirements. During the year ended September 27, 2009, Optex
Systems, Inc. (Delaware) had delivered approximately 95% of the accelerated
units, with the remaining units to be delivered through the first quarter of
2010. In the last fiscal quarter of 2009, Optex Systems Holdings
received several additional orders of periscopes from two customers with
delivery requirements starting in the fourth fiscal quarter of 2009 and
continuing throughout 2010. Based upon our current backlog demand and
a recent decline in new federal government orders deliverable in the remaining
quarter of fiscal 2010, we expect the periscope product line deliveries to
continue to decline an additional 8% to 17% in the second half of fiscal year
2010 as compared to the same period in 2009.
Howitzer
program revenue increased $0.2 million for the 2009 fiscal year over the 2008
fiscal year. During the third and fourth fiscal quarters of 2009, we
worked aggressively with the U.S. [Department of Defense] to resolve technical
field issues related to two of our Howitzer programs and completed the First
Article Testing and Acceptance requirements on a third, for which government
acceptance approval was obtained on August 25, 2009. Technical
issues experienced on the Howitzer product lines related to problems with the
government-provided technical data and drawing package affecting the
manufacturability of the products and the functionality of the product during
field use and testing. These issues were resolved through Optex initiated
engineering change proposals and customer changes to the statement of
work. As of this date, the issues have been resolved and the contract
schedules have been modified accordingly to implement the required changes. With
most of the technical and start up issues behind us on these programs, we expect
to increase program deliveries during 2010.
Sighting
systems revenues increased $0.7 million over the prior year due to the delivery
of higher quantities of U.S. government and General Dynamics Land Systems
Division sighting systems in the current year over prior year deliveries, offset
by a reduction in shipments to Textron related to a program that ended in
2008.
Increases
in the other products of 35% or $1.4 million for the year ending September 27,
2009 resulted from increased foreign military sales of azimuth mirror assemblies
of $1.0 million combined with increased revenues in muzzle reference systems of
$0.7 million for several U.S. customers, which were offset by lower revenues in
binoculars and various spare order shipments for various customers.
Currently
we are experiencing losses on our Howitzer programs as a result of unanticipated
manufacturing costs due to design and technical data package issues impacting
the product manufacturability. These issues have resulted in
increased labor and material costs due to higher scrap and extensive engineering
costs incurred during the start up phase of the programs. In addition
some of our older “legacy” periscope programs are experiencing losses due to
significant material price increases since the initial 5 year contract award in
2004. As of September 27, 2009, Optex Systems Holdings has reserved
$1.2 million in contract loss reserves on Howitzer programs and $0.1 million on
periscope programs for a total of $1.3 million in contract loss
reserves. The total remaining backlog on these loss programs as of
September 27, 2009 is $9.7 million. We are expecting to ship $3.6
million of the existing loss contract backlog in fiscal 2010, with the remaining
$2.3 million expected to ship in early fiscal year 2011. As these
losses have been previously recognized to the extent identified, future margins
on these revenues are expected to be zero.
29
As of the
fiscal year end 2009, we did not experience any negative impact due to changes
in incremental funding commitments by federal agencies. There has
been one delay in the award of the second delivery order for the U.S. government
periscope contract, however as the contract is a dual award between Optex
Systems Holdings and a competitor with no volume guaranteed to any
single-source, we have not expended any resources in support of the yet to be
awarded portion of the contract. We are anticipating a government
award on the contract in 2010. However, delay of the government procurement has
not negatively impacted Optex Systems Holdings’ revenue in 2009, and due to
other increased periscope orders from non U.S. government contracts deliverable
in 2010, a delay in the award on the prime government contract should
not materially affect Optex Systems Holdings in the near future.
Cost of Goods Sold. During
the Predecessor period from September 29, 2008 through October 14, 2008, we
recorded cost of goods sold of $0.7 million and during the Successor period from
October 15 through September 27, 2009 we recorded cost of goods sold of $24.1
million for a total cost of goods sold during fiscal 2009 of $24.8 million as
compared to $18.2 million during fiscal 2008, an increase of $6.5 million or
35.7%. This increase in cost of goods sold was primarily associated with
increased revenue, primarily on our periscope programs in support of higher
backlog and accelerated delivery schedules, and increased intangible
amortization resulting from the acquisition of the assets of Optex Systems, Inc.
(Texas) (Predecessor) on October 14, 2008. The gross
margin during the Predecessor period beginning September 29, 2008
through October 14, 2008 was $0.1 million and the gross margin for the Successor
period beginning October 15, 2008 through September 27, 2009 was $2.7 million
for a total of $2.8 million or 10.1% of revenues as compared to a gross margin
of 9.5% for the fiscal year ended September 28, 2008. Product gross margins were
down 0.7% to 14.5% for the annual period ended September 27, 2009 versus 15.2%
for the fiscal year ended September 28, 2008 due to a shift in revenue mix
toward less profitable contracts for certain programs, combined with increased
labor related to the reallocation of costs associated with 10 employees shifted
from general and administrative costs to manufacturing overhead in fiscal
2009. Intangible amortization allocable to cost of goods sold
increased $1.3 million to $1.7 million in fiscal 2009 versus $0.4 million in
fiscal 2008. The increased intangible amortization costs were offset
by decreased warranty costs and physical inventory valuation reserves of $1.2
million, resulting in an overall decrease in cost of goods sold of 0.6% of
revenues in the annual period ended September 27, 2009 as compared to the period
ended September 28, 2008.
G&A Expenses. During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
operating expense of $0.1 million and during the period from October 15, 2008
through September 27, 2009, we recorded operating expenses of $2.8 million for a
total of $2.9 million for the fiscal year ended September 27, 2009 as opposed to
$6.5 million during the fiscal year ended September 28, 2008, a decrease of
($3.7) million or 56.9%. The components of the significant net
decrease in general and administrative expenses in the fiscal year ended
September 27, 2009 as compared to the fiscal year ended September 28, 2008 are
outlined below.
|
·
|
Elimination of corporate cost
allocations from Irvine Sensors Corporation of ($2.1) million and the
Irvine Sensors employee stock bonus plan of ($0.4) million as a result of
the ownership change.
|
|
·
|
Increased costs of $0.5 million
in legal, accounting fees, board of director fees, and investor
relations.
|
|
·
|
Lower salaries, wages and
employee related costs due to the reclassification of 10 purchasing and
planning employees from general and administrative to manufacturing
overhead included in cost of sales of ($0.3) million. This
decrease was partially offset by the expense associated with the
implementation of a management incentive bonus plan in 2009 of $0.1
million for a net change of ($0.2) million to general and administrative
salaries, wages and related employee
expenses.
|
|
·
|
Increased amortization of
intangible assets of $0.2 million as a result of the ownership change as
of October 14, 2008.
|
|
·
|
2008 goodwill impairment of
($1.6) million incurred in 2008 versus no impairment in
2009.
|
|
·
|
Reductions of $(0.1) million in
other general & administrative
spending.
|
30
Income (Loss) from
Operations. During the Predecessor period from September 29, 2008 through
October 14, 2008 we recorded income from operations of $0.07 million and for the
Successor period from October 15, 2008 through September 27, 2009, we recorded a
loss from operations of $(0.2) million for a total net loss of $(0.13) million
during the year ended September 27, 2009 as opposed to a loss from operations of
$(4.7) million during the year ended September 28, 2008, an improvement of $4.57
million. This improvement was primarily due to increased sales revenue for the
period ended September 27, 2009, combined with reduced general and
administrative expenses driven by the elimination of Irvine Sensors’ corporate
costs pushed down to us in the fiscal year ended September 28, 2008. The
current year loss from operations also includes an increase of $1.5 million of
non cash amortization of intangible assets to $2.1 million total for 2009 as a
result of the October 14, 2008 acquisition transaction as opposed to $0.6
million intangible amortization incurred in the prior year.
Net Income (Loss) applicable to
common shareholders. During the Predecessor period from September 29,
2008 through October 14, 2008 we recorded net income of $0.1 million. For the
period beginning October 15, 2008 through September 27, 2009, we recorded a net
loss of $(0.3) million for a total net loss of $(0.2) million during the year
ended September 27, 2009, as compared to $(4.8) million for the year ended
September 28, 2008, an improvement of $4.6 million or 95.8%. This
decrease in our net loss was principally the result of reduced operating
expenses related to the elimination of corporate cost allocations from Irvine
Sensors Corporations, since the successor operating as a stand-alone
entity did not incur these costs subsequent to the year ended
September 28, 2008, combined with increased revenue for the period ending
September 27, 2009 offset by increased interest and preferred stock dividends in
fiscal 2009 over fiscal 2008. The federal income tax benefit
increased by $0.3 million over the prior year as a result of book-to-tax timing
differences attributable to intangible amortization and changes in contract loss
reserve balances in 2009. The intangible amortization expense is
amortized over five years for book purposes and is deductible over 15 years
for income tax purposes. In 2008, there was no federal income tax expense
due to the loss from operations.
Liquidity
and Capital Resources
On
October 27, 2009, Optex Systems Holdings secured a short term note payable from
the Longview Fund in the amount of $250,000 bearing interest at 10% per
annum. On March 22, 2010, Optex Systems Holdings repaid $125,000 in
principal plus $10,000 in accrued interest on the outstanding Longview
note On June 4, 2010, Optex Systems Holdings paid off the remaining
principal balance and all accrued and unpaid interest thereon.
On
March 10, 2010, the Company also entered into a revolving credit facility with
Peninsula Bank Business Funding, a division of the Private Bank of the
Peninsula, which provides up to $2,000,000 in financing against eligible
receivables. The material terms of the revolving credit facility are
as follows:
|
·
|
The interest rate for all
advances shall be the greater of 8.5% and the then in effect prime rate
plus 3.5% and subject to a minimum quarterly interest payment of
$16,000.
|
|
·
|
Interest shall be paid monthly
in arrears.
|
|
·
|
The expiration date of the
facility is March 4, 2011, at which time any outstanding advances, and
accrued and unpaid interest thereon, will be due and
payable.
|
|
·
|
In connection with the entry
into the facility by Peninsula Bank Business Funding, Optex Systems,
Inc.(Delaware) paid Peninsula Bank Business Funding a facility fee of
$20,000 and issued a warrant to Peninsula Bank Business Funding to
purchase 1,000,000 shares of its common stock. The warrant bears an
exercise price of $0.10 per share and expires on March 3,
2016.
|
|
·
|
The obligations of Optex
Systems, Inc. (Delaware) to Peninsula Bank Business Funding are secured by
a first lien on all of its assets (including intellectual property assets
should it have any in the future) in favor of Peninsula Bank Business
Funding.
|
|
·
|
The facility contains
affirmative and negative covenants that require Optex Systems, Inc.
(Delaware) to maintain certain minimum cash and EBITDA levels on a
quarterly basis and contains other customary covenants. The facility
also contains customary events of default. Upon the occurrence of an
event of default that remains uncured after any applicable cure period,
Peninsula Bank Business Funding’s commitment to make further advances may
terminate, and Peninsula Bank Business Funding would also be entitled to
pursue other remedies against Optex Systems, Inc. (Delaware) and the
pledged collateral.
|
|
·
|
Pursuant to a guaranty
executed by Optex Systems Holdings in favor of Peninsula Bank Business
Funding, Optex Systems Holdings has guaranteed all obligations of Optex
Systems, Inc. (Delaware) to Peninsula Bank Business
Funding.
|
As of
March 28, 2010, the outstanding balance under this line was $848,771, and as of
July 20, 2010, the latest practicable date, the outstanding balance under this
line was $416,083.
We have
historically met our liquidity requirements from a variety of sources, including
government and customer funding through contract progress bills, short term
loans, notes from related parties, and the sale of equity securities. Based upon
our current working capital position and potential for expanded business
revenues, we believe that our working capital is sufficient to fund our current
operations for at least the next 12 months. However, based on our strategy and
the anticipated growth in our business, we believe that our liquidity needs may
increase in the future. The amount of such increase will depend on many factors,
including the costs associated with the fulfillment of our projects, whether we
upgrade our technology, and the amount of inventory required for our expanding
business. If our liquidity needs do increase, we believe additional capital
resources will be obtained from a variety of sources including, but not limited
to, cash flow from operations and further private placements of our common stock
and/or debt, including receivables funding through a commercial lender.
Cash
Flows for the Period from September 28, 2009 through March 28, 2010
Cash and Cash Equivalents. As
of March 28, 2010, we had cash and cash equivalents of $0.9 million. During the
period from September 28, 2009 through March 28, 2010, we decreased cash and
cash equivalents by $0.02 million primarily due to the timing of accounts
receivable collections and supplier payments in support of increased
inventory.
31
Net Cash Used in Operating
Activities. Net cash used in operating activities during the period from
September 28, 2009 to March 28, 2010 totaled $1.0 million. The primary uses of
cash during this period relate to reductions in accounts payable of $0.9 million
in support of inventory purchased in the first six months of fiscal year 2010
for new periscope orders and higher production volume on our Howitzer programs,
which generally contain higher material content than other product lines.
In addition, we experienced an overall shift in revenues and accounts receivable
in the current quarter from government to non government customers. Our
non-U.S. government customers increased to 60% of revenue for the six months
ended March 28, 2010 as compared to 49% of total revenues for the fiscal year
ended September 27, 2009. These customers generally pay more slowly than
the U.S. government, often beyond the 30 day terms and up to 45-50 days as
compared to direct U.S. government shipments which typically pay in 30 days or
less. During the period from September 28, 2009 through March 28, 2010,
our net inventory decreased by $0.3 million. We expect the cash used in
operating activities to decline significantly during the balance of fiscal 2010
as inventory balances on Howitzer programs decrease and current outstanding
receivables are collected. The second half of fiscal 2010 is expected to
provide increased cash from operating activities as several of our progress
billed programs reach full liquidation and the material purchases on our
Howitzer programs near completion.
Net Cash (Used) Provided by
Investing Activities. In the six months ended March 28, 2010, net cash
used by investing activities totaled $0.01 million and consisted of fixed asset
purchases during the period. We expect this number to increase in the
second half of 2010 as additional capital projects are planned in support of
current cost reduction initiatives.
Net Cash Provided By Financing
Activities. Net cash provided by financing activities totaled $1.0
million during the six months ended March 28, 2010 as a result of the net
proceeds of $0.85 million from the revolving credit facility we entered into
during the second quarter of the fiscal year, and the net $0.13 million ($0.25
million less repayments) provided under the Longview Fund note. These
funds were used to secure inventory from several key suppliers in support of new
periscope orders and higher purchasing and production volume on our Howitzer
programs during the period.
Predecessor
period of September 29, 2008 through October 14, 2008
Cash and Cash Equivalents. As
of October 14, 2008, Optex Systems, Inc. (Texas) (Predecessor) had cash and cash
equivalents of $0.3 million, an increase of $0.1 million from September 29,
2008. The slight increase in cash was primarily due to the timing of cash
receipts on accounts receivable collections and supplier payments. The cash
balance as of October 14, 2008 is included as cash received through Optex
Systems, Inc. (Delaware) (Successor) as of October 15, 2008.
Net Cash Provided by Operating
Activities. Net cash provided by operating activities totaled $0.1
million for the Predecessor period of September 29, 2008 through October 14,
2008. Cash provided by operating activities was primarily due to the timing of
purchases and accounts receivable collections during the 15 day period prior to
the acquisition of Optex Systems Inc, (Texas), by Optex Systems Inc.,
(Delaware). During this period, our net inventory increased by $0.9
million to support substantially increased production rates across all of our
product lines and our accounts receivable decreased $(1.0) million due to timing
of collections from one of our major customers in the second week of October
2008. Accounts payable and accrued expenses decreased by $(0.2) million due to
the timing of cash disbursements prior to the acquisition.
Net Cash Used in Investing
Activities. There was no net cash used in investing activities
during the Predecessor period beginning September 29, 2008 and ending October
14, 2008. Optex Systems Holdings’ business is labor intensive, and we
purchase equipment as it becomes necessary.
Net Cash Provided by Financing
Activities. There was no net cash provided by financing
activities during the Predecessor period beginning September 29, 2008 and ending
October 14, 2008.
32
Successor
period of October 15, 2008 through September 27, 2009
Cash and Cash Equivalents. As
of September 27, 2009, we had cash and cash equivalents of $0.9 million. During
the Successor period of October 15, 2008 through September 27, 2009 we increased
cash and cash equivalents by $0.6 million primarily attributable to the net
proceeds received by us from the private sale of equity securities. A
portion of the net proceeds was used to acquire additional inventory in support
of the higher revenue and production rates during the period and which are
expected to continue through 2010.
Net Cash Used in Operating
Activities. Net cash used in operating activities during the Successor
period beginning October 15, 2008 and ending September 27, 2009 totaled $(0.1)
million. The primary uses of cash during this period resulted from increases of
inventory and accounts receivable in support of higher production and shipping
volumes, partially offset by increases in accounts payable due to higher
purchases required to support the increased revenues. In the period
beginning October 15, 2008 and ending September 27, 2009, our net inventory
increased by $2.5 million to support substantially increased production rates
across all of our product lines. A large portion of this build up in
inventories was progress billable and as such were billed to our customers as
costs were incurred. We expect similar cash flows from operations
until later in fiscal year 2010 when our low margin legacy periscope programs
are ending and will be replaced with newer programs carrying improved pricing
and corresponding better margins.
Net Cash Provided by Investing
Activities. In the Successor period beginning October 15, 2008 and ending
September 27, 2009, net cash provided by investing activities totaled $0.24
million and consisted of cash acquired during the Optex Systems, Inc. (Delaware)
(Predecessor) acquisition as of October 14, 2009 of $0.25 million and cash used
to purchase equipment of $(0.01) million during the period.
Net Cash Provided by Financing
Activities. Net cash provided by financing activities totaled $0.8
million during the period beginning October 15, 2008 through September 27, 2009,
The change of $0.8 million is attributable to the sale of stock for
cash of $1.0 million offset by funds used to repay outstanding loans of $(0.2)
million. We raised funds through a private placement for working capital needs,
primarily inventory purchases, and additional personnel to support increased
revenue and production rates during the period.
Critical
Accounting Policies
Stock-Based
Compensation: In
December 2004, FASB issued FASB ASC 718 (Prior authoritative literature:
SFAS No. 123R, Share-Based
Payment). FASB ASC 718 establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity’s equity instruments or that may be settled by the issuance of
those equity instruments. FASB ASC 718 focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. FASB ASC 718 requires that the compensation cost
relating to share-based payment transactions be recognized in the financial
statements. That cost will be measured based on the fair value of the
equity or liability instruments issued.
Optex
Systems Holdings’ accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of FASB
ASC 505-50 (Prior authoritative literature: EITF 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for
Certain Transactions Involving Equity Instruments Granted to Other Than
Employees”). The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting agreement.
Stock-based compensation related to non-employees is accounted for based on the
fair value of the related stock or options or the fair value of the services,
whichever is more readily determinable in accordance with FASB ASC
718.
33
Revenue Recognition:
Optex recognizes revenue based on the modified percentage of completion
method utilizing the units-of-delivery method, in accordance with FASB ASC
605-35 (Prior authoritative literature: SOP 81-1 “Accounting for Performance of
Construction–Type and certain Production –Type Contracts”):
|
·
|
The units-of-delivery method
recognizes as revenue the contract price of units of a basic production
product delivered during a period and as the cost of earned revenue the
costs allocable to the delivered units; costs allocable to undelivered
units are reported in the balance sheet as inventory or work in progress.
The method is used in circumstances in which an entity produces units of a
basic product under production-type contracts in a continuous or
sequential production process to buyers'
specifications.
|
Optex
contracts are fixed price production type contracts whereas a defined order
quantity is delivered to the customer in a continuous or sequential production
process to buyers specifications (build to print). Our deliveries against
these contracts generally occur in monthly increments across fixed delivery
periods spanning from 3 to 36 months.
Warranty Costs: Some of
our customers require that we warranty the quality of our products to meet
customer requirements and be free of defects for up to fifteen months subsequent
to delivery. In the year ended September 27, 2009 Optex Systems Holdings
recognized income of $145,470 for unrecognized warranty costs due to an
improvement in the experience rate for warranties expiring in 2009 and for the
three months ended December 27, 2009, Optex Systems Holdings did not incur any
warranty expenses. On certain periscope product lines the warranty period has
been extended from 15 to 24 months due to technical considerations incurred
during the manufacture of such products. During June 2008, Optex Systems, Inc.
(Texas) experienced a manufacturing control test failure related to the
environmental testing of one of its products. As a result of the environmental
control test failure, Optex implemented a manufacturing process change to
eliminate the potential for similar future failures. We believe our
manufacturing control test environment to be significantly more stringent than
that which would occur under field conditions, however as a result of the
internal test failure and manufacturing process change, we extended our warranty
for all product shipped prior to the implemented change. As of July 20, 2010,
the extended warranty period has expired with no warranty claims realized
related to this condition.
As of
December 27, 2009, Optex Systems Holdings has $81,530 in warranty reserves to
cover future warranty costs. Future warranty costs were determined based
on estimated cost of replacement for expected returns factored by our most
recent experience rate of defects as a percentage of sales. Prior to
fiscal year 2008, all warranty costs were expensed as incurred as product was
replaced with no reserve for warranties against deliveries in the covered
period.
Estimated Costs at Completion and
Accrued Loss on Contracts:
Optex Systems Holdings reviews and reports on the performance of its
contracts and production orders against the respective resource plans for such
contracts/orders. These reviews are summarized in the form of estimates at
completion. Estimates at completion include Optex Systems Holdings’ incurred
costs to date against the contract/order plus management's current estimates of
remaining amounts for direct labor, material, other direct costs and subcontract
support and indirect overhead costs based on the completion status and future
contractual requirements for each order. If an estimate at completion indicates
a potential overrun (loss) against a fixed price contract/order, management
generally seeks to reduce costs and /or revise the program plan in a manner
consistent with customer objectives in order to eliminate or minimize any
overrun and to secure necessary customer agreement to proposed
revisions.
If an
estimate at completion indicates a potential overrun against budgeted
resources for a fixed price contract/order, management first attempts to
implement lower cost solutions to still profitably meet the requirements of the
fixed price contract. If such solutions do not appear practicable, management
makes a determination whether to seek renegotiation of contract or order
requirements from the customer. If neither cost reduction nor renegotiation
appears probable, an accrual for the contract loss/overrun is recorded against
earnings and the loss is recognized in the first period the loss is identified
based on the most recent estimates at completion of the particular contract or
product order.
34
For the
fiscal quarter ended December 27, 2009 and year ended September 27, 2009,
estimated loss reserves were $1.2 million and $1.3 million, respectively.
Decreases in estimated loss reserves from the year ended September 27, 2009 of
$0.1 million is attributable to shipments against these loss programs in the
first fiscal quarter of 2010.
Government Contracts:
Virtually all of our contracts are prime or subcontracted directly with the
federal government and as such, are subject to Federal Acquisition Regulation
Subpart 49.5, “Contract Termination Clauses” and more specifically Federal
Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the
Government (Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for
default”.
Recent
Accounting Pronouncements
In
February 2010, FASB issued ASU 2010-09 “Subsequent Event (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements”. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised
financial statements. Revised financial statements include financial
statements revised as a result of either correction of an error or retrospective
application of GAAP. All of the amendments in ASU 2010-09 are effective upon
issuance of the final ASU, except for the use of the issued date for conduit
debt obligors, which is effective for interim or annual periods ending after
June 15, 2010. The Company adopted ASU 2010-09 in February 2010 and therefore
has omitted the disclosure previously required as referenced above.
In June
2008, FASB issued FASB ASC 260-10-55 (Prior authoritative literature: FASB
Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”). FASB ASC 260-10-55 clarifies that share-based payment
awards that entitle their holders to receive nonforfeitable dividends or
dividend equivalents before vesting should be considered participating
securities. As participating securities, we will be required to include these
instruments in the calculation of our basic earnings per share, and we will need
to calculate basic earnings per share using the "two-class method." Restricted
stock is currently included in our dilutive earnings per share calculation using
the treasury stock method. The two-class method of computing earnings per share
is an earnings allocation formula that determines earnings per share for each
class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings. FASB ASC
260-10-55 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those fiscal
years. As such, Optex Systems Holdings adopted these provisions at the
beginning of the interim period ended December 27, 2009. Adoption of FASB
ASC 260-10-55 did not have a material effect on Optex Systems Holdings’
financial statements.
In May
2009, FASB issued FASB ASC 855-10 (Prior authoritative literature: SFAS
No. 165, "Subsequent
Events"). FASB ASC 855-10 establishes principles and requirements for the
reporting of events or transactions that occur after the balance sheet date, but
before financial statements are issued or are available to be issued. FASB ASC
855-10 is effective for financial statements issued for fiscal years and interim
periods ending after June 15, 2009. As such, Optex Systems Holdings adopted
these provisions at the beginning of the interim period ended June 28, 2009.
Adoption of FASB ASC 855-10 did not have a material effect on Optex
Systems Holdings’ financial statements.
In June
2009, FASB issued ASC 105-10 (Prior authoritative literature: SFAS No.
168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162"). FASB
ASC 105-10 establishes the FASB Accounting Standards Codification TM
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. FASB ASC 105-10 is effective
for financial statements issued for fiscal years and interim periods ending
after September 15, 2009. Optex Systems Holdings adopted these provisions
at the beginning of the interim period ended December 27, 2009.
Adoption of FASB ASC 105-10 did not have a material effect on Optex Systems
Holding’s financial statements.
35
In
December 2007, FASB issued FASB ASC 805 (Prior authoritative literature:
SFAS No. 141(R), “Business
Combinations”) and FASB ASC 810-10-65 (Prior authoritative
literature: SFAS No. 160, “Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB No. 51”) . These new standards will significantly change the
accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. FASB ASC 805 and FASB
ASC 810-10-65 are required to be adopted simultaneously and are effective for
the first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited. The adoption of FASB ASC 805 and FASB ASC
810-10-65 did not have a material impact on Optex Systems Holdings’ financial
position, results of operations, or cash flows.
In March
2008, FASB issued FASB ASC 815-10 (Prior authoritative literature: SFAS
No. 161, " Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.
133 ”). FASB ASC 815-10 requires enhanced disclosures about an entity’s
derivative and hedging activities. FASB ASC 815-10 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008 with early application encouraged. As such, Optex Systems Holdings is
required to adopt these provisions at the beginning of the fiscal year ended
September 27, 2009. The adoption of FASB ASC 815-10 did not have a
material impact Optex Systems Holdings’ financial position, results of
operations, or cash flows.
In May
2008, FASB issued FASB ASC 944 (Prior authoritative literature: SFAS No.
163, "Accounting for Financial
Guarantee Insurance Contracts—an interpretation of FASB Statement No.
60 "). FASB ASC 944 interprets Statement 60 and amends existing
accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of that Statement. FASB
ASC 944 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal
years. Optex Systems Holdings adopted these provisions at the beginning of
the interim period ended December 27, 2009. The adoption of issued FASB
ASC 944 did not have a material impact on Optex Systems Holdings’ financial
position, results of operations, or cash flows.
Cautionary
Factors That May Affect Future Results
This
registration statement on Form S-1 contains forward-looking statements. To the
extent that any statements made in this registration statement on Form S-1
contain information that is not historical, these statements are essentially
forward-looking. Forward-looking statements can be identified by the use of
words such as “expects,” “plans,” “will,” “may,” “anticipates,” believes,”
“should,” “intends,” “estimates,” and other words of similar meaning. These
statements are subject to risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties are outlined in “Risk Factors” and include, without limitation,
Optex Systems Holdings’ ability to raise additional capital to
finance Optex Systems Holdings’ activities; the effectiveness,
profitability, and the marketability of its products; legal and regulatory risks
associated with the reorganization; the future trading of the common stock of
Optex Systems Holdings; the ability of Optex Systems Holdings to operate as a
public company; the period of time for which the proceeds of the Private
Placement will enable Optex Systems Holdings to fund its operations; Optex
Systems Holdings’ ability to protect its proprietary information;
general economic and business conditions; the volatility of Optex
Systems Holdings’ operating results and financial condition; Optex
Systems Holdings’ ability to attract or retain qualified senior
management personnel and research and development staff.
Information
regarding market and industry statistics contained in this registration
statement is included based on information available to Optex Systems Holdings
that it believes is accurate. It is generally based on industry and other
publications that are not produced for purposes of securities offerings or
economic analysis. Forecasts and other forward-looking information obtained from
these sources are subject to the same qualifications and the additional
uncertainties accompanying any estimates of future market size, revenue and
market acceptance of products and services. Optex Systems Holdings does not
undertake any obligation to publicly update any forward-looking statements. As a
result, investors should not place undue reliance on these forward-looking
statements.
36
BUSINESS
Background
Prior
History - Sustut Exploration, Inc.
Sustut
was a Delaware corporation formed on April 11, 2006 to search for available
properties in North Central British Columbia. In May 2006, Sustut entered into
an agreement which was negotiated at arms length with Richard Simpson to acquire
a 100% interest in the WILLOW claim purported to be located in the Omineca
Mining Division, NTS map sheet 94D/10E. The property could have been acquired
from Simpson by paying a total of $75,000 in two option payments with the last
option payment being due on May 15, 2008, however, Sustut did not make the
required payments and did not acquire title to those property
rights.
The
mineral claim which was to be Sustut’s primary business expired on May 15, 2008
leaving Sustut with no operating business of which to dispose. Optex
Systems Holdings does not believe it presently maintains any rights related to
the Willowvale project and does not intend to pursue a mining or mineral
business. In the event that Mr. Simpson seeks payment of any amount
Optex Systems Holdings does not intend to make any payment to exercise any
option or extend the term of the rights, if any continue to exist.
Reorganization
On March
30, 2009, a reorganization occurred whereby the then existing shareholders of
Optex Systems, Inc. (Delaware) exchanged their shares of Optex Systems, Inc.
(Delaware) common stock with the shares of common stock of Optex Systems
Holdings as follows: (i) the outstanding 85,000,000 shares of Optex
Systems, Inc. (Delaware) common stock were exchanged for 113,333,282 shares of
Optex Systems Holdings common stock, (ii) the outstanding 1,027 shares of Optex
Systems, Inc. (Delaware) Series A preferred stock were exchanged for 1,027
shares of Optex Systems Holdings Series A preferred stock and (iii) the
8,131,667 shares of Optex Systems, Inc. (Delaware) common stock purchased in the
private placement were exchanged for 8,131,667 shares of Optex Systems Holdings
common stock. Optex Systems, Inc. (Delaware) has remained a wholly-owned
subsidiary of Optex Systems Holdings, and the Optex Systems, Inc. (Delaware)
shareholders are now shareholders of Optex Systems Holdings. As a
result of the reorganization, Sileas Corporation beneficially owns approximately
73.52% of the issued and outstanding common stock of Optex Systems Holdings and
Arland Holdings, Ltd. owns 5.89% of the issued and outstanding common stock of
Optex Systems Holdings. Furthermore, at the time of the
reorganization, Andrey Oks resigned as the sole officer and director of Optex
Systems Holdings. Additionally, Stanley Hirschman, Ronald Richards
and Merrick Okamoto were appointed as its directors, and Stanley Hirschman,
Danny Schoening and Karen Hawkins were appointed as its President, COO and V.P.
of Finance/Controller, respectively.
Prior to
the closing under the reorganization agreement, Optex Systems, Inc. (Delaware)
accepted subscriptions from accredited investors for a total 27.1 units, for
$45,000 per unit, with each unit consisting of 300,000 shares of common stock of
Optex Systems, Inc. (Delaware) and warrants to purchase 300,000 shares of common
Stock for $0.45 per share for a period of five years from the initial closing,
which were issued by Optex Systems, Inc. (Delaware) after the closing referenced
above. Gross proceeds to Optex Systems, Inc. (Delaware) were
$1,219,750, and after deducting (i) a cash finder’s fee of $139,555, (ii)
non-cash consideration of indebtedness owed to an investor of $146,250, and
(iii) stock issuance costs of $59,416, the net proceeds were
$874,529. The finder also received five year warrants to purchase
2.39 units, at an exercise price of $49,500 per unit.
37
Contracts
Each
contract with Optex Systems Holdings’ customers has specific quantities of
material that need to be purchased, assembled, and finally shipped. Prior
to bidding a contract, Optex Systems Holdings contacts potential sources of
material and receives qualified quotations for this material. In some
cases, the entire volume is given to a single supplier and in other cases, the
volume might be split between several suppliers. If a contract has a
single source supplier and that supplier fails to meet their obligations (e.g.,
quality, delivery), then Optex Systems Holdings would attempt to find an
acceptable alternate supplier, and if successful, it would then renegotiate
contractual deliverables (e.g.,
specifications, delivery, price.). Currently, approximately 28%
of our total material requirements are single sourced across 21 suppliers
representing approximately 20% of our active supplier base. Single sourced
component requirements span across all of our major product lines. Of
these single sourced components, we have material contracts (purchase orders)
with firm pricing and delivery schedules in place with each of the suppliers to
supply the parts necessary to satisfy our current contractual
needs.
We are
subject to, and must comply with various governmental regulations that impact,
among other things, our revenue, operating costs, profit margins and the
internal organization and operation of our business. The material regulations
affecting our U.S. government business are summarized in the table
below.
Regulation
|
|
Summary
|
Federal
Acquisition Regulation
|
The
principal set of rules in the Federal Acquisition Regulation System. This
system consists of sets of regulations issued by agencies of the federal
government of the United States to govern what is called the "acquisition
process," which is the process through which the government purchases
("acquires") goods and services. That process consists of three phases:
(1) need recognition and acquisition planning, (2) contract formation, and
(3) contract administration. The FAR System regulates the activities of
government personnel in carrying out that process. It does not regulate
the purchasing activities of private sector firms, except to the extent
that parts of it are incorporated into government solicitations and
contracts by reference.
|
|
International
Traffic in Arms Regulations
|
United
States government regulations that control the export and import of
defense-related articles and services on the United States Munitions
List. These regulations implement the provisions of the Arms
Export Control Act.
|
|
Truth
in Negotiations Act
|
A
public law enacted for the purpose of providing for full and fair
disclosure by contractors in the conduct of negotiations with the
government. The most significant provision included is the requirement
that contractors submit certified cost and pricing data for negotiated
procurements above a defined threshold, currently $650,000. It
requires contractors to provide the government with an extremely broad
range of cost or pricing information relevant to the expected costs of
contract performance, and it requires contractors and subcontractors to
submit cost or pricing data to government and to certify that,
to the best of their knowledge and belief, the data are current, accurate,
and complete.
|
Optex
Systems Holdings is responsible for full compliance with the Federal Acquisition
Regulation. Upon award, the contract may identify certain regulations
that Optex Systems Holdings needs to meet. For example, a contract
may allow progress billing pursuant to specific Federal Acquisition Regulation
clauses incorporated into the contract. Other contracts may call for
specific first article acceptance and testing requirements. The Federal
Acquisition Regulation will identify the specific regulations that Optex
Systems Holdings must follow based on the type of contract
awarded. The Federal Acquisition Regulation also contains guidelines
and regulations for managing a contract after award, including conditions under
which contracts may be terminated, in whole or in part, at the government’s
convenience or for default. These regulations also subject us to financial
audits and other reviews by the government of our costs, performance, accounting
and general business practices relating to our government contracts, which may
result in adjustment of our contract-related costs and fees and, among other
things and impose accounting rules that define allowable and unallowable costs
governing our right to reimbursement under certain
contracts.
38
First
Article Testing and Acceptance requirements consist of specific
steps. For example, first article testing on a Howitzer type product
is very comprehensive and very time consuming. Each piece that is
part of the assembly requires each dimension and material specification to be
verified, and each product has in excess of 100 piece parts. Once the
individual piece parts are verified to be compliant to the specification, the
assembly processes are documented and verified. A sample of the
production (typically 3 units) is verified to meet final performance
specifications. Once the units meet the final performance
specification, they are then exposed to a series of tests which simulate the
lifetime use of the product in the field. This consists of exposing
the units to thermal extremes, humidity, mechanical shock, vibration, and other
physical exposure tests. Once completed, the units undergo a final
verification that no damage has occurred as a result of the testing and that
they continue to meet the performance specification. All of the
information and data is recorded into a final first article inspection and test
report and submitted to the customer along with the test units for final
approval. First Article Acceptance and Testing is generally required
on new contracts/product awards but may also be required on existing products or
contracts where there has been a significant gap in production, or where the
product has undergone significant manufacturing process, material, tooling,
equipment or product configuration changes.
Optex
Systems Holdings, Inc. is also subject to laws, regulations and executive orders
restricting the use and dissemination of information classified for national
security purposes and the exportation of certain products and technical data as
covered by the International Traffic in Arms Regulation. In order to
import or export items listed on the U.S. Munitions List, we are required to be
registered with the Directorate of Defense Trade Controls office. The
registration is valid for 1 year, and the registration fees are established
based on the number of license applications submitted the previous year.
Optex Systems Holdings currently has an approved and current registration on
file with the Directorate of Defense Trade Controls office. Once the
registration is approved, each import/export license must be filed
separately. License approval requires the company to provide proof of
need, such as a valid contract or purchase order requirement for the specific
product or technical data requested on the license and requires a detailed
listing of the items requested for export/import, the end-user, the end-user
statement, the value of the items, consignees/freight forwarders and a copy of a
valid contract or purchase order from the end-user. The approval
process for the license can vary from several weeks to six months or
more. The licenses Optex Systems Holdings currently uses are the
DSP-5 (permanent export) and DSP-73 (temporary export).
The
aforementioned licenses are valid for 48 months from date that each such license
is issued as
set forth on the table below.
DSP-5 Licenses
|
Issue Date
|
Expiration Date
(48 months from date of issue)
|
||
050137740
|
01/05/2009
|
01/04/2013
|
||
050146207
|
03/13/2009
|
03/12/2013
|
||
050137823
|
01/05/2009
|
01/04/2013
|
||
050128943
|
11/24/2008
|
11/23/2012
|
||
050169739
|
06/04/2009
|
06/03/2013
|
||
050185923
|
08/28/2009
|
08/27/2013
|
||
050187735
|
03/19/2010
|
03/18/2014
|
||
050220671
|
|
10/01/2009
|
|
09/30/2013
|
39
DSP-73 Licenses
|
Issue Date
|
Expiration Date
(48 months from date of issue)
|
||
730024737
|
02/16/2010
|
02/15/2014
|
||
730007737
|
08/13/2008
|
08/12/2012
|
||
730008340
|
09/26/2008
|
09/25/2012
|
||
730008736
|
11/18/2008
|
11/17/2012
|
||
730010051
|
|
02/27/2009
|
|
02/26/2013
|
Licenses
are subject to termination if a licensee is found to be in violation of the Arms
Export Control Act or the International Traffic in Arms Regulations
requirements. If a licensee is found to be in violation, in addition to a
termination of its licenses, it can be subject to fines and penalties by the
government.
Optex
Systems Holdings’ contracts may also be governed by the Truth in Negotiation Act
requirements where certain of our contracts or proposals exceed the $650,000
threshold and/or are deemed as sole source, or non competitive awards, covered
under this Act. These contracts require that Optex Systems Holdings
provide a vast array of cost and pricing data in addition to certification that
our pricing data and disclosure materials are current, accurate and complete
upon conclusion of the negotiation. Due to the additional disclosure
and certification requirements, if a post contract award audit were to uncover
that the pricing data provided was in any way not current accurate or complete
as of the certification date, Optex could be subjected to a defective pricing
claim adjustment with accrued interest. Currently, Optex does not
have any pending claims as a result of defective pricing as a result of these
covered contracts. Additionally, as a result of this requirement,
contract price negotiations may span from two to six months and will often
result in undefinitized or not to exceed ceiling priced contracts subject to
future downward negotiations and price adjustments. Currently, Optex
Systems Holdings does not have any undefinitized contracts subject to further
price negotiation.
Our
failure to comply with applicable regulations, rules and approvals or misconduct
by any of our employees could result in the imposition of fines and penalties,
the loss of security clearances, the loss of our U.S. government contracts or
our suspension or debarment from contracting with the U.S. government generally,
any of which could have a material adverse effect our business, financial
condition, results of operations and cash flows. We are currently in compliance
with all applicable regulations and do not have any pending claims as a result
of non compliance.
The
material terms of our five largest contracts are as follows:
Progress
|
Remaining
|
||||||||||||||||||||||
Customer
|
Contract Quantities
|
Total Award
|
Billable
|
Order Period
|
Value
|
||||||||||||||||||
Customer
|
PO/Contract
|
Contract Type
|
Min Qty
|
Max Qty
|
Value (4)
|
(1)
|
Expiration
|
(5)
|
Delivery Period
|
||||||||||||||
General Dynamics Land
|
PCL860000 thru
|
1 year blanket order with
|
N/A | N/A | $ | 14,813,100 |
Yes
|
Expired
|
$ | 1,401,924 |
Dec 2007 - Jan 2011
|
||||||||||||
Systems
|
PCL860005 (Mul
|
Fixed Qty Contract release
|
|||||||||||||||||||||
tiplePrime
|
which includes ability to
|
||||||||||||||||||||||
Contracts)
|
increase or decrease
|
||||||||||||||||||||||
quantity on each release up
|
|||||||||||||||||||||||
to 20% from PO release
|
|||||||||||||||||||||||
quantity.
|
|||||||||||||||||||||||
Tank-automotive and
|
W52H09-05-D-
|
5 Year Firm Fixed Price (3)
|
138 | 2,100 | $ | 9,762,286 |
Yes
|
30-Jun-10
|
$ | 4,300,662 |
Oct 2007-May 2011
|
||||||||||||
Armaments Command -
|
0260
|
||||||||||||||||||||||
Rock Island
|
|||||||||||||||||||||||
Tank-automotive and
|
W52H09-05-D-
|
5 Year Firm Fixed Price (3)
|
138 | 1,250 | $ | 5,006,119 |
Yes
|
30-Jun-10
|
$ | 1,454,136 |
Apr 2007- July 2010
|
||||||||||||
Armaments Command -
|
0248
|
||||||||||||||||||||||
Rock Island
|
|||||||||||||||||||||||
Tank-automotive and Armaments Command -
Rock Island
|
W52H09-09-D-0128
|
3
Yr – Evaluated Pricing (3). Restricted Procurement between
Optex Systems & Miller Holzwarth
|
250 each
supplier
|
250 each supplier
|
$ | 118,250 |
Yes
|
31-Dec-11
|
$ | 0 |
Initial award
deliverable Aug -
Sept 2009.
Additional awards
not to exceed
aggregate 2000 units
per month total units.
|
||||||||||||
General Dynamics Land
|
40050551
|
Firm Fixed Price and Fixed
|
N/A | N/A | $ | 6,330,336 |
Yes
|
N/A
|
$ | 6,330,336 |
Jan 2011 - Feb 2013
|
||||||||||||
Systems
|
(Multiple Prime
|
Quantity Purchase Order
|
|||||||||||||||||||||
Contracts)
|
(1)
Payment terms on shipments are net 30 days.
(2)
Only first delivery order awarded. Maximum order value potential of
up to $22 million with expected award value of $7.5 million. We
estimate the maximum order potential at $22 million based on the government’s
estimated maximum order quantity for each periscope type times the Optex not to
exceed price per unit for each of the solicited periscope
assemblies. The $7.5 million expected value is derived based on the
governments estimated quantity requirement for each periscope type across the
contract period times Optex proposed not to exceed price per unit, assuming that
the award is split equally between Optex and the other
supplier.
(3)
Indefinite Delivery/Indefinite Quantity type contract.
(4)
Total Award Value” as included in the table represents the total value of all
delivery orders against the prime contract that have already been awarded to
Optex. As the total award value represents already awarded delivery
order contracts, there are no material reasons why that amount would not be
received. Based on Optex's historical experience with these contracts
and other like contracts, the amount awarded has directly correlated to the
amount received.
(5)
The Remaining Value depicts the open undelivered values remaining to be
delivered against the contract awards. Only these undelivered values
of the contracts may be subject to the contract termination
clause. It has been the experience of Optex Systems that these
clauses are rarely invoked.
Organizational
History
On
October 14, 2008, in a transaction that was consummated via public auction,
Optex Systems, Inc. (Delaware) purchased all of the assets of Optex Systems,
Inc. (Texas) in exchange for $15 million of Irvine Sensors Corporation debt and
the assumption of approximately $3.8 million of certain liabilities of Optex
Systems, Inc. (Texas). Optex Systems, Inc. (Delaware) was formed by
the Longview Fund, LP and Alpha Capital Antstalt, former secured creditors of
Irvine Sensors Corporation, to consummate the transaction with Optex Systems
Holdings, and subsequently, on February 20, 2009, Longview Fund conveyed its
ownership interest in Optex Systems Holdings to Sileas Corporation, an entity
owned by three of Optex Systems Holdings’ officers (one of whom is also one
of Optex Systems Holdings’ three directors). On March 30, 2009, a
reorganization occurred whereby Optex Systems, Inc. (Delaware) became a
wholly-owned subsidiary of Optex Systems Holdings.
Products
Optex
Systems Holdings’ products are installed on various types of U.S. military land
vehicles, such as the Abrams and Bradley fighting vehicles, light armored and
advanced security vehicles and have been selected for installation on the Future
Combat Systems Stryker vehicle. Optex Systems Holdings also manufactures and
delivers numerous periscope configurations, rifle and surveillance sights and
night vision optical assemblies. Optex Systems Holdings delivers its products
both directly to the military services and to prime contractors.
40
Optex
Systems Holdings delivers high volume products, under multi-year contracts, to
large defense contractors and government customers. Optex Systems Holdings has a
reputation for quality and credibility with its customers as a strategic
supplier. Optex Systems Holdings also anticipates the opportunity to integrate
some of its night vision and optical sights products into commercial
applications.
Specific
product lines include:
|
·
|
Electronic sighting
systems
|
|
·
|
Mechanical sighting
systems
|
|
·
|
Laser protected glass
periscopes
|
|
·
|
Laser protected plastic
periscopes
|
|
·
|
Non-laser protected plastic
periscopes
|
|
·
|
Howitzer sighting
systems
|
|
·
|
Ship
binoculars
|
|
·
|
Replacement optics (e.g. filters,
mirrors)
|
Location and
Facility
We are
located in Richardson, TX in a 49,000 square foot facility, and as of July 20,
2010, we had 84 full time employees. We operate with a single shift, and
capacity could be expanded by adding a second shift. Our proprietary
processes and methodologies provide barriers to entry by other competing
suppliers. In many cases, we are the sole source provider or one of
only two providers of a product. We have capabilities which
include machining, bonding, painting, tracking, engraving and assembly and can
perform both optical and environmental testing
in-house.
We lease
our facility. Effective as of January 4, 2010, Optex Systems
Holdings, Inc. renewed its Richardson, TX lease. Under the terms of
the amendment:
|
·
|
The lease term is extended until
July 31, 2015.
|
|
·
|
The base rent is as follows:
until 7/31/2010, $0.00 per square foot, from 8/1/2010 – 7/31/2013, $4.70
per square foot and from 8/1/2013 – 7/31/2015, $4.95 per square
foot.
|
|
·
|
A $195,352.00 improvement
allowance is included.
|
|
·
|
For the first two years of the
extended term, the landlord has granted the option to take over additional
space at similar terms as in the
amendment.
|
Prior Operational/Financial
Challenges; Recovery; and Future Growth Potential
While
Optex Systems, Inc. (Texas) was a wholly-owned subsidiary of Irvine Sensors
Corporation, Irvine Sensors Corporation faced certain business challenges and
utilized the cash flow from Optex Systems, Inc. (Texas) to meet its own funding
needs. Accordingly, the diversion of its cash flow to Irvine Sensors
Corporation left Optex Systems, Inc. (Texas) with limited working capital to
satisfy its own operating needs.
As of the
year ended September 28, 2008, Optex Systems, Inc. (Texas) reported $4.3 million
of liabilities attributable to corporate expenses allocated to Optex
Systems, Inc. (Texas) through an intercompany payable account “Due to Parent”.
These costs were for expenses allocated by Irvine Sensors Corporation to Optex
Systems, Inc. (Texas), including legal, audit, and consulting fees; insurance
costs; and significant amounts of Irvine Sensors Corporation general overhead
allocated to Optex Systems, Inc. (Texas). The outstanding “Due to Parent”
balance was not acquired as part of the October 14, 2008 transaction. Therefore,
this balance will have no impact on future operating results or
liquidity.
41
The
estimated total General and Administrative expenses assuming Optex Systems, Inc.
(Texas) was operated on a stand-alone basis during the 2008 fiscal year
are:
Year- Ended
|
||||
September 28,
2008
|
||||
Accounting
& Auditing Fees
|
$
|
250,000
|
||
Legal
Fees
|
60,000
|
|||
Consulting
Fees
|
60,000
|
|||
Workers
Comp & General Insurance
|
70,000
|
|||
Total
|
$
|
440,000
|
As a
result of the Optex Systems, Inc. (Texas) purchase on October 14, 2008, these
general and administrative costs were incurred and paid directly by Optex
Systems, Inc. (Delaware) for the 2009 fiscal year, and have been reflected in
the financial statements.
Since the
acquisition, the business outlook for the operating business formerly owned by
Optex Systems, Inc. (Texas) has changed dramatically. Management has
strengthened Optex Systems Holdings’ balance sheet and has increased
operational efficiencies and productivity, as demonstrated by the significant
$4.5 million reduction in operating loss to $(129,248) versus $(4,654,251) for
(i) the total for the periods September 29, 2008 through October 14, 2008
(Predecessor) and October 15, 2008 through September 27, 2009
(Successor) and (ii) the year ended September 28, 2008 (Predecessor),
respectively. Management expects to deliver additional improvement in
operations over time.
In some
cases, we may receive orders subject to subsequent price negotiation on
contracts exceeding the $650,000 federal government simplified acquisition
threshold. These “undefinitized” contracts are considered firm contracts,
but as Cost Accounting Standards Board covered contracts, they are subject to
the Truth in Negotiations Act disclosure requirements and downward-only price
negotiation. As of September 28, 2008, $4.0 million of booked orders was
subject to this criteria. As of December 27, 2009, there were no booked
orders subject to this criteria. Our experience has been that the
historically negotiated price differentials have been immaterial and we do not
anticipate any significant downward adjustments on these booked
orders.
We are
currently bidding on several substantial government contracts to expand sales
and production beyond the current production and backlog. We
are also exploring possibilities to adapt some of our products for
commercial use in those markets that demonstrate potential for solid revenue
growth.
Market Opportunity – U.S.
Military
Our
products are currently marketed to the military and related government
markets. Since 1998, annual U.S. military spending has increased over
225% to over $600 billion. The trend of significant growth in
government spending on the military and defense is very positive for Optex
Systems Holdings and others in the defense industry sector. The data
suggests that the market continues to be robust and Optex Systems Holdings
believes the markets for new and replacement parts, such as those manufactured
by Optex Systems Holdings, are significant.
The chart
below was derived from public government spending sources and depicts total U.S.
Military Spending from 1998 through 2008. Total military spending
increased from $268.2 billion in 1998 to $607.3 billion in 2008 representing a
total increase in military spending of 226% in the last 10 years. It
is difficult to directly tie this spending to any specific military vehicles;
however, Optex Systems Holdings serves the U.S. armed forces and various state
national guards. The purpose of including this chart is to provide
the reader with trend data showing increased military spending by the government
since 1998, which is favorable for Optex Systems Holdings’ overall
business.
42
Source:
Government Printing Office, U.S. Budget Historical Tables, FY 2008, Table 3.2
Outlays by function and subfunction, 1962-2012
The
following factors are important to the U.S. military:
|
·
|
Reliability – failure can cost
lives
|
|
·
|
Time delivery to
schedule
|
|
·
|
Cost
effectiveness
|
|
·
|
Armed forces need to be able to
see to perform
|
|
·
|
Mission critical
products.
|
Optex
Systems Holdings focuses on delivering products that satisfy these factors and
believes it is well positioned to continue to service U.S. military
needs.
Market Opportunity –
Commercial
Optex
Systems Holdings’ products are currently sold to military and related government
markets. We believe there may be opportunities to commercialize various products
we presently manufacture to address other markets. Our initial focus will be
directed in three product areas.
|
·
|
Big Eye Binoculars – While the
military application we produce is based on mature military designs, Optex
Systems Holdings owns all castings, tooling and glass technology. These
large fixed mount binoculars could be sold to cruise ships, personal
yachts and
cities/municipalities.
|
43
|
·
|
Night Vision Sight – Optex
Systems Holdings has manufactured the optical system for the NL-61 Night
Vision Sight for the Ministry of Defense of Israel. This technology could
be implemented for commercial
applications.
|
|
·
|
Infrared Imaging Equipment –
Optex Systems Holdings manufactures and assembles infrared imaging
equipment and components for Raytheon’s Thermal Imaging M36 Mount product.
This equipment and technology has potential to be assembled for border
patrol, police and governmental security
agencies.
|
Customer
Base
Optex
Systems Holdings serves customers in three primary categories: as prime
contractor (Tank-automotive and Armaments Command, U.S. Army, Navy and Marine
Corps), as subcontractor (General Dynamics, BAE, Raytheon and Northrop) and also
as a supplier to foreign governments (Israel, Australia and
NAMSA). Although we do serve all three of these categories, at present, we derive approximately 90%
of the gross business revenue from three customers, with 47% from General
Dynamics Land Systems Divisions, 33% from Tank-automotive and Armaments Command
and 10% from NorcaTec LLC with which we have approximately 50
discrete contracts for items that are utilized in vehicles, product lines and
spare parts. Given the size of General Dynamics Land System Division and
Tank-automotive and Armaments Command as well as the fact that there are
multiple contracts with each entity, which are not interdependent, we are of the
opinion that this provides us with a fairly well diversified revenue
pool.
Marketing
Plan
Potential
Entrants – Low. In order to enter this market, potential competitors must
overcome several barriers to entry. The first hurdle is that an entrant would
need to prove to the government agency in question the existence of a government
approved accounting system for larger contracts. Second, the entrant would need
to develop the processes required to produce the product. Third, the entrant
would then need to produce the product and then submit successful test
requirements (many of which require lengthy government consultation for
completion). Finally, in many cases the customer has an immediate need and
therefore cannot wait for this qualification cycle and therefore must issue the
contracts to existing suppliers.
44
Buyers –
Medium. In most cases the buyers (usually government agencies or defense
contractors) have two fairly strong suppliers. It is in their best interest to
keep at least two, and therefore in some cases the contracts are split between
suppliers. In the case of larger contracts, the customer can request an open
book policy on costs and expects a reasonable margin to have been
applied.
Substitutes
– Low. Optex Systems Holdings has both new vehicle contracts and replacement
part contracts for the exact same product. The U.S. government has declared that
the Abrams/Bradley base vehicles will be the ground vehicle of choice out
through 2040. The Bradley vehicle has been in service for 28 years, the Abrams
for 27 years. Therefore it appears that the systems are capable of a life
of approximately 30 years. In February 2008, the U.S. Army signed a 5 year
multi-year third party contract for the delivery of improved Abrams and
Bradleys. The contract is for up to 435 tanks and 540 Bradley vehicles. These
are the only production tanks currently being procured by the government. This
in conjunction with the 30 year life span supports their continued use through
2040. There are no replacement systems known to be proposed or funded at this
time. The Abrams is the principal battle tank of the United States Army and
Marine Corps, and the armies of Egypt, Kuwait, Saudi Arabia, and since 2007,
Australia. The new contract terms allow efficiencies within the supply chain and
a very long return on investment on new vehicle proposals.
Suppliers
– Low to Medium. The suppliers of standard processes (e.g.: casting, machining,
plating) have very little power. Given the current state of the economy, they
need to be very competitive to gain and /or maintain contracts. Those suppliers
of products that use top secret clearance processes are slightly better off;
however, there continues to be multiple avenues of supply and therefore moderate
power.
Industry
Competitors – Low. The current suppliers have been partitioned according to
their processes and the products. Optex Systems Holdings and Miller-Holzwarth,
Inc. both compete for plastic periscope products whereas Optex Systems Holdings
and Seiler Instrument & Manufacturing Co., Inc., have competed on the higher
level periscope products. In the last 12-18 months, we have begun to challenge
Seiler in areas where they have long held the dominant role. For example, while
the existing Howitzer contracts are at low margins, the new bids will be at a
much higher margin now that we have proven we can produce the
product.
The
second model is a two by two matrix for products and customers.
This
product/customer matrix sets forth our four basic approaches:
45
1)
|
Sell
existing products to existing
customers.
|
2)
|
Sell
existing products to new customers.
|
3)
|
Develop
new products to meet the needs of our existing
customers.
|
4)
|
Develop
new products to meet the needs of new
customers.
|
The
product categories described in the above matrix are associated with the product
lines set forth below:
Name
|
Product Line
|
|
M137,
M187, M119 Aiming Device
|
Howitzer
Sighting Systems
|
|
Aiming
Circle
|
Howitzer
Sighting Systems
|
|
Periscopes
|
Laser
Protected Plastic Periscopes
|
|
Collimators
|
Electronic
Sighting Systems
|
|
Back
Up Sights
|
Mechanical
Sighting Systems
|
|
ICWS
|
Laser
Protected Glass Periscopes
|
Those
“new customers” listed (BAE and Textron) are producers of armored vehicles.
Optex Systems Holdings has provided them quotations for laser protected plastic
periscopes and mechanical sighting systems. Both of these companies have
previously purchased products from Optex Systems Holdings. “New Customers”
listed (L3 and ITT) are potential customers for night vision
products.
Operations
Plan
Our
operations plan can be broken down into three distinct areas: material
management, manufacturing space planning and efficient scales of
economy.
Materials
Management –
The
largest portion of our costs are materials. We have completed the following
activities in order to demonstrate continuous improvement:
-
|
Successful
completion of ISO9001:2008
certification
|
-
|
Weekly
cycle counts on inventory items
|
-
|
Weekly
material review board meeting on non-moving piece
parts
|
-
|
Kanban
kitting on products with consistent ship weekly ship
quantities
|
-
|
Daily
review of yields and product
velocity
|
-
|
Bill
of material reviews prior to work order
release
|
Future
continuous improvement opportunities include installation and training of shop
floor control module within the ERP system and organizational efficiencies of
common procurement techniques among buyers.
Manufacturing
Space Planning –
We
currently lease 49,000 square feet of manufacturing space, and we have the
ability to lease additional space (see “Location and Facility”). Given the ample
building opportunities along with competitive lease rates, our objective is to
maintain building and building-related costs consistent with prior historical
norms on a percentage of sales basis.
46
Consistent
with the space planning, we will drive economies of scale to reduce support
costs on a percentage of sales perspective. These cost reductions can then be
either brought directly to the bottom line or used for business
investment.
This
process is driven by the use of six sigma techniques and process
standardization. Initial activities in this area have been the successful six
sigma projects in several production areas which has led to improved output and
customer approval on the aesthetics of the work environment. In addition to the
5S projects, we have used the Define, Measure, Analyze, Improve, Control Problem
Solving technique to identify bottlenecks within the process flow and improve
product yields. These successful techniques can then be duplicated across the
production floor and drive operational improvements.
Intellectual
Property
We
utilize several highly specialized and unique processes in the manufacture of
our products. While we believe that these trade secrets have value, it is
probable that our future success will depend primarily on the innovation,
technical expertise, manufacturing and marketing abilities of our personnel. We
cannot assure you that we will be able to maintain the confidentiality of our
trade secrets or that our non-disclosure agreements will provide meaningful
protection of our trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or other disclosure. The
confidentiality agreements that are designed to protect our trade secrets could
be breached, and we might not have adequate remedies for the breach.
Additionally, our trade secrets and proprietary know-how might otherwise become
known or be independently discovered by others. We do not possess any
patents.
Our
competitors, many of which have substantially greater resources, may have
applied for or obtained, or may in the future apply for and obtain, patents that
will prevent, limit or interfere with our ability to make and sell some of our
products. Although we believe that our products do not infringe on the patents
or other proprietary rights of third parties, we cannot assure you that third
parties will not assert infringement claims against us or that such claims will
not be successful.
Competition
The
markets for our products are competitive. We compete primarily on the basis of
our ability to design and engineer products to meet performance specifications
set by our customers. Our customers include the military and government end
users as well as prime contractors that purchase component parts or
subassemblies, which they incorporate into their end products. Product pricing,
quality, customer support, experience, reputation and financial stability are
also important competitive factors.
There are
a limited number of competitors in each of the markets for the various types of
products that we design, manufacture and sell. At this time we consider our
primary competitors to be Seiler Instruments, Miller-Holzwarth, Kent Periscopes,
and EO System Co.
Our
competitors are often well entrenched, particularly in the defense markets. Some
of these competitors have substantially greater resources than we do. While we
believe that the quality of our technologies and product offerings provides us
with a competitive advantage over certain manufacturers, some of our competitors
have significantly more financial and other resources than we do to spend on the
research and development of their technologies and for funding the construction
and operation of commercial scale plants.
47
We expect
our competitors to continue to improve the design and performance of their
products. We cannot assure investors that our competitors will not develop
enhancements to, or future generations of, competitive products that will offer
superior price or performance features, or that new technology or processes will
not emerge that render our products less competitive or obsolete. Increased
competitive pressure could lead to lower prices for our products, thereby
adversely affecting our business, financial condition and results of operations.
Also, competitive pressures may force us to implement new technologies at a
substantial cost, and we may not be able to successfully develop or expend the
financial resources necessary to acquire new technology. We cannot assure you
that we will be able to compete successfully in the future.
External Growth
Potential/Roll-Up Opportunities
We
operate in a business environment which is highly fragmented with numerous
private companies, many of which were established more than 20 years ago. We
believe there may be opportunities to pursue mergers with these competitors. We
are not aware of any previous attempts to consolidate companies with our defense
manufacturing expertise.
The
typical company we compete with has 50-100 employees and annual revenue of
$20-$50 million dollars. Most of these private companies have never had the
opportunity to enjoy the benefits of consolidation and the resulting economies
of scale associated with a larger entity.
We plan
to engage our competition on a selective basis, and to explore all opportunities
to grow our operations through mergers and/or acquisitions. We have no
acquisition agreements pending at this time and are not currently in discussions
or negotiations with any third parties.
Employees
Optex
Systems Holdings had 99 full time equivalent employees as of March 28, 2010.
Optex Systems Holdings uses a small temporary work force to handle peak
loads. To the best of its knowledge, Optex Systems Holdings is
compliant with local prevailing wage, contractor licensing and insurance
regulations, and has good relations with its employees.
LEGAL
PROCEEDINGS
Optex
Systems Holdings is not a party to any pending material legal proceeding. To the
knowledge of management, no federal, state or local governmental agency is
presently contemplating any proceeding against Optex Systems Holdings. To the
knowledge of management, no director, executive officer or affiliate of Optex
Systems Holdings, or any owner of record or beneficially of more than 5% of
Optex Systems Holdings’ common stock is a party adverse to Optex Systems
Holdings or has a material interest adverse to Optex Systems Holdings in any
proceeding.
MANAGEMENT
Our board
of directors directs the management of the business and affairs of our company
as provided in our certificate of incorporation, our by-laws and the General
Corporation Law of Delaware. Members of our board of directors keep informed
about our business through discussions with senior management, by reviewing
analyses and reports sent to them, and by participating in board and committee
meetings.
Directors
and Executive Officers
The
following table sets forth information regarding the members of our board of
directors and our executive officers and other significant employees. All of our
current officers and directors were appointed on March 30, 2009, the closing
date of the reorganization.
The
following table sets forth certain information with respect to the directors and
executive officers of Optex Systems Holdings:
49
Name
|
Age
|
Position
|
||
Stanley
A. Hirschman
|
63
|
President,
Secretary, Treasurer & Director
|
||
Merrick
D. Okamoto
|
49
|
Director
|
||
Ronald
F. Richards
|
44
|
Chairman
of the Board
|
||
Danny
Schoening
|
45
|
Chief
Operating Officer
|
||
Karen
L. Hawkins
|
44
|
Vice
President of Finance and
Controller
|
Stanley A. Hirschman.
Mr. Hirschman served as a Director and President of Optex Systems, Inc.
(Delaware) since September 28, 2008 and assumed the same roles on behalf of
Optex Systems Holdings on March 30, 2009, in which roles he is committed to
providing Optex his management experience and provides direction and oversight
of other executive officers and management. From 1997 to 2009, he was president
of CPointe Associates, Inc., a Plano, Texas consulting group, and provided
consulting services to small and medium sized companies. As of October 2009, in
order to meet his responsibilities at Optex, he concluded his active role at
CPointe. Additionally, since February 2009 he has been the majority beneficial
owner of Sileas Corp (which has no active business), the majority shareholder of
Optex Systems Holdings. Mr. Hirschman is a director of Axion Power
International, where he serves on the Audit Committee. Prior to
establishing CPointe Associates, he was Vice President Operations, Software
Etc., Inc., a 396 retail store software chain, from 1989 until 1996. He has also
held executive positions with T.J. Maxx, Gap Stores and Banana Republic. Mr.
Hirschman is a member of the National Association of Corporate Directors,
regularly participates in the KMPG Audit Committee Institute and is a graduate
of the Harvard Business School Audit Committees in the New Era of Governance
symposium. He is active in community affairs and serves on the Advisory Board of
the Salvation Army Adult Rehabilitation Centers.
Merrick D. Okamoto.
Mr. Okamoto served as a Director of Optex Systems, Inc. (Delaware) since October
2008 and has served as a Director of Optex Systems Holdings since March 30,
2009. In 2001, Mr. Okamoto co-founded Viking Asset Management, LLC and is the
President and a Managing Member. Viking Asset Management is the investment
advisor to Longview Fund, LP and Longview Fund International, Ltd. Limited
partners in Viking’s family of funds are comprised of institutions, private
banks, family offices and high net worth individuals from around the world. Mr.
Okamoto has completed financings for hundreds of public and private companies
across a broad array of industries and sectors. In 1998, Mr. Okamoto co-founded
and was the President of TradePortal.com, Inc. TradePortal.com, Inc. is a
software development company and its wholly owned subsidiary, TradePortal
Securities, Inc., a direct access execution brokerage firm. Mr. Okamoto was
instrumental in developing the proprietary Trade Matrix™ software platform. In
2000, TradePortal.com, Inc. sold a minority stake to Thomson Reuters (TRI:NYSE),
a US $12 billion revenue company. In 1995, he founded First Stage Capital, Inc.
which specializes in investment banking and consulting to public and private
companies. From 1983 to 1994, he was employed in the securities industry with
Shearson Lehman Brothers, Prudential Securities and Paine Webber. Mr. Okamoto is
widely recognized as an advanced trader specializing in short-term trading and
has more than 25 years of extensive experience in technical market analysis
techniques and has been a frequent speaker at national trading venues. From 1987
to 1990, he created and hosted the television program, The Income Report in Los
Angeles . He has also appeared on CNN and The MacNeil-Lehrer
Report.
50
Ronald F. Richards.
Mr. Richards has served as a Director of Optex Systems, Inc. (Delaware) since
October 2008 and has served as a Director of Optex Systems Holdings since March
30, 2009, as well as the Chairman of the Board of Optex Systems Holdings. Mr.
Richards is the founder and Managing Director of Gray Wolf Partners, LLC, a
strategic and financial advisory firm. From February 2007 to October 2008, he
served as a Managing Director of Viking Asset Management, LLC where his
responsibilities included: (i) sourcing, conducting due diligence, and
structuring potential investment opportunities and (ii) working with portfolio
companies to enhance shareholder value. He previously served as Chief Financial
Officer and Senior Vice President, Business Development of Biopure Corporation,
a publicly traded biotechnology company developing oxygen therapeutics and as a
Managing Director, Corporate Finance of Wells Fargo Van Kasper. Mr. Richards has
over 21 years of experience working with public and private companies in the
areas of investment banking, corporate finance, law and accounting. He has
structured and executed numerous public offerings and private placements raising
a total of more than $660 million. He also co-authored PIPES: A CEO's Guide to Successful
Private Placements in Public Equities. Mr. Richards holds JD, MBA and BA
degrees from UCLA. He is a member of the State Bar of California and a retired
Certified Public Accountant.
Danny Schoening. Mr.
Schoening joined Optex Systems, Inc. (Texas) in January 2008. Upon the
acquisition of the assets of Optex Systems, Inc. (Texas) by Optex Systems, Inc.
(Delaware), Mr. Schoening became the COO of Optex Systems, Inc. (Delaware) (as
of September 28, 2008) and he commenced service with Optex Systems Holdings as
its Chief Operating Officer as of the date of the reorganization, March 30,
2009. He has been instrumental in establishing the systems and infrastructure
required to continue Optex System’s rapid growth. This activity was rewarded
with Optex System’s recent ISO9001:2000 Certification. From February 2004 to
January 2008, Danny was the Vice President of Operations for The Finisar
Corporation AOC Division for 4 years where he led a team of up to 200 employees
to produce vertical cavity lasers for the data communications industry at
production rates of hundreds of thousands of units per week. Prior to Finisar,
Danny was the Director of Operations for multiple divisions of Honeywell
International. Serving the Automotive, Medical, Aerospace, and Consumer
Commercial Markets. During this 17 year period, Danny was recognized with
Honeywell’s Lund Award, their highest award for developing employee resources.
Danny has a broad experience level in the following technologies: Mechanical
Assembly Processes, Micro-Electronic Assembly Processes, Laser Manufacturing,
Plastic Molding, Metal Machining, Plating, Thick Film Printing, Surface Mount
Technology, Hall Effect Technology and MEMS based Pressure Devices. Danny
received a Bachelors of Science in Manufacturing Engineering Technology from the
University of Nebraska, an MBA from Southern Methodist University, and holds
three united States Patents.
Karen L. Hawkins. Ms.
Hawkins has served Optex Systems Holdings as its Vice President, Finance and
Controller, since the date of the reorganization, March 30, 2009 and was the
controller of Optex Systems, Inc. (Delaware), effective September 28, 2009. She
began her employment with Optex Systems, Inc. (Texas) in April 2007. Ms. Hawkins
is a Certified Public Accountant since 1992 with over 22 years experience in
Financial Accounting and Management, primarily focused in the Defense and
Transportation Industries. She has a strong background in both Financial &
Cost Accounting, with extensive Government Pricing, Financial Analysis, and
Internal Auditing experience. Her past history also includes Program Management,
Materials Management and Business Development. She brings over 14 years direct
experience in Government Contracting with a strong knowledge of Cost Accounting
Standards Board and Federal Acquisition Regulation. Her previous employment
includes General Dynamics – Ordinance and Tactical Division, Garland (formerly
known as Intercontinental Manufacturing) for over 13 years from November, 1994
through March , 2007. During her tenure there she served in the roles of
Controller (Accounting & IT), Program Manager over a $250M 3 year Army
Indefinite Delivery/Indefinite Quantity (Indefinite Delivery/Indefinite
Quantity) type contract, as well as Materials Manager with oversight of
Purchasing, Production Control & Warehousing functions. Prior to her
employment at General Dynamics, Ms. Hawkins served in various finance and
accounting positions at Luminator, a Mark IV Industries Co, and Johnson
Controls, Battery Division - Garland. Karen received her Bachelors in Business
Administration in Accounting from Stephen F. Austin State University in Texas in
1986.
Family
Relationships
There are
no family relationships among the officers and directors.
51
Code
of Ethics
Our board
of directors has adopted a Code of Ethics which has been distributed to all
directors, and executive officers, and will be distributed to employees and will
be given to new employees at the time of hire. The Financial Code of Ethics
contains a number of provisions that apply principally to our CEO, Chief
Financial Officer and other key accounting and financial personnel. A copy of
our Code of Business Conduct and Ethics can be found under the “Investor
Relations” section of our website (www.optexsys.com)
under the section for corporate governance. We also intend to disclose any
amendments or waivers of our Code on our website.
Board
and Committee Meetings
We are
incorporated under the laws of the State of Delaware. The interests of our
stockholders are represented by the board of directors, which oversees our
business and management.
The board
of directors meets regularly during the year and holds special meetings and acts
by unanimous written consent whenever circumstances require. The board held 4
meetings (including special meetings) and took action by unanimous written
consent 3 times during our fiscal year ended September 27, 2009.
If the
board of directors convenes a special meeting, the non-management directors meet
in executive session if circumstances warrant.
Board
Committees
At this
time, the board of directors currently has an Audit Committee, of which Ronald
Richards is the sole member, and we do not have a formal charter at this time
due to the size of the Committee but intend to adopt one at a future
date.
Board
nominations
Stockholders
wishing to bring a nomination for a director candidate before a stockholders
meeting must give written notice to our Corporate Secretary, either by personal
delivery or by United States mail, postage prepaid. The stockholder’s notice
must be received by the Corporate Secretary not later than (a) with respect to
an Annual Meeting of Stockholders, 90 days prior to the anniversary date of the
immediately preceding annual meeting, and (b) with respect to a special meeting
of stockholders for the election of directors, the close of business on the
tenth day following the date on which notice of the meeting is first given to
stockholders. The stockholder’s notice must set forth all information relating
to each person whom the stockholder proposes to nominate that is required to be
disclosed under applicable rules and regulations of the SEC, including the
written consent of the person proposed to be nominated to being named in the
proxy statement as a nominee and to serving as a director if elected. The
stockholder’s notice must also set forth as to the stockholder making the
nomination (i) the name and address of the stockholder, (ii) the number of
shares held by the stockholder, (iii) a representation that the stockholder is a
holder of record of stock of the Optex Systems Holdings, entitled to vote at the
meeting and intends to appear in person or by proxy at the meeting to nominate
the person named in the notice, and (iv) a description of all arrangements or
understandings between the stockholder and each nominee.
Stockholder
Communications with the Board of Directors
Stockholders
may communicate directly with the board of directors or any board member by
writing to them at Optex Systems Holdings, Inc., 1420 Presidential Drive,
Richardson, TX 75081. The outside of the envelope should prominently indicate
that the correspondence is intended for the board of directors or for a specific
director. The secretary will forward all such written communications to the
director to whom it is addressed or, if no director is specified, to the entire
board of directors.
Director
Attendance at Annual Meetings of Stockholders
We
encourage our directors to attend annual meetings, although such attendance is
not required.
52
Director
Compensation
See table
below under “Executive Compensation – Director Compensation.”
EXECUTIVE
COMPENSATION
Executive
Compensation
Summary
Compensation Table
The
following table sets forth, for the years indicated, all compensation paid,
distributed or accrued for services, including salary and bonus amounts,
rendered in all capacities by Optex Systems Holdings’ principal executive
officer, principal financial officer and all other executive officers who
received or are entitled to receive remuneration in excess of $100,000 during
the stated periods. These officers are referred to herein as the “named
executive officers.” Except as provided below, none of our executive officers
received annual compensation in excess of $100,000 during the last two fiscal
years.
|
Stock
|
Option
|
All Other
|
|||||||||||||||||||||||
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Total
|
||||||||||||||||||||
Name and Principal Position
|
Year
|
($)
|
($)
|
($)
|
($)(6)
|
($)
|
($)
|
|||||||||||||||||||
Stan
Hirschman, President (7)
|
2009
|
(5) |
-
|
-
|
-
|
-
|
25,000
|
25,000
|
||||||||||||||||||
2008
|
(5) |
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
Danny
Schoening, Chief
|
2009
|
$
|
182,932
|
$
|
11,000
|
$
|
-
|
$
|
10,588
|
$
|
$
|
204,520
|
||||||||||||||
Operating Officer (7) |
2008
|
(1,2) |
122,646
|
10,300
|
7,500
|
-
|
-
|
140,446
|
||||||||||||||||||
Karen
Hawkins, VP Finance /
|
2009
|
133,647
|
7,271
|
-
|
5,516
|
-
|
146,434
|
|||||||||||||||||||
Controller (7) |
2008
|
132,473
|
300
|
-
|
-
|
-
|
132,773
|
|||||||||||||||||||
2007
|
(1) |
56,900
|
300
|
-
|
-
|
-
|
57,200
|
|||||||||||||||||||
Andrey
Oks, CEO, CFO, Secretary, Treasurer and Director
|
2008
|
(3) |
-
|
-
|
10,000
|
-
|
-
|
10,000
|
||||||||||||||||||
Terry
Hughes, CEO
|
2007
|
(4) |
-
|
-
|
-
|
-
|
42,000
|
42,000
|
1
|
The compensation depicted is not
reflective of a full year’s compensation as Danny Schoening did not begin
employment until the second quarter of fiscal year 2008 and Karen Hawkins
did not begin employment until the third quarter of fiscal year 2007. For
Mr. Schoening and Ms. Hawkins, information is for service as an officer of
Optex Texas and Optex Delaware. Given the fact that there has not been a
change in fiscal year but rather adoption of the fiscal year of the
accounting acquirer, there has been no adjustment made to treat the period
since the change in fiscal year as a stub period, and all numbers
presented are for complete fiscal
years.
|
2
|
Stock awards include issues of
10,000 common shares of Irvine Sensors Common Stock on January 16, 2008 at
the then current market share price of $0.75 per
share.
|
3
|
Mr. Oks was appointed as an
officer of Sustut as of September 15, 2008 and resigned as of March 29,
2009. Mr. Oks was given 10,000,000 shares of restricted stock as
compensation for services which was forfeited to Sustut on the date of his
resignation.
|
4
|
Mr. Hughes served as an
officer of Sustut and resigned on September 12, 2008 and forfeited the
9,902,624 shares of Common Stock in Optex Systems Holdings he owned at
that time. He received no other compensation during 2008. In 2007 Mr.
Hughes received $42,500 in compensation, the nature of which is
unspecified.
|
5
|
Stanley Hirschman’s compensation
in 2009 consisted solely of $25,000 cash paid for Director’s Fees. He
received no other compensation Mr. Hirschman was not compensated for his
service in 2008, so this table does not include compensation amounts for
him for 2008.
|
53
6
|
The amounts in the “Option
awards” column reflect the dollar amounts recognized as the executive
portion of compensation expense for financial statement reporting purposes
for each named executive officer during fiscal 2009, as required by FASB
ASC 718 (prior authoritative literature SFAS 123(R)), disregarding any
estimates for forfeitures relating to service-based vesting conditions.
For the assumptions relating to these valuations, see note 12 to our
fiscal 2009 audited financial statements. Andrey Oks & Terry Hughes
were executives of Sustut Exploration, Inc. during the years 2007 and
2008, prior to the reverse merger on March 30, 2009. Concurrent with the
reverser merger and name change to Optex Systems Holdings, Inc on March
30, 2009 Optex Systems Holdings adopted the fiscal year end of the
accounting acquirer and changed the period end from December 31 to a
fiscal year end of September. There were no earnings of either of these
individuals subsequent to the reverse merger and adoption of the
accounting acquirers’ fiscal period. All compensation expense shown for
these individuals prior to the March 30, 2009 reorganization are depicted
in calendar years ending December 31, 2008 and December 31,
2007.
|
7
|
Danny Schoening, Karen Hawkins
and Stanley Hirschman were all executives of Optex Systems Holdings
subsequent to the March 30, reorganization. Prior to the reorganization
Danny Schoening and Karen Hawkins were executives of Optex Systems, Inc.
(Texas) and Optex Systems, Inc. (Delaware) and Stanley Hirschman became an
executive of Optex Systems, Inc. (Delaware) in September 2008. Both Optex
Systems, Inc. (Texas) and Optex Systems, Inc. (Delaware) had previously
been operating under an October through September fiscal year end and as
such, compensation for these individuals is depicted in fiscal years
beginning in October and ending in September for each of the years 2007
through 2009.
|
Option
Grants in Last Fiscal Year
The
following table sets forth information with respect to each grant of a plan
based award made to our named executive officers during the fiscal year ended
September 27, 2009. There were no options granted to any of the named
executive officers during the fiscal year ended September 28, 2008.
Fiscal
Year 2009 Grants of Plan-Based Awards
Name
|
Grant
Date
|
|
All Other
Option
Awards: No
of Securities
Underlying
Options
|
|
|
Equity Exercise
or Base Price of
Option Awards
($/Sh)
|
|
|
Grant Date
Fair Value of
Stock and
Option Awards
($)(3)
|
|
||||
Danny
Schoening (1)
|
3/30/2009
|
1,414,649
|
$
|
0.15
|
$
|
63,705
|
||||||||
Karen
Hawkins (2)
|
5/14/2009
|
250,000
|
$
|
0.15
|
$
|
63,910
|
|
(1)
|
On March 29, 2009 Danny Schoening
was awarded 1,414,649 options pursuant to his employment agreement with
vesting rights over three years on the anniversary date of the grant at
34%, 33% and 33% for each respective year. The options expire on March 28,
2016
|
(2)
|
On May 14, 2009 Karen Hawkins was
awarded 250,000 options pursuant to the equity compensation plan detailed
below. The options vest over four years on the anniversary date at 25% per
year respectively and expire on May 13,
2016.
|
(3)
|
Amounts represent the total grand
date fair value of stock options granted in fiscal year 2009 under FASB
ASC 718 (Prior authoritative literature: SFAS No. 123R). The assumptions
used by us with respect to the valuation of options are set forth in Note
12 to our fiscal 2009 audited financial
statements.
|
Employment
Agreement
Optex
Systems Holdings entered into an employment agreement with Danny Schoening dated
December 1, 2008. The term of the agreement commenced as of December 1, 2008 and
shall continue through June 1, 2010. Thereafter, the term of the agreement shall
be automatically extended for successive 18 month periods, unless Optex Systems
Holdings or Schoening shall provide a written notice of termination at least
ninety (90) days prior to the end of the initial term or any extended term, as
applicable. During the first eighteen months of the term of the agreement, Optex
Systems Holdings shall pay to Schoening a base salary at the annual rate of
$190,000. Schoening was paid a one time bonus of $10,000 at the commencement of
the employment agreement in December 2008 and was granted options to purchase
1,414,649 shares of common stock of Optex Systems Holdings at an exercise price
of $0.15 per share at the time of the closing of the
reorganization.
54
On each
renewal date of the commencement of employment, Schoening’s base salary shall be
reviewed by the Board and may be increased to such rate as the Board, in its
sole discretion, may hereafter from time to time determine. During the term of
the agreement, Schoening shall be entitled to receive bonuses of up to 30% of
his base salary per year at the discretion of Optex Systems Holdings’ Board of
Directors pursuant to performance objectives to be determined by the Board of
Directors. Any bonuses shall be payable in cash and shall be paid within ninety
(90) days of any year anniversary of the date of the agreement. Upon closing of
the reorganization, Optex Systems Holdings granted Schoening stock options equal
to 1% of the issued and outstanding shares of Optex Systems Holdings immediately
after giving effect to the reorganization, with 34% of the options vesting on
March 30, 2010, and 33% of the options vesting on each of March 31, 2011 and
March 31, 2012.
The
employment agreement contains the following events of termination: (i) death of
Mr. Schoening; (ii) termination by Optex Systems Holdings for cause (including
conviction of a felony, commission of fraudulent acts, willful misconduct by Mr.
Schoening, continued failure to perform duties after written notice, violation
of securities laws and breach of the employment agreement), (iii) termination
without cause by Optex Systems Holdings and (iv) termination by Mr. Schoening
for good reason (including breach by Optex Systems Holdings of its obligations
under the agreement, the requirement for Mr. Schoening to move more than 100
miles away for his employment without consent, and merger or consolidation that
results in more than 66% of the combined voting power of the then outstanding
securities of Optex Systems Holdings or its successor changing ownership or a
sale of all or substantially all of Optex Systems Holdings’ assets, without the
surviving entity assuming the obligations under the agreement). For a
termination by Optex Systems Holdings for cause or upon death of Mr. Schoening,
then Mr. Schoening shall be paid salary and bonus earned through the date of
termination. For a termination by Optex Systems Holdings without cause or by Mr.
Schoening with good reason, then Mr. Schoening shall also be paid six months
base salary in effect and all granted stock options shall remain exercisable for
a period of two years after such termination, with all unvested stock options
immediately vesting. The agreement contains a standard non-solicitation and
non-compete agreement that extends for one year following termination
thereof.
Optex
Systems Holdings does not have any other employment agreements with its
executive officers and directors.
Equity
Compensation Plan Information
Optex
Systems Holdings currently has an option compensation plan covering the issuance
of options for the purchase of up to 6,000,000 shares. The purpose of the Plan
is to assist Optex Systems Holdings in attracting and retaining highly competent
employees and to act as an incentive in motivating selected officers and other
employees of Optex Systems Holdings and its subsidiaries, and directors and
consultants of Optex Systems Holdings and its subsidiaries, to achieve long-term
corporate objectives. There are 6,000,000 shares of common stock reserved for
issuance under this Plan. As of September 27, 2009, Optex Systems Holdings had
issued 2,681,649 share options under this Plan of which zero shares had vested
as of September 27, 2009.
Outstanding
Equity Awards as of September 27, 2009
|
Option Awards
|
|
|
||||||||||||
|
|
Equity Incentive Plan Awards
|
|
|
|
|
|||||||||
Number of shares underlying unexercised o
ptions
|
|||||||||||||||
|
#
|
#
|
|
|
|
Exercise
|
|
Expiration
|
|
|
|||||
Name
|
Exercisable
|
Unexercisable
|
|
Unearned
|
|
Price
|
|
Date
|
Footnotes
|
|
|||||
Danny
Schoening
|
-
|
1,414,649
|
1,414,649
|
$
|
0.15
|
3/29/2016
|
(1)
|
|
|||||||
Karen
Hawkins
|
-
|
250,000
|
250,000
|
$
|
0.15
|
5/13/2016
|
(2)
|
|
55
|
(1)
|
Options
granted on March 30, 2009 pursuant to employment agreement and reverse
Merger. Shares vest over 3 years at a rate of 34%, 33% and 33% for each
respective anniversary date subsequent to 2009 and expire after seven
years. As of September 27, 2009 none of the options had
vested.
|
|
(2)
|
Options
granted on May 14, 2009 pursuant to employee stock option compensation
plan. Shares vest over 4 years at a rate of 25% per year each respective
anniversary date subsequent to 2009 and expire after seven years. As of
September 27, 2009 none of the options had
vested.
|
Nonqualified
deferred compensation
We had no
non-qualified deferred compensation plans during year ended September 27,
2009.
Director
Compensation
The
following table provides information regarding compensation paid to directors
for services rendered during the year ended September 27, 2009.
|
Fees
|
Non-Equity
|
Nonqualified
|
||||||||||||||||||||||||||
|
Earned or
|
Stock
|
Option
|
Incentive Plan
|
Deferred
|
All Other
|
|||||||||||||||||||||||
|
Paid in Cash
|
Awards
|
Awards
|
Compensation
|
Compensation
|
Compensation
|
|||||||||||||||||||||||
Name
|
($)
|
($)
|
($)
|
($)
|
Earnings ($)
|
($)
|
Total ($)
|
||||||||||||||||||||||
Ronald
Richards
|
(1)
|
$
|
100,000
|
-
|
-
|
-
|
-
|
-
|
$
|
100,000
|
|||||||||||||||||||
Stanley
Hirschman
|
(2)
|
25,000
|
-
|
-
|
-
|
-
|
-
|
25,000
|
|||||||||||||||||||||
Merrick
Okamoto
|
(3)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
(1)
|
Director Fees paid monthly from
December 2008 through September 2009. Ronald Richards is paid $2,500
monthly as an Independent Director, $2,500 monthly for serving as Chairman
of the Audit Committee, and $5,000 monthly for serving as Chairman of the
Board of Directors. Note that fees paid through March 29, 2009 were for
service as a director of Optex Systems, Inc. (Delaware) and that the
Director become a Director of Optex Systems Holdings on March 30,
2009.
|
|
(2)
|
Director Fees paid monthly from
December 2008 through September 2009. Stanley Hirschman is paid $2,500
monthly as a Director. Note that fees paid through March 29, 2009 were for
service as a director of Optex Systems, Inc. (Delaware) and that the
Director become a Director of Optex Systems Holdings on March 30,
2009.
|
|
(3)
|
Merrick Okamoto serves as a
non-independent director and does not earn directors
fees.
|
The
members of our board of directors are actively involved in various aspects of
our business ranging from relatively narrow board oversight functions to
providing hands-on guidance to our executives and scientific staff with respect
to matters within their personal experience and expertise. We believe that the
active involvement of all directors in our principal business and policy
decisions increases our board of directors’ understanding of our needs and
improves the overall quality of our management decisions.
All of
our directors are compensated separately for service as members of our board of
directors.
56
Nonqualified
deferred compensation
We had no
non-qualified deferred compensation plans during year ended September 27,
2009.
Post-Termination
Compensation
We have
not entered into change in control agreements with any of our named executive
officers or other members of the executive management team other than the
provision with respect to Mr. Schoening described above. However, our Board of
Directors has the full and exclusive power to interpret the plans, including the
power to accelerate the vesting of outstanding, unvested awards. A “change in
control” is generally defined as (1) the acquisition by any person of 30% or
more of the combined voting power of our outstanding securities or (2) the
occurrence of a transaction requiring stockholder approval and involving the
sale of all or substantially all of our assets or the merger of us with or into
another corporation.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On
July 20, 2010, we had 139,444,940
shares of common stock, and 1,027 shares of Series A
preferred stock issued and outstanding. The following table sets forth certain
information with respect to the beneficial ownership of our securities as of
July 20, 2010, for (i) each of our directors and executive officers; (ii) all of
our directors and executive officers as a group; and (iii) each person who we
know beneficially owns more than 5% of our common stock.
Beneficial
ownership data in the table has been calculated based on Commission rules that
require us to identify all securities that are exercisable for or convertible
into shares of our common stock within 60 days of July 20, 2010 and treat the underlying
stock as outstanding for the purpose of computing the percentage of ownership of
the holder.
Except as
indicated by the footnotes following the table, and subject to applicable
community property laws, each person identified in the table possesses sole
voting and investment power with respect to all capital stock held by that
person. The address of each named executive officer and director, unless
indicated otherwise by footnote, is c/o Optex Systems Holdings’ corporate
headquarters.
Except as
otherwise set forth below, the address of each of the persons listed below is
Optex Systems Holdings’ address.
Title of Class
Common
Stock
|
Name of Beneficial
Owner
|
|
Number of
Shares
|
|
|
Preferred
Conversion
(4)
|
|
|
Combined
Ownership
|
|
|
Percentage
of
Outstanding
Shares
|
|
|||||
5%
Holders
|
Arland
Holdings, Ltd. (1)
|
11,148,935
|
11,148,935
|
5.89
|
%
|
|||||||||||||
Sileas
Corporation (2,3)
|
102,184,347
|
37,040,000
|
139,224,347
|
73.52
|
%
|
|||||||||||||
|
|
|||||||||||||||||
Directors
and Officers:
|
Stanley
Hirschman (2)
|
102,184,347
|
37,040,000
|
139,224,347
|
73.52
|
%
|
||||||||||||
Danny
Schoening (5)
|
102,184,347
|
37,040,000
|
139,224,347
|
73.52
|
%
|
|||||||||||||
Karen
Hawkins
|
-
|
-
|
-
|
-
|
|
|||||||||||||
Ronald
Richards
|
-
|
-
|
-
|
-
|
||||||||||||||
Merrick
Okamoto(9)
|
1,950,000
|
-
|
1,950,000
|
1.40
|
%
|
|||||||||||||
Andrey
Oks (6)
|
-
|
-
|
-
|
-
|
||||||||||||||
Terry
Hughes (7)
|
-
|
-
|
-
|
-
|
||||||||||||||
Directors
and officers as a group (7 Individuals)
|
104,134,347
|
37,040,000
|
141,174,347
|
74.92
|
%
|
57
Title of Class
|
Name of Beneficial
Owner
|
|
Number of
Shares
|
|
Percentage
of
Outstanding
Shares
|
|||
Preferred
Stock
|
||||||||
5%
Holders
|
Sileas
Corporation (2,3)
|
926
|
90.0
|
%
|
||||
Alpha
Capital Anstalt (8)
|
101
|
10.0
|
%
|
1
|
Represents shares held by Arland
Holdings, Ltd., which is located at 551 5th Avenue, Suite 1601, New York,
NY 10176. Arie Rabinowitz has voting control over the shares held by
Arland Holdings, Ltd.
|
2
|
Represents shares held by Sileas
of which Stanley Hirschman, a Director/Officer Optex Systems Holdings, has
a controlling interest (80%); therefore, under Rule 13d-3 of the Exchange
Act, Mr. Hirschman is deemed to be the beneficial owner, along with Mr.
Schoening.
|
3
|
Sileas’ ownership interest in
Optex Systems Holdings has been pledged to Longview as security for a loan
in connection with the acquisition of Longview’s interests in Optex
Delaware by Sileas. Investment decisions for Longview are made by its
investment advisor, Viking Asset Management, LLC. Mr. Peter Benz is the
Chairman, Chief Executive Officer and a Managing Member of Viking Asset
Management and may be deemed to control its business activities, including
the investment activities of Longview. Mr. Merrick Okamoto who is a
director of Optex Systems Holdings is the President and a Managing Member
of Viking Asset Management and may be deemed to control its business
activities, including the investment activities of Longview. In the event
of a default by Sileas on its debt obligation to Longview, the shares held
by Sileas may be returned to Longview. Viking and Longview each may be
deemed to have shared voting and dispositive authority over the shares of
Optex Systems Holdings’ common stock if they are returned to Longview. In
such an event, Mr. Benz and Mr. Okamoto, as control persons of Viking
and/or Longview, may be deemed to beneficially own all such shares;
however, they have stated that they would disclaim such beneficial
ownership were this to
occur.
|
4
|
Represents shares of common stock
issuable upon conversion of preferred stock held by the stockholder.
Sileas Corporation holds 90% or 926 of the preferred shares which are
convertible into 37,040,000 common shares. Alpha Capital owns the
remaining 10% or 101 preferred shares convertible into 4,040,000 common
shares, representing less than 2.13% total beneficially
ownership.
|
5
|
Represents shares held by Sileas
of which Mr. Schoening, an Officer of Optex Systems Holdings, has a
controlling interest (15%); therefore, under Rule 13d-3 of the Exchange
Act, Mr. Schoening is deemed to be the beneficial owner, along with Mr.
Hirschman, of those shares.
|
6
|
Andrey Oks did not own any shares
subsequent to the reverse merger. Andrey Oks was given 10,000,000 shares
of restricted stock as compensation for services in 2008 as an executive
officer , which he forfeited on the date of his resignation on March 29,
2009.
|
7
|
Terry Hughes served as an officer
of Sustut and resigned on September 12, 2008 at which time he forfeited
9,902,624 shares of common shares he owned at the
time.
|
58
8
|
Represents shares held by
Alpha Capital Anstalt, which is located at Pradfant 7, 9490 Furstentums,
Vaduz, Lichtenstein. Konrad Ackerman has voting control and investment
power over the shares held by Alpha Capital
Anstalt.
|
9
|
Represents 975,000 shares of
Common Stock and 975,000 warrants held by Longview Fund, LP. Investment
decisions for Longview are made by its investment advisor, Viking Asset
Management, LLC. Mr. Merrick Okamoto who is a director of Optex
Systems Holdings is the President and a Managing Member of Viking Asset
Management and may be deemed to control its business activities, including
the investment activities of Longview. Mr. Okamoto, as a control person of
Viking and/or Longview, may be deemed to beneficially own all such shares;
however, he disclaims such beneficial
ownership.
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Relationship
between Optex Systems, Inc. (Texas), Irvine Sensors Corporation and Longview and
Alpha
Longview
and Alpha were owed certain debt by Irvine Sensors Corporation including debt
evidenced by (i) a December 29, 2006 Term Loan and Security Agreement executed
by Irvine Sensors Corporation and Longview and Alpha, and (ii) a series of
secured promissory notes purchased by them and issued to them on December 29,
2006, July 19, 2007 and November 28, 2007. As of August 24, 2008, the total
amount due under all of the described notes was approximately $18.4 million.
Optex Systems, Inc. (Texas), which was and is a wholly owned subsidiary of
Irvine Sensors Corporation, was a guarantor of all of those notes, and pursuant
to related security agreements Longview and Alpha had a validly perfected, fully
enforceable security interest in all personal property of Optex Systems, Inc.
(Texas). On September 19, 2008, pursuant to an Assignment and Stock/Note
Issuance Agreement, Alpha and Longview transferred and assigned to Optex
Systems, Inc. (Delaware) which assumed, $15 million of their respective
interests and rights in the aforesaid notes and obligations to Optex Systems,
Inc. (Delaware) in exchange for$9 million of equity and $6 million of
debt.
Acquisition
of Assets of Optex Systems, Inc. (Texas) by Optex Systems, Inc. (Delaware) on
October 14, 2008
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) purchased all of the assets of Optex
Systems, Inc. (Texas) in exchange for $15 million of Irvine Sensors Corporation
debt owned by it and the assumption of approximately $3.8 million of certain
Optex Systems, Inc. (Texas) liabilities. The $15 million of Irvine Sensors
Corporation debt was contributed by Longview and Alpha to Optex Systems, Inc.
(Delaware) in exchange for a $6 million note payable from Optex Systems, Inc.
(Delaware) and a $9 million equity interest in Optex Systems, Inc. (Delaware).
Longview and Alpha owned Optex Systems, Inc. (Delaware) until February 20, 2009,
when Longview sold 100% of its interests in Optex Systems, Inc. (Delaware) to
Sileas, as discussed below. In referring to these transactions, Optex Systems,
Inc. (Delaware) is considered to be the successor entity to Optex Systems, Inc.
(Texas), the predecessor entity.
Secured
Promissory Notes and Common Shares Issued in connection with Purchase by Optex
Systems, Inc. (Delaware)
In
connection with the public sale of the Optex Systems, Inc. (Texas) assets to
Optex Systems, Inc. (Delaware), Optex Systems, Inc. (Delaware) delivered to each
of Longview and Alpha a Secured Promissory Note due September 19, 2011 in the
principal amounts of $5,409,762 and $540,976, respectively. Each Note bears
simple interest at the rate of 6% per annum, and the interest rate upon an event
of default increases to 8% per annum. After 180 days from the issue date, the
principal amount of the Notes and accrued and unpaid interest thereon may be
converted into Optex Systems, Inc. (Delaware) common stock at a conversion price
of $1.80 per share (pre-split and pre-reorganization price). The Notes may be
redeemed prior to maturity at a price of 120% of the then outstanding principal
amount plus all accrued and unpaid interest thereon. The obligations of Optex
Systems, Inc. (Delaware) under the Notes are secured by a lien against all of
the assets of Optex Systems, Inc. (Delaware) in favor of Longview and Alpha. In
addition, Optex Systems, Inc. (Delaware) issued common stock to each of Longview
and Alpha in the quantities of 45,081,350 and 4,918,650, respectively. On
October 30, 2008, Alpha sold its Optex Systems, Inc. (Delaware) common stock to
Arland Holding, Ltd. On February 20, 2009, Longview sold its Note to Sileas (see
below).
59
Acquisition
by Sileas of Longview’s Interests in Optex Systems, Inc. (Delaware) on February
20, 2009
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc. (Delaware), in a private
transaction. The primary reason for the acquisition was to eliminate shareholder
control of Optex Systems Holdings by Longview and to limit any perception of
control over the day-to-day operations of Optex Systems Holdings, whether or not
such control actually existed. While Longview makes investments in a variety of
companies, it strives to invest passively and leave the day-to-day operations of
the companies in its investment portfolio to the management teams of those
companies. In addition, the acquisition allowed Optex Systems Holdings to avoid
potential conflicts of interest or other related business issues that might have
adversely affected Optex Systems Holdings’ operations as a result of Longview’s
investments in other companies.
The
purchase price for the acquisition was $13,524,405. Sileas issued a purchase
money note to Longview for the full amount of the purchase price in exchange for
45,081,350 shares of common stock of Optex Systems Holdings (representing 90% of
the outstanding shares) and transfer to Sileas of a note dated December 2, 2008,
issued by Optex Systems Holdings to Longview in the principal amount of
$5,409,762. No contingent consideration is due the seller in the transaction.
The obligations of Sileas under the Note are secured by a security interest in
Optex Systems Holdings’ common and preferred stock owned by Sileas that was
granted to Longview pursuant to a Stock Pledge Agreement delivered by Sileas to
Longview and also by a lien on all of the assets of Sileas. On March 27, 2009,
Sileas and Alpha (which owned the balance of the $6,000,000 of the notes)
exchanged the $6,000,000 aggregate principal amount of notes, plus accrued and
unpaid interest thereon, for 1,027 shares of Optex Systems, Inc. (Delaware)
Series A preferred stock.
Sileas
has no operations or business activities other than holding the stock and notes
described above and has no revenues, and it holds no assets other than the stock
and notes described above. The management of Sileas believes that the value of
its common stock and preferred stock holdings in Optex Systems Holdings will
increase over time. Sileas plans to repay Longview, no later than the maturity
date, through some combination of a recapitalization of Sileas equity and debt
and partial or full liquidation of its interests in Optex Systems Holdings.
Sileas will be limited by the extent of the stock price of Optex Systems
Holdings and limitations on ability to resell the stock it owns in Optex Systems
Holdings.
Secured
Promissory Note Due February 20, 2012/Longview Fund, LP
As a
result of the transaction described above between Sileas and Longview on
February 20, 2009, Sileas, the new majority owner of Optex Systems, Inc.
(Delaware), executed and delivered to Longview, a Secured Promissory Note due
February 20, 2012 in the principal amount of $13,524,405. The Note bears simple
interest at the rate of 4% per annum, and the interest rate upon an event of
default increases to 10% per annum. In the event that a Major
Transaction occurs prior to the maturity date resulting in the Borrower
receiving Net Consideration with a fair market value in excess of the principal
and interest due under the terms of this Secured Note, then in addition to
paying the principal and interest due, Sileas shall also pay an amount equal to
90% of the consideration. “Major Transaction” refers to a transaction whereby
Optex Systems, Inc. (Delaware) would consolidate or merge into or sell or convey
all or substantially all of its assets to a third party entity for more than
nominal consideration, and “Net Consideration” refers to the fair market value
of the consideration received in connection with a Major Transaction less all
outstanding liabilities of Optex Systems, Inc. (Delaware).
60
Reorganization/Share
Exchange
On March
30, 2009, a reorganization occurred whereby the then existing shareholders of
Optex Systems, Inc. (Delaware) exchanged their shares of common stock with the
shares of common stock of Optex Systems Holdings as follows: (i) the
outstanding 85,000,000 shares of Optex Systems, Inc. (Delaware) common stock
were exchanged by Optex Systems Holdings for 113,333,282 shares of Optex Systems
Holdings common stock, (ii) the outstanding 1,027 shares of Optex Systems, Inc.
(Delaware) Series A preferred stock were exchanged by Optex Systems Holdings for
1,027 shares of Optex Systems Holdings Series A preferred stock and (iii) the
8,131,667 shares of Optex Systems, Inc. (Delaware) common stock purchased in the
private placement, which also occurred on March 30, 2009, were exchanged by
Optex Systems Holdings for 8,131,667 shares of Optex Systems Holdings common
stock. The per share price in the private placement was $0.15 per share of
common stock, and the closing date was March 30, 2009. Optex Systems, Inc.
(Delaware) remains a wholly-owned subsidiary of Optex Systems
Holdings.
At the
time of the reorganization, 25,000,000 shares owned by Andrey Oks, the former
CEO of Optex Systems Holdings, were cancelled. Immediately prior to the closing,
17,449,991 shares of Optex Systems Holdings common stock were outstanding. The
17,449,991 shares derives from the 17,999,995 shares outstanding as of December
31, 2008 plus the 26,999,996 shares issued in conjunction with the 2.5:1 forward
stock split authorized by the Sustut Board and shareholders and effected on
February 27, 2009 less retirement of Andrey Oks’ 25,000,000 shares and
cancellation of 3,800,000 shares previously issued to Newbridge Securities
Corporation, shares plus issuance of 1,250,000 shares in payment for two
investor relations agreements. The total outstanding common shares of Optex
Systems Holdings subsequent to the closing of the reorganization is as
follows:
Existing
Sustut Shareholders
|
17,449,991
|
|||
Optex
Systems, Inc. (Delaware) shares exchanged
|
113,333,282
|
|||
Optex
Systems, Inc. (Delaware) Private Placement shares
exchanged
|
8,131,667
|
|||
Total
Shares after reorganization
|
138,914,940
|
|||
Cancellation
of shares - American Capital Ventures
|
(700,000
|
)
|
||
Private
placement - June 29, 2009
|
750,000
|
|||
Issuance
of shares as consideration - ZA Consulting
|
480,000
|
|||
Shares
Outstanding on September 27, 2009
|
139,444,940
|
Short Term Note Payable/Longview
Fund - On
September 23, 2008 Optex Systems, Inc. (Texas) borrowed $146,709 from Longview
and issued a promissory note dated September 23, 2008, to Longview in connection
therewith. The September 23, 2008 Note bears interest at the rate of 10% per
annum with interest accruing until the maturity date of the September 23, 2008
Note, which was originally set as November 7, 2008. On March 30, 2009 in
conjunction with the reorganization and Private Placement, Longview purchased
3.25 units of the Private Placement using $146,250 of the amount due under the
Note as consideration for the purchase. The outstanding balance related to the
original note issue of $459 plus $11,101 of accrued interest was paid in
September 2009.
On
October 27, 2009, Optex Systems Holdings borrowed $250,000 from Longview on an
unsecured basis pursuant to a promissory note, which originally expired on
December 1, 2009, but was extended until July 15, 2010. The note bears interest
at the rate of 10% per annum, and all accrued and unpaid interest will be due
upon maturity. Optex will make a prepayment equal to 50% of the then outstanding
principal amount plus accrued and unpaid interest thereon upon the closing of a
credit facility or other equity or debt financing from which the net proceeds
are at least $900,000.
In
exchange for the extension, Optex Systems Holdings granted Longview a warrant to
purchase 100,000 shares of restricted common stock with an exercise price of
$0.15 per share and a term of three years. On March 22, 2010, Optex
Systems Holdings repaid $125,000 in principal plus $10,000 in accrued interest
on the outstanding Longview note. On June 4, 2010, Optex Systems
Holdings paid off the remaining principal balance and all accrued and unpaid
interest thereon.
61
Transactions
with Executive Management
See the
“Executive Compensation” section for a discussion of the material elements of
compensation awarded to, earned by or paid to our named executive officers.
Other than as stated in the “Executive Compensation” section, we have not
entered into any transactions with executive management.
THE
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
This
prospectus covers 11,784,177 shares of common stock held by the selling
stockholders pursuant to the registration obligations of certain subscription
agreements of Optex Systems, Inc. (Delaware), which were assumed by Optex
Systems Holdings (for which all consideration owed was received by us on March
30, 2009) with the selling stockholders in order to permit the resale of these
shares of common stock by the selling stockholders from time to time after the
date of this prospectus. After completion of the offering, if all shares
registered are sold, the selling stockholders will hold shares of our common
stock, upon exercise of their warrants, as stated. We will not receive any of
the proceeds from the sale by the selling stockholders of the shares of common
stock covered by this prospectus. We will bear all fees and expenses incident to
our obligation to register the shares of common stock.
|
Name of Selling Stockholder (18)
|
|
Amount
beneficially owned
by Selling
Stockholder
|
|
Amount to be
offered to Selling
Stockholder's
Account
|
|
Amount to be
beneficially owned
following
completion of
offering
|
|
Percent to be
beneficially owned
following
completion of the
offering
|
|
||||||
(1)
|
Albert
& Diane Gragnani
|
1,200,000
|
869,504 (600,000 shares of common
stock and 269,504 shares underlying
warrants)
|
330,496
|
0.17
|
%
|
||||||||||
(2)
|
Curio
Holdings
|
600,000
|
434,751(300,000
shares of common
stock
and 134,751 shares underlying
warrants)
|
165,249
|
0.09
|
%
|
||||||||||
(3)
|
Daniel
McDonald
|
300,000
|
217,377
(150,000 shares of common
stock
and 67,377 shares underlying
warrants)
|
82,623
|
0.04
|
%
|
||||||||||
(4)
|
Eric
Samuelson
|
1,500,000
|
1,086,878
(750,000 shares of common
stock
and 336,878 shares underlying
warrants)
|
413,122
|
0.22
|
%
|
||||||||||
(5)
|
George
Gummow
|
600,000
|
434,751
(300,000 shares of common
stock
and 134,751 shares underlying
warrants)
|
165,249
|
0.09
|
%
|
||||||||||
(6)
|
Gerald
Berkson
|
453,334
|
328,479(226,667
shares of common
stock
and 101,812 shares underlying
warrants)
|
124,855
|
0.07
|
%
|
||||||||||
(7)
|
Gerald
Holland
|
600,000
|
434,751
(300,000 shares of common
stock
and 134,751 shares underlying
warrants)
|
165,249
|
0.09
|
%
|
||||||||||
(8)
|
Kenneth
and Irene Chaffin
|
300,000
|
217,376
(150,000 shares of common
stock
and 67,376 shares underlying
warrants)
|
82,624
|
0.04
|
%
|
||||||||||
(9)
|
Lee
Stambollis
|
360,000
|
260,851
(180,000 shares of common
stock
and 80,851 shares underlying
warrants)
|
99,149
|
0.05
|
%
|
||||||||||
(10),
(19)
|
Longview
Fund, LP
|
1,950,000
|
1,412,942
(975,000 shares of common
stock
and 437,942 shares underlying
warrants)
|
537,058
|
0.28
|
%
|
||||||||||
(11)
|
Michael
Peter Lee
|
600,000
|
434,751
(300,000 shares of common
stock
and 134,751 shares underlying
warrants)
|
165,249
|
0.09
|
%
|
||||||||||
(12)
|
Robert
E. Kraemer
|
600,000
|
434,751
(300,000 shares of common
stock
and 134,751 shares underlying
warrants)
|
165,249
|
0.09
|
%
|
||||||||||
(13)
|
Somasundaram
Ilangovan
|
600,000
|
434,751
(300,000 shares of common
stock
and 134,751 shares underlying
warrants)
|
165,249
|
0.09
|
%
|
||||||||||
(14)
|
Victor
M. Dandridge III
|
1,800,000
|
1,304,254
(900,000 shares of common
stock
and 404,254 shares underlying
warrants)
|
495,746
|
0.26
|
%
|
||||||||||
(15)
|
George
Warburton
|
3,600,000
|
2,608,508
(1,800,000 shares of common
stock
and 808,508 shares underlying
warrants)
|
991,492
|
0.52
|
%
|
||||||||||
(16)
|
Dr.
Marc Medway
|
600,000
|
434,751
(300,000 shares of common
stock
and 134,751 shares underlying
warrants)
|
165,249
|
0.09
|
%
|
||||||||||
(17)
|
Michael
R. Ruffer
|
600,000
|
434,751
(300,000 shares of common
stock
and 134,751 shares underlying
warrants)
|
165,249
|
0.09
|
%
|
||||||||||
Total
|
16,263,334
|
11,784,177 (8131,667 shares of common
stock and 3,652,510 shares underlying
warrants)
|
4,479,157
|
2.33
|
%
|
62
(1)
|
Consists of 600,000 common shares
outstanding and 600,000 warrants exercisable within 60 days of May 12,
2009. The address for Albert & Diane Gragnani is 478 Country Club Dr.
San Francisco, CA 94132.
|
(2)
|
300,000 common shares outstanding
and 300,000 warrants exercisable within 60 days of May 12, 2009 The
address for Curio Holding, Inc. is 1630 York Avenue, New York, NY 10028,
of which the sole stockholder is Inge L. Kerster, with the same address,
who exercises voting and investment control with respect to shares of
common stock held by that selling
stockholder.
|
(3)
|
Consists of 150,000 common shares
outstanding and 150,000 warrants exercisable within 60 days of May 12,
2009. The address for Daniel McDonald is 2615 Silverton Rd. Salem, OR
97303.
|
(4)
|
Consists of 750,000 common shares
outstanding and 750,000 warrants exercisable within 60 days of May 12,
2009. The address for Eric Samuelson is Rear 320 South Clairmont
Springfield, OH 45505.
|
(5)
|
Consists of 300,000 common shares
outstanding and 300,000 warrants exercisable within 60 days of May 12,
2009. The address for George Gummow is 14821 Bartlett Ct. San Martin, CA
95046.
|
(6)
|
Consists of 226,667 common shares
outstanding and 226,667 warrants exercisable within 60 days of May 12,
2009. The address for Gerald Berkson is 2222 Springfield Way San Mateo, CA
94403.
|
(7)
|
Consists of 300,000 common shares
outstanding and 300,000 warrants exercisable within 60 days of May 12,
2009. The address for Gerald Holland is 3231 NE 59th St. Fort Lauderdale,
FL 33308,
|
(8)
|
Consists of 150,000 common shares
outstanding and 150,000 warrants exercisable within 60 days of May 12,
2009. The address for Kenneth and Irene Chaffin is 915 N. Road I West
Chino Valley, AZ 86323.
|
(9)
|
Consists of 180,000 common shares
outstanding and 180,000 warrants exercisable within 60 days of May 12,
2009. The address for Lee Stambollis is 300 26th Ave. San Mateo, CA
94403.
|
(10)
|
Consists of 975,000 common shares
outstanding and 975,000 warrants exercisable within 60 days of May 12,
2009. The address of Longview Fund, L.P. is c/o Viking Asset Management,
505 Sansome Street, Suite 1275, San Francisco, CA 94111. Investment
decisions for Longview are made by its investment advisor, Viking Asset
Management, LLC. Mr. Peter Benz is the Chairman, Chief Executive Officer
and a Managing Member of Viking Asset Management and may be deemed to
control its business activities, including the investment activities of
Longview. Mr. Merrick Okamoto who is a director of Optex Systems Holdings
is the President and a Managing Member of Viking Asset Management and may
be deemed to control its business activities, including the investment
activities of Longview. Mr. Benz and Mr. Okamoto, as control
persons of Viking and/or Longview, may be deemed to beneficially own all
such shares; however, they disclaim such beneficial
ownership.
|
(11)
|
Consists of 300,000 common shares
outstanding and 300,000 warrants exercisable within 60 days of May 12,
2009. The address for Michael Peter Lee is Redwood House, Lodge Gardens,
Great Carlton, South Lincolnshire LN11.8JY U.
K.
|
(12)
|
Consists of 300,000 common shares
outstanding and 300,000 warrants exercisable within 60 days of May 12,
2009. The address for Robert E. Kraemer is N6816 St RD 79 Menomonie, WI
54751.
|
(13)
|
Consists of 300,000 common shares
outstanding and 300,000 warrants exercisable within 60 days of May 12,
2009. The address for Somasundaram Ilangovan is 229 Sydney Road Holland,
PA 18966.
|
(14)
|
Consists of 900,000 common shares
outstanding and 900,000 warrants exercisable within 60 days of May 12,
2009. The address for Victor M. Dandridge III is 695 Berkmar Court
Charlottesville, VA
22901.
|
63
(15)
|
Consists of 1,800,000 common
shares outstanding and 1,800,000 warrants exercisable within 60 days of
May 12, 2009. The address for George Warburton is 19 The Citadel Fort
George St. Peter Port Guernsey
GY125X.
|
(16)
|
Consists of 300,000 common shares
outstanding and 300,000 warrants exercisable within 60 days of May 12,
2009. The address for Dr. Marc Medway is 506 Hobby Horse Hills Ambler, PA
19002.
|
(17)
|
Consists of 300,000 common shares
outstanding and 300,000 warrants exercisable within 60 days of May 12,
2009. The address for Michael R. Ruffer is 11809 Lyrac Ct Oakton, VA
22124.
|
(18)
|
All of the securities listed in
this table were purchased as of March 30, 2009 when Optex Systems Holdings
accepted subscriptions from accredited investors for a total 27.1 units
for $45,000.00 per unit, with each unit consisting of Three Hundred
Thousand (300,000) shares of common stock, no par value of Optex Systems
Holdings and warrants to purchase Three Hundred Thousand (300,000) shares
of common stock at an exercise price of $0.45 per share for a period of
five (5) years from the date of
closing.
|
(19)
|
Sileas Corporation currently owns
102,184,347 shares of common stock and 926 shares of preferred stock
convertible into 37,040,000 shares of common stock. This ownership
interest in the Company held by Sileas has been pledged to Longview as
security for a loan in connection with the acquisition of Longview’s
interests in Optex Systems, Inc. (Delaware) by Sileas. Investment
decisions for Longview are made by its investment advisor, Viking Asset
Management, LLC. Mr. Peter Benz is the Chairman, Chief Executive Officer
and a Managing Member of Viking Asset Management and may be deemed to
control its business activities, including the investment activities of
Longview. Mr. Merrick Okamoto who is a director of Optex Systems Holdings
is the President and a Managing Member of Viking Asset Management and may
be deemed to control its business activities, including the investment
activities of Longview. In the event of a default by Sileas on its debt
obligation to Longview, the shares held by Sileas may be returned to
Longview. Viking and Longview each may be deemed to have shared voting and
dispositive authority over the shares of Optex Systems Holdings’ common
stock if they are returned to Longview. Mr. Benz and Mr. Okamoto, as
control persons of Viking and/or Longview, may be deemed to beneficially
own all such shares; however, they disclaim such beneficial
ownership.
|
The
selling stockholders may sell all or a portion of the shares of common stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. The shares of common
stock may be sold in one or more transactions at fixed prices, at prevailing
market prices at the time of the sale, at varying prices determined at the time
of sale, or at negotiated prices. These sales may be effected in transactions,
which may involve crosses or block transactions:
|
·
|
to purchasers
directly;
|
|
·
|
in ordinary brokerage
transactions and transactions in which the broker solicits
purchasers;
|
|
·
|
through underwriters or dealers
who may receive compensation in the form of underwriting discounts,
concessions or commissions from such stockholders or from the purchasers
of the securities for whom they may act as
agent;
|
|
·
|
by the pledge of the shares as
security for any loan or obligation, including pledges to brokers or
dealers who may effect distribution of the shares or interests in such
securities;
|
|
·
|
to purchasers by a broker or
dealer as principal and resale by such broker or dealer for its own
account pursuant to this
prospectus;
|
|
·
|
in a block trade in which the
broker or dealer so engaged will attempt to sell the securities as agent
but may position and resell a portion of the block as principal to
facilitate a
transaction;
|
64
|
·
|
through an exchange distribution
in accordance with the rules of the exchange or in transactions in the
over-the-counter market;
|
|
·
|
pursuant to Rule 144;
or
|
|
·
|
in any other manner not
proscribed by law.
|
If the
selling stockholders effect such transactions by selling shares of common stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of the shares of common stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of
the shares of common stock or otherwise, the selling stockholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in positions they
assume. If the selling stockholders enter into an agreement to sell their shares
to a broker-dealer and such broker-dealer is acting as an underwriter, we will
file a post-effective amendment to the registration statement of which this
prospectus forms a part for the purpose of updating this disclosure with respect
to such broker-dealer and its related plan of distribution. The selling
stockholders may also sell shares of common stock short and deliver shares of
common stock covered by this prospectus to close out short positions. The
selling stockholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
The
selling stockholders and any broker-dealer participating in the distribution of
the shares of common stock may be deemed to be “underwriters” within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act.
We have
advised the selling stockholders that under current interpretations they may not
use shares registered on this registration statement to cover short sales of our
common stock made prior to the date on which this registration statement shall
have been declared effective by the Commission. If the selling stockholders use
this prospectus for any sale of our common stock, it will be subject to the
prospectus delivery requirements of the Securities Act.
The
selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
shares of common stock by the selling stockholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in the
distribution of the shares of common stock to engage in market-making activities
with respect to the shares of common stock. All of the foregoing may affect the
marketability of the shares of common stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
common stock.
Optex
Systems Holdings has agreed to indemnify the selling stockholders against (i)
any untrue statement of a material fact contained in any registration statement
filed by Optex Systems Holdings on behalf of the selling stockholders, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission to state therein a material
fact required to be stated therein, or necessary to make the statements therein
not misleading, or (iii) any violation by Optex Systems Holdings of the
Securities Act, the Exchange Act, or any rule or regulation promulgated under
the Securities Act, or the Exchange Act made by Optex Systems Holdings in
connection therewith.
Once sold
under the registration statement, of which this prospectus forms a part, the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
65
There can
be no assurance that the selling stockholders will sell any or all of the shares
of common stock registered pursuant to the registration statement, of which this
prospectus forms a part.
Our
common stock is quoted on the OTCBB under the symbol “OPXS.OB”.
DESCRIPTION
OF SECURITIES
Optex
Systems Holdings is authorized to issue 200,000,000 shares of common stock and
5,000 shares of preferred stock of which 1,027 shares are designated as Series A
preferred stock. As of July 20, 2010, there were 139,444,940
shares of common stock issued and outstanding and 1,027 Series A preferred stock
issued and outstanding.
Common
Stock
The
holders of common stock are entitled to one vote per share. The holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of legally available funds. However, the
current policy of the board of directors is to retain earnings, if any, for
operations and growth. Upon liquidation, dissolution or winding-up, the holders
of common stock are entitled to share ratably in all assets that are legally
available for distribution. The holders of common stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of any series of preferred stock, which
may be designated solely by action of the board of directors and issued in the
future.
Preferred
Stock
Series
A preferred stock
On March
24, 2009, Optex Systems Holdings filed a Certificate of Designation with the
Secretary of State of the State of Delaware authorizing a series of preferred
stock, under its articles of incorporation, known as “Series A preferred stock”.
This Certificate of Designation was approved by Optex Systems Holdings’ Board of
Directors and Shareholders at a Board Meeting and Shareholders Meeting held on
February 25, 2009. The Certificate of Designation sets forth the following terms
for the Series A preferred stock as described in the table below.
Authorized
Shares:
|
1,027
|
|
Per
Share Stated Value:
|
$6,000
|
|
Liquidation
Preference:
|
Per
share stated value
|
|
Conversion
Price into common stock:
|
$0.15
per share, as adjusted on a pro rata basis for stock splits, dividends,
combinations or reclassifications and on a full ratchet basis for equity
issuances at a price less than the then in effect exercise
price.
|
|
Voting
Rights:
|
The
Series A preferred shares shall vote along with the common stock on an as
converted basis and shall have one vote per share.
|
|
Dividends:
|
6%
per annum payable quarterly payable quarterly in
arrears.
|
66
Stock
Options
As of the
date of this prospectus, we have 2,681,649 outstanding
stock options that represent potential future cash proceeds to our company of
$402,247. Optex Systems Holdings granted an officer at the consummation of the
reorganization, 1,414,649 options, on March 29, 2009 with an exercise price of
$0.15 per share, vesting as follows: 34% of the options vesting one year
following the date of grant, and 33% vesting on each of the second and third
anniversaries following the date of grant. On May 14, 2009,Optex Systems
Holdings issued 1,267,000 share options to its employees with an exercise price
of $0.15 per share and vesting equally at 25% per year at the end of each
service year for four years. The holders of options are not required
to exercise their rights at any time and we are unable to predict the amount and
timing of any future option exercises. We reserve the right to temporarily
reduce the exercise prices of our options from time to time in order to
encourage the early exercise of the options. As of the date of this
prospectus, none of the stock options had vested.
Delaware
Anti-takeover Statute
We are
subject to the provisions of section 203 of the Delaware General Corporation Law
regulating corporate takeovers. In general, those provisions prohibit a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder, unless:
|
·
|
the transaction is approved by
the board of directors before the date the interested stockholder attained
that status;
|
|
·
|
upon consummation of the
transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced; or
|
|
·
|
on or after the date the business
combination is approved by the board of directors and authorized at a
meeting of stockholders by at least two-thirds of the outstanding voting
stock that is not owned by the interested
stockholder.
|
Section
203 defines “business combination” to include the following:
|
·
|
any merger or consolidation
involving the corporation and the interested
stockholder;
|
|
·
|
any sale, transfer, pledge or
other disposition of 10% or more of the assets of the corporation
involving the interested
stockholder;
|
|
·
|
subject to certain exceptions,
any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
|
|
·
|
any transaction involving the
corporation that has the effect of increasing the proportionate share of
the stock of any class or series of the corporation beneficially owned by
the interested stockholder;
or
|
|
·
|
the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the
corporation.
|
In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
A
Delaware corporation may opt out of this provision either with an express
provision in its certificate of incorporation or bylaws approved by its
stockholders. However, we have not opted out, and do not currently intend to opt
out, of this provision. The statute could prohibit or delay mergers or other
takeover or change in control attempts and, accordingly, may discourage attempts
to acquire us.
67
Certificate
of Incorporation and By-laws
Our
Certificate of Incorporation and by-laws include provisions that may have the
effect of delaying or preventing a change of control or changes in our
management. These provisions include:
|
·
|
the right of the board of
directors to elect a director to fill a vacancy created by the resignation
of a director or the expansion of the board of
directors;
|
|
·
|
the requirement for advance
notice for nominations of candidates for election to the board of
directors or for proposing matters that can be acted upon at a
stockholders’ meeting (as set forth in Article II Section IV of the Bylaws
which require notice to be given least ten (10) and not more than sixty
(60) days prior to each meeting, and notice of each special meeting shall
also state the purpose or purposes for which it has been called);
and
|
|
·
|
the right of our board of
directors to alter our bylaws without stockholder
approval.
|
Also
pursuant to the reorganization, we amended our bylaws which provided for a
fiscal year end on December 31 to a fiscal year ending on the Sunday nearest
September 30.
Transfer
Agent
Our
transfer agent is American Registrar & Transfer Co., 342 East 900 South,
Salt Lake City, UT 84111.
LEGAL
MATTERS
The
legality of the shares of common stock offered by this prospectus will be passed
upon for us by Jolie Kahn, Esq. of New York, NY.
EXPERTS
The
financial statements as of September 27, 2009 and September 28, 2008 included in
this prospectus have been so included in reliance on the report of EFP
Rotenberg, LLP successor to Rotenberg & Co. LLP, an independent registered
public accounting firm, given on the authority of said firm as experts in
accounting and auditing.
On
October 8, 2009, Optex Systems Holdings received notice that its current
auditors, Rotenberg and Co., LLP, had resigned in connection with their merger
with EFP Group, which was effective as of October 1, 2009. Optex
Systems Holdings has engaged the new firm resulting from the merger, EFP
Rotenberg, LLP, to continue as Optex Systems Holdings' independent registered
public accounting firm. All of the partners and employees of
Rotenberg and Co., LLP and EFP Group have joined the new firm, EFP Rotenberg,
LLP. EFP Rotenberg, LLP is currently registered with the
PCAOB.
Rotenberg
and Co., LLP was engaged by Optex Systems Holdings on March 30, 2009 and has
performed reviews for the quarters ended March 29, 2009 and June 28,
2009. Rotenberg and Co., LLP has not performed any audit services or
rendered any audit report from the time of its engagement through the date of
cessation of the client-auditor relationship on October 1,
2009. There have been no disagreements with Rotenberg and Co. LLP or
reportable events since the date of their engagement on March 30, 2009 through
the date of cessation of the client-auditor relationship on October 1,
2009.
On
October 17, 2009, with the approval of Optex Systems Holdings’ Board of
Directors, EFP Rotenberg, LLP was engaged as Optex Systems Holdings’ independent
registered public accountant effective concurrent with the
merger. Prior to such engagement, during the two most recent fiscal
years, Optex Systems Holdings had not consulted with EFP Rotenberg, LLP on any
matter.
68
Optex
Systems Holdings provided Rotenberg and Co., LLP with a copy of the disclosure
relating to this change in its certifying accountant and requested that
Rotenberg and Co., LLP furnish Optex Systems Holdings with a letter addressed to
the Securities and Exchange Commission stating whether it agrees with the above
statements and, if it does not agree, the respects in which it does not agree, a
copy of which is filed as Exhibit 16.1 to the Registration Statement of which
this prospectus is a part.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed a registration statement on Form S-1 with the Commission with respect to
this offering. This prospectus, which is part of the registration statement,
does not include all of the information contained in the registration statement.
You should refer to the registration statement and its exhibits and schedules
for additional information. Whenever we make reference in this prospectus to any
of our contracts, agreements or other documents, the references are not
necessarily complete and you should refer to the exhibits and schedules attached
to the registration statement for copies of the actual contract, agreement or
other document.
We also
file annual, quarterly and current reports, proxy statements and other documents
with the Commission under the Exchange Act. You may read and copy any materials
that we may file without charge at the Commission’s Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. You may call the Commission at
1-800-SEC-0330 for further information on the operation of the Public Reference
Room. You may obtain copies of the documents at prescribed rates by writing to
the Public Reference Section of the Commission at 100 F Street, N.E.,
Washington, D.C. 20549. The Commission also maintains an Internet site,
http://www.sec.gov, which contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission. The other information we file with the Commission is not part of the
registration statement of which this prospectus forms a part.
69
OPTEX
SYSTEMS HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF
MARCH 28, 2010
BALANCE
SHEETS AS OF MARCH 28, 2010 (SUCCESSOR) (UNAUDITED) AND SEPTEMBER 27,
2009 (SUCCESSOR)
|
F-2
|
STATEMENTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 28, 2010
(SUCCESSOR) AND THE THREE MONTHS ENDED MARCH 29, 2009 (SUCCESSOR) AND FOR
THE PERIOD OCTOBER 15, 2008 THROUGH MARCH 29, 2009 (SUCCESSOR) AND FOR THE
PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008 (PREDECESSOR)
(UNAUDITED)
|
F-4
|
STATEMENTS
OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 28, 2010
(SUCCESSOR) AND FOR THE PERIOD OCTOBER 15, 2008 THROUGH MARCH 29, 2009
(SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008
(PREDECESSOR) (UNAUDITED)
|
F-5
|
FINANCIAL
STATEMENT FOOTNOTES (UNAUDITED)
|
F-7
|
F-1
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Balance Sheets
Successor
|
Successor
|
|||||||
March 28, 2010
(Unaudited)
|
September 27,
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 897,110 | $ | 915,298 | ||||
Accounts
Receivable
|
2,454,725 | 1,802,429 | ||||||
Net
Inventory
|
7,713,021 | 8,013,881 | ||||||
Deferred
Tax Asset
|
785,034 | 711,177 | ||||||
Prepaid
Expenses
|
340,726 | 318,833 | ||||||
Total
Current Assets
|
$ | 12,190,616 | $ | 11,761,618 | ||||
Property
and Equipment
|
||||||||
Property
Plant and Equipment
|
$ | 1,347,537 | $ | 1,341,271 | ||||
Accumulated
Depreciation
|
(1,129,119 | ) | (1,094,526 | ) | ||||
Total
Property and Equipment
|
$ | 218,418 | $ | 246,745 | ||||
Other
Assets
|
||||||||
Security
Deposits
|
$ | 20,684 | $ | 20,684 | ||||
Intangibles
|
1,446,806 | 1,965,596 | ||||||
Goodwill
|
7,110,415 | 7,110,415 | ||||||
Total
Other Assets
|
$ | 8,577,905 | $ | 9,096,695 | ||||
Total
Assets
|
$ | 20,986,939 | $ | 21,105,058 |
The
accompanying notes are an integral part of these financial
statements
F-2
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Balance Sheets - Continued
Successor
|
Successor
|
|||||||
March 28, 2010
(Unaudited)
|
September 27,
2009
|
|||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
Payable
|
$ | 1,777,177 | $ | 2,497,322 | ||||
Accrued
Expenses
|
455,636 | 671,045 | ||||||
Accrued
Warranties
|
25,000 | 81,530 | ||||||
Accrued
Contract Losses
|
1,080,301 | 1,348,060 | ||||||
Credit
Facility
|
848,771 | - | ||||||
Loans
Payable
|
$ | 125,000 | $ | - | ||||
Total
Current Liabilities
|
$ | 4,311,885 | $ | 4,597,957 | ||||
Stockholders'
Equity
|
||||||||
Optex
Systems Holdings, Inc. – (par $0.001, 200,000,000 authorized, 139,444,940
shares issued and outstanding as of September 27,
2009)
|
$ | 139,445 | $ | 139,445 | ||||
Optex
Systems Holdings, Inc. Preferred Stock ($0.001 par 5,000 authorized,
1027 series A preferred, issued and outstanding)
|
1 | 1 | ||||||
Additional
Paid-in-capital
|
16,914,701 | 16,643,388 | ||||||
Retained
Earnings (Deficit)
|
(379,093 | ) | (275,733 | ) | ||||
Total
Stockholders' Equity
|
$ | 16,675,054 | $ | 16,507,101 | ||||
Total
Liabilities and Stockholders' Equity
|
$ | 20,986,939 | $ | 21,105,058 |
The
accompanying notes are an integral part of these financial
statements
F-3
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Statements of Operations (Unaudited)
Successor
|
Successor
|
Successor
|
Successor
|
Predecessor
|
||||||||||||||||
Three months
ended March 28,
2010
|
Three months
ended March 29,
2009
|
Six months ended
March 28, 2010
|
For the period October
15, 2008 through
March 29, 2009
|
For the period
September 29,
2008 through
October 14, 2008
|
||||||||||||||||
Revenues
|
$ | 6,318,123 | $ | 6,708,286 | $ | 12,233,427 | $ | 13,100,430 | $ | 871,938 | ||||||||||
Total
Cost of Sales
|
5,587,479 | 6,151,915 | 10,747,884 | 11,717,097 | 739,868 | |||||||||||||||
Gross
Margin
|
$ | 730,644 | $ | 556,371 | $ | 1,485,543 | $ | 1,383,333 | $ | 132,070 | ||||||||||
General
and Administrative
|
||||||||||||||||||||
Salaries
and Wages
|
$ | 180,708 | $ | 189,167 | $ | 345,859 | $ | 326,014 | $ | 22,028 | ||||||||||
Employee
Benefits & Taxes
|
60,712 | 73,505 | 109,238 | 154,735 | 495 | |||||||||||||||
Employee
Stock/Option Bonus Plan
|
24,937 | - | 47,437 | 4,812 | (4,812 | ) | ||||||||||||||
Amortization
of Intangible
|
79,823 | 101,158 | 159,645 | 202,317 | - | |||||||||||||||
Rent,
Utilities and Building Maintenance
|
51,077 | 57,102 | 104,552 | 99,942 | 12,493 | |||||||||||||||
Investor
Relations
|
114,665 | - | 202,070 | - | - | |||||||||||||||
Legal
and Accounting Fees
|
57,166 | 92,493 | 107,906 | 168,353 | 360 | |||||||||||||||
Consulting
and Contract Service Fees
|
30,615 | 55,255 | 86,031 | 124,050 | 10,527 | |||||||||||||||
Travel
Expenses
|
6,203 | 11,704 | 16,669 | 25,023 | - | |||||||||||||||
Board
of Director Fees
|
32,500 | 37,500 | 70,000 | 50,000 | - | |||||||||||||||
Other
Expenses
|
105,014 | 87,111 | 182,578 | 124,174 | 16,155 | |||||||||||||||
Total
General and Administrative
|
$ | 743,420 | $ | 704,995 | $ | 1,431,985 | $ | 1,279,420 | $ | 57,246 | ||||||||||
Operating
Income (Loss)
|
$ | (12,776 | ) | $ | (148,624 | ) | $ | 53,558 | $ | 103,913 | $ | 74,824 | ||||||||
Other
Expenses
|
||||||||||||||||||||
Other
Income and Expense
|
$ | - | $ | (647 | ) | $ | - | $ | (1,083 | ) | $ | - | ||||||||
Interest
(Income) Expense - Net
|
35,444 | 91,904 | 38,899 | 174,710 | 9,492 | |||||||||||||||
Total
Other
|
$ | 35,444 | $ | 91,257 | $ | 38,899 | $ | 173,627 | $ | 9,492 | ||||||||||
Income
(Loss) Before Taxes
|
$ | (48,220 | ) | $ | (239,881 | ) | $ | 14,659 | $ | (69,714 | ) | $ | 65,332 | |||||||
Income
Taxes (Benefit)
|
(56,154 | ) | 86,664 | (73,857 | ) | 350,318 | - | |||||||||||||
Net
Income (Loss) After Taxes
|
$ | 7,934 | $ | (326,545 | ) | $ | 88,516 | $ | (420,032 | ) | $ | 65,332 | ||||||||
Less
Preferred Stock Dividend
|
$ | (96,652 | ) | $ | - | $ | (191,876 | ) | $ | - | $ | - | ||||||||
Net
Loss Applicable to Common Shareholders
|
$ | (88,718 | ) | $ | (326,545 | ) | $ | (103,360 | ) | $ | (420,032 | ) | $ | 65,332 | ||||||
Basic
and Diluted Loss per Share
|
$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | 6.53 | ||||||
Weighted
Average Common Shares Outstanding
|
139,444,940 | 113,614,399 | 139,444,940 | 113,473,841 | 10,000 |
The
accompanying notes are an integral part of these financial
statements
F-4
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Statements of Cash Flows (Unaudited)
Successor
|
Successor
|
Predecessor
|
||||||||||
Six months ended March
28, 2010
|
For the period
October 15,
2008 through March 29, 2009
|
For the period
September 29, 2008
through October 14,
2008
|
||||||||||
Cash
Flows from Operating Activities:
|
||||||||||||
Net
Income (Loss)
|
$ | 88,516 | $ | (420,032 | ) | $ | 65,332 | |||||
Adjustments
to Reconcile Net Loss to Net Cash Used in Operating
Activities:
|
||||||||||||
Depreciation
and Amortization
|
553,385 | 1,086,403 | 9,691 | |||||||||
Provision
for Allowance for Inventory Valuation
|
18,067 | 95,773 | 27,363 | |||||||||
Noncash
Interest Expense
|
3,921 | 159,780 | 9,500 | |||||||||
Stock
Option Compensation Expense
|
47,437 | - | - | |||||||||
(Increase)
Decrease in Accounts Receivable
|
(652,296 | ) | (657,266 | ) | 1,049,802 | |||||||
(Increase)
Decrease in Inventory (Net of Progress Billed)
|
282,793 | (1,177,967 | ) | (863,566 | ) | |||||||
(Increase)
Decrease in Other Current Assets
|
6,712 | 240,570 | 18,541 | |||||||||
(Increase)
Decrease in Deferred Tax Asset
|
(73,857 | ) | - | - | ||||||||
Increase
(Decrease) in Accounts Payable and Accrued Expenses
|
(936,082 | ) | 595,890 | (186,051 | ) | |||||||
Increase
(Decrease) in Accrued Warranty Costs
|
(56,530 | ) | 57,305 | - | ||||||||
Increase
(Decrease) in Due to Parent
|
- | - | 1,428 | |||||||||
Increase
(Decrease) in Accrued Estimated Loss on Contracts
|
(267,759 | ) | 62 | (15,304 | ) | |||||||
Increase
(Decrease) in Income Taxes Payable
|
- | 350,318 | - | |||||||||
Total
Adjustments
|
$ | (1,074,209 | ) | $ | 750,868 | $ | 51,404 | |||||
Net
Cash (Used)/Provided by Operating Activities
|
$ | (985,693 | ) | $ | 330,836 | $ | 116,736 | |||||
Cash
Flows from Investing Activities:
|
||||||||||||
Cash
Received through Optex Texas acquisition
|
$ | - | $ | 253,581 | $ | - | ||||||
Purchased
of Property and Equipment
|
(6,266 | ) | (17,725 | ) | (13,338 | ) | ||||||
Net
Cash Used in Investing Activities
|
$ | (6,266 | ) | $ | 235,856 | $ | (13,338 | ) | ||||
Cash
Flows from Financing Activities:
|
||||||||||||
Private
Placement Net of Stock Issuance Cost
|
874,529 | |||||||||||
Proceeds
(to) from Credit Facility (net)
|
848,771 | |||||||||||
Proceeds
from Loans Payable
|
250,000 | (207,265 | ) | (20,000 | ) | |||||||
Repayments
on Loans Payable
|
(125,000 | ) | ||||||||||
Net
Cash (Used in) Provided by Financing Activities
|
$ | 973,771 | $ | 667,264 | $ | (20,000 | ) | |||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
$ | (18,188 | ) | $ | 1,233,956 | $ | 83,398 | |||||
Cash
and Cash Equivalents at Beginning of Period
|
915,298 | - | 170,183 | |||||||||
Cash
and Cash Equivalents at End of Period
|
$ | 897,110 | $ | 1,233,956 | $ | 253,581 |
The
accompanying notes are an integral part of these financial
statements
F-5
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Statements of Cash Flows - continued (Unaudited)
Successor
|
Successor
|
Predecessor
|
||||||||||
Six months ended
March 28, 2010
|
For the period
October
15, 2008
through
March 29, 2009
|
For the period
September 29, 2008
through
October 14, 2008
|
||||||||||
Noncash
Investing and Financing Activities:
|
||||||||||||
Optex
Delaware (Successor) Purchase of Optex Texas
(Predecessor)
|
||||||||||||
Cash
Received
|
- | 253,581 | - | |||||||||
Accounts
Receivable
|
- | 1,404,434 | - | |||||||||
Inventory
|
- | 5,383,929 | - | |||||||||
Intangibles
|
- | 4,036,790 | - | |||||||||
Other
Assets
|
- | 632,864 | - | |||||||||
Accounts
Payable
|
- | (1,953,833 | ) | - | ||||||||
Other
Liabilities
|
- | (1,868,180 | ) | - | ||||||||
Debt
|
- | (6,000,000 | ) | - | ||||||||
Goodwill
|
- | 7,110,415 | - | |||||||||
Issuance
of Stock
|
$ | - | $ | 9,000,000 | $ | - | ||||||
Conversion
of Debt to Series A Preferred Stock
|
||||||||||||
Additional
Paid in Capital (6,000,000 Debt Retirement plus Accrued Interest of
$159,780)
|
$ | - | $ | 6,159,780 | $ | - | ||||||
Issuance
of Common Shares in Exchange for Investor Relations
Services
|
||||||||||||
Additional
Paid in Capital (1,250,000 shares issued at $0.0001
par)
|
$ | - | $ | 187,500 | $ | - | ||||||
Issuance
of Warrants as Debt Issuance Cost
|
||||||||||||
Additional
Paid in Capital (1,100,000 warrants)
|
$ | 32,000 | $ | - | $ | - | ||||||
Supplemental
Cash Flow Information:
|
||||||||||||
Cash
Paid for Interest
|
$ | 34,978 | 3,817 | $ | - | |||||||
Cash
Paid for Taxes
|
$ | 119,847 | $ | - | $ | - |
The
accompanying notes are an integral part of these financial
statements
F-6
Note 1 - Organization and
Operations
On March
30, 2009, Optex Systems Holdings, Inc. (formerly known as Sustut Exploration,
Inc.), a Delaware corporation (“Optex Systems Holdings” or “Successor”), along
with Optex Systems, Inc., a privately held Delaware corporation (“Optex Systems,
Inc. (Delaware)”), which is a wholly-owned subsidiary of Optex
Systems Holdings, entered into a reorganization agreement and plan of
reorganization, pursuant to which Optex Systems, Inc. (Delaware) was acquired by
Optex Systems Holdings in a share exchange transaction. Optex Systems
Holdings became the surviving corporation. At the closing, there was a name
change from Sustut Exploration Inc. to Optex Systems Holdings, Inc., and its
year end changed from December 31 to a fiscal year ending on the Sunday
nearest September 30.
On
October 14, 2008, certain senior secured creditors of Irvine Sensors
Corporation, Longview Fund, L.P. and Alpha Capital Anstalt, formed Optex
Systems, Inc. (Delaware), which acquired all of the assets and assumed certain
liabilities of Optex Systems, Inc., a Texas corporation (“Optex Systems, Inc.
(Texas)” or “Predecessor”) and a wholly-owned subsidiary of Irvine Sensors
Corporation, in a transaction that was consummated via purchase at a public
auction. Following this asset purchase, Optex Systems, Inc. (Texas)
remained a wholly-owned subsidiary of Irvine Sensors
Corporation.
In
accordance with FASB ASC 805 (Prior authoritative literature: SFAS No.
141(R), “Business
Combinations” and EITF 98-3 “Determining Whether a Non-monetary
Transaction Involves Receipt of Productive Assets or of a Business”), Optex
Systems, Inc. (Delaware)’s purchase of substantially all of the assets and
assumption of certain liabilities represented the acquisition of a
business. FASB ASC 805 outlines the guidance in determining whether a
“business” has been acquired in a transaction. For a transferred set of
activities and assets to be a business, it must contain all of the inputs and
processes necessary for it to continue to conduct normal operations after the
transferred set of assets is separated from the transferor, which include the
ability to sustain a revenue stream by providing its outputs to customers. Optex
Systems, Inc. (Delaware) obtained the inputs and processes necessary for normal
operations.
On
February 20, 2009, Sileas Corporation, a newly-formed Delaware corporation,
owned by present members of Optex Systems Holdings’ management, purchased 100%
of Longview's equity and debt interest in Optex Systems, Inc. (Delaware)
(Longview’s interest in Optex Systems, Inc. (Delaware) then representing 90% of
the issued and outstanding common equity interests in Optex Systems, Inc.
(Delaware)), in a private transaction . See Note 4 for a further
description of the Sileas transaction.
Optex
Systems, Inc. (Delaware) operated as a privately-held Delaware corporation until
March 30, 2009, when as a result of the reorganization agreement (described
above and also in Note 5), it became a wholly-owned subsidiary of Optex Systems
Holdings. Sileas is the majority owner (parent) of Optex Systems Holdings,
owning approximately 73.5% of the issued and outstanding equity interests in
Optex Systems Holdings. Optex Systems Holdings plans to carry on the
business of Optex Systems, Inc. (Delaware) as its sole line of business, and all
of Optex Systems Holdings’ operations are conducted by and through its
wholly-owned subsidiary, Optex Systems, Inc. (Delaware). Accordingly, in
subsequent periods the financial statements presented are those of the
accounting acquirer. The financial statements of Optex Systems Holdings
represent subsidiary statements and do not include the accounts of its majority
owner.
The
Company’s operations are based in Richardson, Texas in a leased facility
comprising 49,100 square feet. As of March 28, 2010, Optex Systems
Holdings operated with 99 full-time equivalent employees.
Optex
Systems Holdings manufactures optical sighting systems and assemblies, primarily
for Department of Defense applications. Its products are installed on a
variety of U.S. military land vehicles, such as the Abrams and Bradley fighting
vehicles, light armored and advanced security vehicles, and have been selected
for installation on the Stryker family of vehicles. Optex Systems Holdings also
manufactures and delivers numerous periscope configurations, rifle and
surveillance sights and night vision optical assemblies. Optex Systems Holdings’
products consist primarily of build to customer print products that are
delivered both directly to the military and to other defense prime
contractors.
In
February 2009, Optex Systems Holdings’ ISO certification status was
upgraded from 9001:2000 to 9001:2008, bringing Optex Systems Holdings into
compliance with the new ISO standards rewritten to align with ISO
14001.
F-7
Note
2 - Accounting Policies
Basis
of Presentation
Principles of
Consolidation: The consolidated financial statements include the
accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex
Systems, Inc. (Delaware). All significant inter-company balances and
transactions have been eliminated in consolidation.
The
accompanying financial statements include the results of operations and cash
flows of Optex Systems, Inc. (Delaware), the accounting acquirer in the Sustut
reorganization and the successor in the October 14, 2008 Optex Systems, Inc.
(Texas) asset purchase transaction, for the three and six months ending March
28, 2010, the three months ended March 29, 2009 and the period from October 15,
2008 through March 29, 2009 and the results of operations and cash flows for the
period from September 29, 2008 through October 14, 2008 of Optex Systems, Inc.
(Texas), Predecessor. The accompanying financial statements include the
balance sheets at March 28, 2010 and September 27, 2009 for Optex Systems, Inc.
(Delaware), the accounting acquirer.
These
financial statements have been presented as subsidiary-only financial
statements, reflecting the statements of operations and cash flows of the
subsidiary as a stand-alone entity.
Although,
Optex Systems, Inc. (Texas) (Predecessor) has been majority owned by various
parent companies described in the preceding paragraphs, no accounts of the
parent companies or the effects of consolidation with any parent companies have
been included in the accompanying financial statements. The Optex Systems,
Inc. (Texas) accounts have been presented on the basis of push down accounting
in accordance with FASB ASC 805-50-S99 (Prior authoritative literature:
Staff Accounting Bulletin No. 54 Application of “Push Down” Basis of
Accounting in Financial Statements of Subsidiaries Acquired by Purchase).
FASB ASC 805-50-S99 states that the push down basis of accounting should be used
in a purchase transaction in which the entity becomes wholly-owned by another
entity. Under the push down basis of accounting certain transactions incurred by
the parent company, which would otherwise be accounted for in the accounts of
the parent, are “pushed down” and recorded on the financial statements of the
subsidiary. Accordingly, items resulting from the Optex Systems, Inc. (Texas)
purchase transaction, such as goodwill, debt incurred by the parent to acquire
the subsidiary and other costs related to the purchase have been recorded on the
financial statements of Optex Systems Holdings.
The
condensed consolidated financial statements of Optex Systems Holdings included
herein have been prepared by Optex Systems Holdings, without audit, pursuant to
the rules and regulations of the SEC. Certain information and footnote
disclosures normally included in financial statements prepared in conjunction
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although Optex Systems Holdings believes
that the disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the annual audited financial statements and the notes thereto
included in the Optex Systems Holdings’ Form 10-K and other reports filed
with the SEC.
The
accompanying unaudited interim financial statements reflect all adjustments of a
normal and recurring nature which are, in the opinion of management, necessary
to present fairly the financial position, results of operations and cash flows
of Optex Systems Holdings for the interim periods presented. The results of
operations for these periods are not necessarily comparable to, or indicative
of, results of any other interim period or for the fiscal year taken as a whole.
Certain information that is not required for interim financial reporting
purposes has been omitted.
Use
of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statement and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from the estimates.
Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted, as
necessary, for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. Cost is determined using the first-in
first-out method. Under arrangements by which progress payments are received
against certain contracts, the customer retains a security interest in the
undelivered inventory identified with these contracts. Payments received
for such undelivered inventory are classified as unliquidated progress payments
and deducted from the gross inventory balance. As of March 28, 2010 and
September 27, 2009, inventory included:
F-8
As of
March 28, 2010
(unaudited)
|
As of
September 27, 2009
|
|||||||
Raw
Materials
|
$ | 5,992,250 | $ | 7,161,241 | ||||
Work
in Process
|
4,929,339 | 4,043,308 | ||||||
Finished
Goods
|
277,342 | 245,056 | ||||||
Gross
Inventory
|
$ | 11,198,931 | $ | 11,449,605 | ||||
Less:
|
||||||||
Unliquidated
Progress Payments
|
(2,913,017 | ) | (2,880,898 | ) | ||||
Inventory
Reserves
|
(572,893 | ) | (554,826 | ) | ||||
Net
Inventory
|
$ | 7,713,021 | $ | 8,013,881 |
Stock-Based
Compensation: In December 2004, FASB issued FASB ASC 718 (Prior
authoritative literature: SFAS No. 123R, “Share-Based
Payment”). FASB ASC 718 establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services, but primarily focuses on transactions whereby an entity obtains
employee services for share-based payments. FASB ASC 718 requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity
instruments.
The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of FASB ASC
505-50 (Prior authoritative literature: EITF 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for
Certain Transactions Involving Equity Instruments Granted to Other Than
Employees”). The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting agreement.
Stock-based compensation related to non-employees is accounted for based on the
fair value of the related stock or options or the fair value of the services,
whichever is more readily determinable in accordance with FASB ASC
718.
Income
Tax/Deferred Tax: FASB ASC 740 (Prior Authoritative Literature:
SFAS No. 109, “Accounting for
Income Taxes”), requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on differing treatment of items
for financial reporting and income tax reporting purposes. The deferred
tax balances are adjusted to reflect tax rates by tax jurisdiction, based on
currently enacted tax laws, which will be in effect in the years in which the
temporary differences are expected to reverse. Under FASB ASC 740, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future
operations. Optex Systems Holdings has recognized deferred income tax
benefits on net operating loss carry-forwards to the extent Optex Systems
Holdings believes it will be able to utilize them in future tax filings.
The difference between the income tax expense and pretax accounting income is
primarily attributable to $116,938 and $231,883 of deductible expenses
representing permanent timing differences between book income and taxable income
for the amortization of goodwill during the three and six months ending March
28, 2010, respectively. This expense is deductible over 15 years for
income tax purposes but is not amortized for accounting purposes. The tax
effect of this permanent timing difference is a reduction in income tax expense
of $39,759 and $78,840 for the three and six months ended March 28, 2010,
respectively.
Earnings per
Share: Basic earnings per share is computed by dividing income
available for common shareholders (the numerator) by the weighted average number
of common shares outstanding (the denominator) for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
The
potentially dilutive securities that Optex Systems Holdings has outstanding are
convertible preferred stock, stock options and warrants. In computing the
dilutive effect of convertible preferred stock, the numerator is adjusted to add
back any convertible preferred dividends, and the denominator is increased to
assume the conversion of the number of additional common shares. Optex Systems
Holdings uses the Treasury Stock Method to compute the diluted effect of stock
options and warrants. Convertible preferred stocks, stock options and warrants
that are antidilutive are excluded from the calculation of diluted earnings per
common share.
F-9
For the
three and six months ended March 28, 2010, 1,027 shares of Series A Preferred
Stock, 2,655,649 stock options and 9,948,667 warrants were excluded as
antidilutive. There were no dilutive convertible securities issued and
outstanding for the periods ended March 29, 2009 (Successor) or October 14, 2008
(Predecessor).
Reclassification:
Certain expenses reflected in the financial statements for the three and six
months ended March 29, 2009 have been reclassified to conform with the current
year presentation.
Note
3 - Recent Accounting Pronouncements
In
February 2010, FASB issued ASU 2010-09 “Subsequent Event (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements”. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date in both issued and revised
financial statements. Revised financial statements include financial
statements revised as a result of either correction of an error or retrospective
application of GAAP. All of the amendments in ASU 2010-09 are effective upon
issuance of the final ASU, except for the use of the issued date for conduit
debt obligors, which is effective for interim or annual periods ending after
June 15, 2010. The Company adopted ASU 2010-09 in February 2010 and
therefore omitted the disclosure previously required as referenced
above.
Note
4 — Acquisition of Substantially All of the Assets of Optex Systems, Inc.
(Texas)
Acquisition
of Assets of Optex Systems, Inc. (Texas) by Optex Systems, Inc. (Delaware) on
October 14, 2008
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation indebtedness owned by it and the assumption of
approximately $3.8 million of certain Optex Systems, Inc. (Texas) liabilities.
The $15 million of Irvine Sensors Corporation indebtedness was contributed by
Longview and Alpha to Optex Systems, Inc. (Delaware), in exchange for a $6
million note payable from Optex Systems, Inc. (Delaware) and a $9 million equity
interest in Optex Systems, Inc. (Delaware) (which consisted of the issuance by
Optex Systems, Inc. (Delaware) of 45,081,350 and 4,918,650 shares of its common
stock to each of Longview Fund and Alpha, respectively). On October 30, 2008,
Alpha sold its Optex Systems, Inc. (Delaware) common stock to Arland Holdings,
Ltd. There was no contingent consideration associated with the purchase.
Longview and Arland Holdings, Ltd. owned Optex Systems, Inc. (Delaware) together
until February 20, 2009, when Longview sold 100% of its equity and debt
interests in Optex Systems, Inc. (Delaware) to Sileas, as discussed
below.
Optex
Systems, Inc. (Delaware) purchased all of the assets of Optex Systems, Inc.
(Texas), including: intellectual property, production processes and know-how,
and outstanding contracts and customer relationships. Optex Systems, Inc.
(Delaware) also assumed certain liabilities of Optex Systems, Inc. (Texas)
consisting of accounts payable and accrued liabilities. Optex Systems Holdings’
management intends to improve the business’s ability to serve its existing
customers and to attract new customers by providing quality products and
superior service.
Pro forma
revenue and earnings per share information is presented cumulatively in Note
5.
Secured
Promissory Note Issued in Connection with Purchase by Optex Systems, Inc.
(Delaware) (Successor)
In
connection with the public sale of the Optex Systems, Inc. (Texas) (Predecessor)
assets to Optex Systems, Inc. (Delaware) (Successor), Optex Systems, Inc.
(Delaware) issued to Longview and Alpha secured promissory notes, due September
19, 2011, in the principal amounts of $5,409,762 and $540,976, respectively. On
February 20, 2009, Longview sold its Optex Systems, Inc. (Delaware) secured
promissory note to Sileas, as described below. On March 27, 2009, Sileas and
Alpha exchanged these secured promissory notes plus accrued and unpaid interest
of $159,780 for 1,027 shares of Optex Systems, Inc. (Delaware) Series A
preferred stock.
F-10
Acquisition
by Sileas on February 20, 2009
On
February 20, 2009, Sileas purchased 100% of the equity (which at the time
represented 90% of the issued and outstanding equity interests of Optex Systems,
Inc. (Delaware)) and debt interest in Optex Systems, Inc. (Delaware) held by
Longview. As of the date of this transaction, Sileas became the majority owner
of Optex Systems Holdings.
Secured
Promissory Note Due February 20, 2012/Longview Fund, LP
As a
result of the transaction between Sileas and Longview, on February 20, 2009,
Sileas (which is currently majority owner of Optex Systems Holdings) executed
and delivered to Longview, a secured promissory note due February 20, 2012 in
the principal amount of $13,524,405. This secured promissory note bears simple
interest at the rate of 4% per annum, and the interest rate increases to 10% per
annum upon the occurrence of an event of default thereunder. In the event Optex
Systems Holdings sells or conveys all or substantially all its assets to a third
party entity for more than nominal consideration, other than due to a
reorganization into Sileas or reincorporation in another jurisdiction, then this
secured promissory note shall be immediately due and owing without demand. In
the event that such a major transaction occurs prior to the maturity date
resulting in Sileas receiving net consideration with a fair market value in
excess of the principal and interest due under the terms of this secured
promissory note (the “Optex Consideration”), then in addition to paying the
principal and interest due, Sileas shall also pay to Longview an amount equal to
90% of the Optex Consideration. The obligations of Sileas under this secured
promissory note are secured by a security interest in Optex
Systems Holdings’ common and preferred stock owned by Sileas that was
granted to Longview and also by a lien on all of the assets of Sileas (which
consist solely of the Optex Systems Holdings common and preferred stock held by
Sileas).
Optex
Systems Holdings has not guaranteed the note, and Longview does not have legal
remedies that it can exercise against Optex Systems Holdings in the event of a
default by Sileas. Therefore, there are no actual or potential cash flow
commitments from Optex Systems Holdings. In the event of default by Sileas on
its obligations under the note, Longview would only be entitled to receive the
Optex Systems Holdings common and preferred stock held by Sileas.
Note
5 –Reorganization Plan and Private Placement
Reorganization/Share
Exchange
On March
30, 2009, a reorganization occurred whereby the then existing shareholders of
Optex Systems, Inc. (Delaware) exchanged their shares of common stock with the
shares of common stock of Optex Systems Holdings as follows: (i) the outstanding
85,000,000 shares of Optex Systems, Inc. (Delaware) common stock were exchanged
by Optex Systems Holdings for 113,333,282 shares of Optex Systems Holdings
common stock, (ii) the outstanding 1,027 shares of Optex Systems, Inc.
(Delaware) Series A preferred stock were exchanged by Optex Systems Holdings for
1,027 shares of Optex Systems Holdings Series A preferred stock and (iii) the
8,131,667 shares of Optex Systems, Inc. (Delaware) common stock purchased in the
private placement were exchanged by Optex Systems Holdings for 8,131,667 shares
of Optex Systems Holdings common stock. Following the reorganization, Optex
Systems, Inc. (Delaware) remained a wholly-owned subsidiary of Optex Systems
Holdings.
Shares
outstanding of Optex Systems Holdings common stock just prior to the closing of
the reorganization consisted of 17,449,991 shares which included 1,250,000
shares issued on March 27, 2009 as payment for investor relations
services. On June 29, 2009, 700,000 of the issued investor relations
shares were surrendered to Optex Systems Holdings and cancelled upon termination
of one of the investor relations contracts.
Private
Placement
Prior to
the closing of the reorganization, as of March 30, 2009, Optex Systems, Inc.
(Delaware) accepted subscriptions from accredited investors for a total of 27.1
units, for $45,000 per unit, with each unit consisting of 300,000 shares of
common stock, of Optex Systems, Inc. (Delaware) and warrants to purchase 300,000
shares of common stock for $0.45 per share for a period of five years from the
initial closing, which were issued by Optex Systems, Inc. (Delaware) after the
closing referenced above. Gross proceeds to Optex Systems, Inc. (Delaware) were
$1,219,750, and after deducting (i) a cash finder’s fee of $139,555, (ii)
non-cash consideration of indebtedness owed to an investor of $146,250, and
(iii) stock issuance costs of $59,416, net proceeds were $874,529. The finder
also received five year warrants to purchase 2.39 units, at an exercise price of
$49,500 per unit.
The
following table represents the reorganization and private placement transactions
which occurred on March 30, 2009 reflected in March 29, 2009 statements due to
the election to report as of the accounting acquirer’s period
end:
F-11
Optex
Systems Holdings, Inc.
Balance
Sheet Adjusted for Reorganization and Private Placement
Unaudited
Quarter
Ended March 29,
2009
|
Reorganization
Adjustments
(1)
|
Private
Placement
Adjustments
|
Unaudited Quarter
Ended March 29,
2009
|
|||||||||||||
Assets
|
||||||||||||||||
Current
Assets
|
$ | 8,880,436 | $ | 187,500 | $ | 929,738 | $ | 9,997,674 | ||||||||
Non-current
Assets
|
10,422,425 | - | - | 10,422,425 | ||||||||||||
Total
Assets
|
$ | 19,302,861 | $ | 187,500 | $ | 929,738 | $ | 20,420,099 | ||||||||
Liabilities
|
||||||||||||||||
Loans
Payable
|
146,709 | (146,250 | ) | 459 | ||||||||||||
Other
Current Liabilities
|
4,416,403 | - | 55,209 | 4,471,612 | ||||||||||||
Total
Liabilities
|
$ | 4,563,112 | $ | - | $ | (91,041 | ) | $ | 4,472,071 | |||||||
Equity
|
||||||||||||||||
Optex
Systems Holdings, Inc. – (par $0.001per share, 200,000,000 shares
authorized, 138,914,940 shares issued and outstanding as of March 29,
2009)
|
113,333 | 17,450 | 8,132 | 138,915 | ||||||||||||
Optex
Systems Holdings, Inc. preferred stock (par value $0.001 per
share, 5,000 shares authorized, 1027 shares of Series A Preferred
issued and outstanding)
|
1 | 1 | ||||||||||||||
Additional
Paid in Capital
|
15,046,446 | 170,050 | 1,012,647 | 16,229,143 | ||||||||||||
Retained
Earnings
|
(420,031 | ) | (420,031 | ) | ||||||||||||
Total
Stockholders Equity
|
$ | 14,739,749 | $ | 187,500 | $ | 1,020,779 | $ | 15,948,028 | ||||||||
Total
Liabilities and Stockholders Equity
|
$ | 19,302,861 | $ | 187,500 | $ | 929,738 | $ | 20,420,099 |
(1) Sustut
Exploration, Inc. Balance Sheet as of the March 30, 2009 reorganization. Other
assets include $187,500 in prepaid expenses for investor relation services to be
realized over the next 12 months. The services were prepaid by the issuance of
1,250,000 Sustut shares by Sustut prior to March 30, 2009. The original prepaid
expense covered April 2009 through April 2010. On June 29, 2009 700,000 of
these shares were returned to Optex Systems Holdings due to the cancellation of
one of the investor relations agreements. The amortized expense related to
the remaining 550,000 shares has been reflected on the Consolidated Statement of
Operations for Optex Systems Holdings as expensed.
The
accompanying unaudited pro forma financial information for the consolidated
successor three and six months ended March 28, 2010 and three and six months
ended March 29, 2009 (Combined Successor and Predecessor) present the historical
financial information of the accounting acquirer. The pro forma financial
information is presented for informational purposes only. Such information is
based upon the standalone historical results of each company and does not
reflect the actual results that would have been reported had the acquisition
been completed when assumed, nor is it indicative of the future results of
operations for the combined enterprise.
The
following represents condensed pro forma revenue and earnings information for
the six months ended March 29, 2009 as if the acquisition of Optex Systems, Inc.
(Texas) and reorganization plan had occurred on the first day of the
year.
F-12
Unaudited
|
||||
Six Months Ended
|
||||
March 29, 2009
|
||||
Revenues
|
13,972,368
|
|||
Net
Income (Loss) attributable to common shareholders
|
(345,200
|
)
|
||
Diluted
earnings per share
|
$
|
(0.00
|
)
|
|
Weighted
Average Shares Outstanding
|
138,914,940
|
The pro
forma information depicted above reflect the impacts of reduced interest
expense, increased intangible amortization expenses, the elimination of
corporate allocation costs from Irvine Sensors Corporation and the elimination
of employee stock bonus compensation previously allocated from Irvine Sensors
Corporation to reflect the costs of the ongoing entity.
Note
6 - Commitments and Contingencies
Leases
As of
March 28, 2010, Optex Systems Holdings leased its office and manufacturing
facilities under a non-cancellable operating lease expiring July 31, 2015 in
addition to maintaining several non-cancellable operating leases for office and
manufacturing equipment. Total expense under facility lease
agreements as of the three and six months ended March 28, 2010 was $64,988 and
$142,338 and total expense for manufacturing and office equipment was $7,194 and
15,328, respectively. Total expense under facility lease agreements for the
three and six months ended March 29, 2009 was $56,978 and $170,935,
respectively. Total expense for manufacturing and office equipment for the
three and six months ended March 29, 2009 was $5,598 and $11,195.
As of
March 28, 2010, the remaining minimum lease payments under the non-cancelable
operating leases for equipment, office and facility space are as
follows:
Operating
|
||||
Leases
|
||||
Fiscal
Year
|
||||
2010
|
$
|
49,127
|
||
2011
|
251,152
|
|||
2012
|
236,112
|
|||
2013
|
231,574
|
|||
2014
|
241,748
|
|||
2015
|
201,457
|
|||
Total
minimum lease payments
|
$
|
1,211,170
|
Pursuant
to the terms of the amendment to the facilities lease, there is no base rent
payment due from January 1, 2010 through July 31, 2010, and the total value of
this rent abatement is $133,898. The value of the deferred rent expense
will be amortized monthly at a rate of $1,998 per month over the life of the
lease. The total unamortized deferred rent as of March 28, 2010 is
$51,390.
F-13
Note
7 - Debt Financing
Related
Parties
Short Term Note
Payable/Longview Fund - On October 27, 2009, Optex Systems
Holdings borrowed $250,000 from the Longview Fund pursuant to a promissory note,
with an original maturity date of December 1, 2009, which was extended to July
15, 2010 pursuant to an allonge dated January 5, 2010. The note bears
interest at the rate of 10% per annum, and all accrued and unpaid interest
thereon will be due upon maturity. The note requires Optex Systems
Holdings to make a prepayment equal to 50% of the then outstanding principal
amount plus accrued and unpaid interest thereon upon the closing of a credit
facility or other equity or debt financing from which the net proceeds to Optex
Systems Holdings are at least $900,000, with any remaining unpaid balance due on
July 15, 2010. In exchange for the allonge, Optex Systems Holdings granted
Longview a warrant to purchase 100,000 shares of its restricted common stock
with an exercise price of $0.15 per share and with a term of three years.
In conjunction with the Peninsula Bank financing (below) on March 22, 2010,
Optex Systems Holdings paid to Longview a principal prepayment of $125,000 and
$10,000 in accrued interest. The remaining principal amount of the note of
$125,000 plus accrued interest thereon is due on July 15, 2010.
Credit
Facility - Peninsula Bank Business Funding
Effective
March 10, 2010, Optex Systems, Inc. (Delaware) entered into a Loan and Security
Agreement (“Agreement”) with Peninsula Bank Business Funding, a division of the
Private Bank of the Peninsula (“Lender”).
The
Agreement provides for a revolving line of credit of up to $2,000,000, based
upon advances to be made against percentages of eligible receivables as set
forth in the Agreement. The material terms of the Agreement are as
follows:
|
·
|
The interest rate for all
advances shall be the greater of 8.5% and the then in effect prime rate
plus 3.5% and subject to a minimum quarterly interest payment of
$16,000.
|
|
·
|
Interest shall be paid monthly in
arrears.
|
|
·
|
The expiration date of the
Agreement is March 4, 2011, at which time any outstanding advances, and
accrued and unpaid interest thereon, will be due and
payable.
|
|
·
|
In connection with the entry into
the Agreement by the Lender, Optex Systems, Inc.(Delaware) paid the Lender
a facility fee of $20,000 and issued a warrant to Lender to purchase
1,000,000 shares of its common stock. The warrant bears an exercise price
of $0.10 per share and expires on March 3,
2016.
|
|
·
|
The obligations of Optex Systems,
Inc. (Delaware) to the Lender are secured by a first lien on all of its
assets (including intellectual property assets should it have any in the
future) in favor of the
Lender.
|
|
·
|
The Agreement contains
affirmative and negative covenants that require Optex Systems, Inc.
(Delaware) to maintain certain minimum cash and EBITDA levels on a
quarterly basis and contains other customary covenants. The
Agreement also contains customary events of default. Upon the
occurrence of an event of default that remains uncured after any
applicable cure period, the Lender’s commitment to make further advances
may terminate, and the Lender would also be entitled to pursue other
remedies against Optex Systems, Inc. (Delaware) and the pledged
collateral.
|
|
·
|
Pursuant to a guaranty executed
by Optex Systems Holdings in favor of Lender, Optex Systems Holdings has
guaranteed all obligations of Optex Systems, Inc. (Delaware) to
Lender.
|
Note
8 – Intangible Assets and Goodwill
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities (see Note 4).
Optex Systems, Inc. (Delaware) has allocated the consideration for its
acquisition of the Purchased Assets among tangible and intangible assets
acquired and liabilities assumed based upon their fair values. Assets that met
the criteria for recognition as intangible assets apart from goodwill were also
valued at their fair values.
The
purchase price was assigned to the acquired interest in the assets and
liabilities of Optex Systems Holdings as of October 14, 2008 as
follows:
Assets:
|
||||
Current
assets, consisting primarily of inventory of $5,383,929 and accounts
receivable of $1,404,434
|
$
|
7,330,910
|
||
Identifiable
intangible assets
|
4,036,789
|
|||
Purchased
goodwill
|
7,110,416
|
|||
Other
non-current assets, principally property and equipment
|
343,898
|
|||
Total
assets
|
$
|
18,822,013
|
||
Liabilities:
|
||||
Current
liabilities, consisting of accounts payable of $1,953,833 and accrued
liabilities of $1,868,180
|
3,822,013
|
|||
Acquired
net assets
|
$
|
15,000,000
|
F-14
Goodwill
was tested for impairment as of March 28, 2010 using a fair value approach and
based on the review, no impairment was required.
The
following table summarizes the estimate of the fair values of the intangible
assets as of the asset transfer date:
Total
|
||||
Contracted
Backlog - Existing Orders
|
$
|
2,763,567
|
||
Program
Backlog - Forecasted Indefinite Delivery/Indefinite Quantity
awards
|
1,273,222
|
|||
Total
Intangible Asset to be amortized
|
$
|
4,036,789
|
The
amortization of identifiable intangible assets associated with the Optex Systems
Inc. (Texas) acquisition on October 14, 2008 expensed for the three and six
months ended March 28, 2010 was $259,395 and $518,790, respectively. The
intangible amortization allocable to manufacturing cost of sales was $179,572
and $359,144, and the intangible amortization allocable to general and
administrative was $79,821 and 159,642 for the three and six months ending March
28, 2010, respectively. The amortization of identifiable intangible assets
expensed for the three and six months ended March 29, 2009 was $517,798 and
$1,035,596, respectively. The intangible amortization allocable to
manufacturing cost of sales was $416,639 and $833,280, respectively, and the
intangible amortization allocable to general and administrative was $101,159 and
$202,316 for the three and six months ending March 29, 2009, respectively. The
identifiable intangible assets and recorded goodwill are amortized over five
years for book purposes and over 15 years for income tax purposes. As
of the March 28, 2010, the total unamortized balance of intangible assets was
$1,446,806. The amortizable intangible assets were tested for impairment
as of September 27, 2009 utilizing undiscounted, projected cash flows and based
upon this analysis, no impairment was noted. Subsequent to the review, there
have been no material changes to our assumptions or estimates that would result
in impairment. However, we intend to continue to monitor the value of our
intangible assets and goodwill in order to identify any impairment that may
occur in the future.
Identifiable
intangible assets primarily consist of customer and program backlog.
The remaining unamortized balance of intangible assets will be amortized between
general and administrative expenses and costs of sales over their remaining
respective estimated useful lives as follows:
2010
|
2011
|
2012
|
2013
|
|||||||||||||||
Customer
backlog amortized by delivery schedule
|
COS
|
$
|
359,145
|
$
|
126,158
|
$
|
19,614
|
$
|
4,762
|
|||||||||
Customer
backlog amortized by delivery schedule
|
G&A
|
32,323
|
11,354
|
1,765
|
427
|
|||||||||||||
Program
backlog amortized straight line across 5 years
|
G&A
|
127,323
|
254,645
|
254,645
|
254,645
|
|||||||||||||
Total
Amortization by Year
|
$
|
518,791
|
$
|
392,157
|
$
|
276,024
|
$
|
259,834
|
Note
9-Stock Based Compensation
Option
Agreements:
On March
26, 2009, the Board of Directors of Optex Systems Holdings adopted the 2009
Stock Option Plan providing for the issuance of up to 6,000,000 shares to Optex
Systems Holdings officers, directors, employees and to independent contractors
who provide services to Optex Systems Holdings.
F-15
Options
granted under the 2009 Stock Option Plan vest as determined by the Board of
Directors of Optex Systems Holdings or any committee set up to act as a
compensation committee of the Board of Directors and terminate after the
earliest of the following events: (i) expiration of the option as provided in
the option agreement, (ii) 90 days following the date of termination of the
employee, or (iii) ten years from the date of grant (five years from the date of
grant for incentive options granted to an employee who owns more than 10% of the
total combined voting power of all classes of Optex Systems Holdings stock at
the date of grant). In some instances, granted stock options are
immediately exercisable into restricted shares of common stock, which vest in
accordance with the original terms of the related options. Optex Systems
Holdings recognizes compensation expense ratably over the requisite service
period.
The
option price of each share of common stock is determined by the Board of
Directors or compensation committee (when one is established), provided that
with respect to incentive stock options, the option price per share will in all
cases be equal to or greater than 100% of the fair value of a share of common
stock on the date of the grant, except an incentive stock option granted under
the 2009 Stock Option Plan to a shareholder that owns more than 10% of the total
combined voting power of all classes of Optex Systems Holdings’ stock, will have
an exercise price of not less than 110% of the fair value of a share of common
stock on the date of grant. No participant may be granted incentive stock
options, which would result in shares with an aggregate fair value of more than
$100,000 first becoming exercisable in one calendar year.
On March
30, 2009, 1,414,649 stock options with an exercise price of $0.15 per share were
granted to an officer of Optex Systems Holdings. These options vest as
follows: 34% after the first year, and 33% each after the second and third
years. These options have a seven year term from the date of
issuance. On May 14, 2009, 1,267,000 stock options were issued to other
Optex Systems Holdings employees, including options to purchase 250,000 shares
to one executive officer. These stock options vest 25% per year after
each year of employment and have a seven year term from the date of
issuance. For shares granted as of May 14, 2009, Optex Systems Holdings
anticipates an annualized employee turnover rate of 3% per year, and as such
anticipates that only 1,174,786 of the 1,267,000 shares will vest as of the end
of the contract term. As of March 28, 2010, none of the stock options had
vested and 26,000 shares had been forfeited due to employee
turnover.
Optex
Systems Holdings recorded compensation costs for options and shares granted
under the plan amounting to $24,937 and $47,437 for the three and six months
ended March 28, 2010, respectively. There were no stock options or shares
granted or outstanding as of March 29, 2009; therefore, no compensation expense
was recorded during that period. The impact of this expense was immaterial
to the basic and diluted net loss per share for the three and six months ended
March 28, 2010. A deduction is not allowed for income tax purposes until
nonqualified options are exercised. The amount of this deduction will be the
difference between the fair value of Optex Systems Holdings’ common stock
and the exercise price at the date of exercise. For the six months ended March
28, 2010, estimated deferred tax assets related to option compensation costs
were $16,129 and have been recorded to reflect the tax effect of the financial
statement expense. There was no similar tax effect related to option
compensation costs for the six months ended March 29, 2009 related to these
stock options. No tax deduction is allowed for incentive stock options.
Accordingly, no deferred tax asset is recorded for GAAP expense related to these
options.
Management
has valued the options at their date of grant utilizing the Black-Scholes-Merton
option pricing model. The fair value of the underlying shares was
determined based on the closing price of Optex Systems Holdings’
publicly-traded shares on the grant date. Further, the expected volatility
was calculated using the historical volatility of a diversified index of
companies in the defense, homeland security, and space industry in
accordance with FASB ASC 718-10-S99-1 (Prior authoritative literature:
Question 6 of SAB Topic 14.D.1). In making this determination and trying
to find another comparable company, Optex Systems Holdings considered the
industry, stage of life cycle, size and financial leverage of such other
entities. Based on the development stage of Optex Systems Holdings,
similar companies with sufficient historical data were not available.
Optex Systems Holdings utilized the three year volatility of the SPADE
Defense Index, which is a diversified index of 58 companies in the same industry
as Optex Systems Holdings. The risk-free interest rate is based on the
implied yield available on U.S. Treasury issues with an equivalent term
approximating the expected life of the options depending on the date of the
grant and expected life of the options. The expected life of options used
was based on the contractual life of the option grant. Optex Systems
Holdings determined the expected dividend rate based on the assumption and
expectation that earnings generated from operations are not expected to be
adequate to allow for the payment of dividends in the near future and the
assumption that the company does not presently have any intention of paying cash
dividends on its common stock. The following weighted-average assumptions were
utilized in the fair value calculations for options granted:
F-16
|
Year ended
|
|
|
September 27, 2009
|
|
Expected
dividend yield
|
0
%
|
|
Expected
stock price volatility
|
23.6
%
|
|
Risk-free
interest rate (1)
|
2.8%-4.07
%
|
|
Expected
life of options
|
4.5
to 7 Years
|
(1)
2.8% for grant expected life less than 7 years
(2)
4.07% for grant expected life of 7 years.
Optex
Systems Holdings has granted stock options to officers and employees as
follows:
Date of
|
Shares
|
Exercise
|
Shares Outstanding
|
Expiration
|
Vesting
|
||||||||||
Grant
|
Granted
|
Price
|
As of 03/28/10
|
Date
|
Date
|
||||||||||
03/30/09
|
480,981 | $ | 0.15 | 480,981 |
03/29/2016
|
03/30/2010
|
|||||||||
03/30/09
|
466,834 | 0.15 | 466,834 |
03/29/2016
|
03/30/2011
|
||||||||||
03/30/09
|
466,834 | 0.15 | 466,834 |
03/29/2016
|
03/30/2012
|
||||||||||
05/14/09
|
316,750 | 0.15 | 310,250 |
05/13/2016
|
05/14/2010
|
||||||||||
05/14/09
|
316,750 | 0.15 | 310,250 |
05/13/2016
|
05/14/2011
|
||||||||||
05/14/09
|
316,750 | 0.15 | 310,250 |
05/13/2016
|
05/14/2012
|
||||||||||
05/14/09
|
316,750 | 0.15 | 310,250 |
05/13/2016
|
05/14/2013
|
||||||||||
Total
|
2,681,649 | 2,655,649 |
The
following table summarizes the status of Optex Systems Holdings’ aggregate
stock options granted under the incentive stock option plan:
Number
|
Weighted
|
|||||||||||||||
of Shares
|
Average
|
Weighted
|
||||||||||||||
Remaining
|
Intrinsic
|
Average
|
Aggregate
|
|||||||||||||
Subject to Exercise
|
Options
|
Price
|
Life (Years)
|
Value
|
||||||||||||
Outstanding
as of September 27, 2009
|
2,667,649
|
$
|
0.21
|
5.14
|
$
|
560,206
|
||||||||||
Granted
– 2010
|
-
|
$
|
-
|
-
|
-
|
|||||||||||
Forfeited
– 2010
|
(12,000
|
)
|
$
|
-
|
-
|
-
|
||||||||||
Exercised
– 2010
|
-
|
$
|
-
|
-
|
-
|
|||||||||||
Outstanding
as of March 28, 2010
|
2,655,649
|
$
|
-
|
4.64
|
$
|
-
|
||||||||||
Exercisable
as of March 28, 2010
|
0
|
$
|
-
|
-
|
$
|
-
|
The
weighted-average grant date fair value of options granted during the six months
ended March 28, 2010 was $0.14, and the total intrinsic value of options
exercised during the six months ended March 28, 2010 was $0.
The
following table summarizes the status of Optex Systems Holdings’ aggregate
non-vested shares granted under the 2009 Stock Option Plan:
F-17
Number of
Non-
vested
Shares
Subject to
Options
|
Weighted-
Average
Grant-
Date
Fair Value
|
|||||||
Non-vested
as of September 27, 2009
|
2,667,649
|
$
|
0.14
|
|||||
Non-vested
granted — six months ended March 28, 2010
|
-
|
$
|
0.00
|
|||||
Vested —
six months ended March 28, 2010
|
-
|
$
|
0.00
|
|||||
Forfeited — six
months ended March 28, 2010
|
(12,000
|
)
|
$
|
0.14
|
||||
Non-vested
as of March 28, 2010
|
2,655,649
|
$
|
0.14
|
As of
March 28, 2010, the unrecognized compensation cost related to non-vested share
based compensation arrangements granted under the plan that was approximately
$276,852. These costs are expected to be recognized on a straight line
basis from March 30, 2009 through May 13, 2013. The total fair value of
options and shares vested during the six months ended March 28, 2010 was
$0.
During
the fiscal year ended September 27, 2009, Optex Systems Holdings issued 480,000
shares of common stock at a market value of $0.30 per share for a total $144,000
and paid $150,000 cash to a vendor in support of an investor relations agreement
executed on June 29, 2009. Pursuant to the agreement, the shares are earned over
the life of the contract at the rate of 40,000 shares per month through June
2010. During the three and six months ended March 28, 2010, Optex Systems
Holdings expensed $36,000 and $72,000, respectively, for shares earned and the
unamortized balance of shares issued against the contract is $36,000 to be
expensed through the third fiscal quarter of 2010.
There
were no stock options issued to Optex Systems, Inc. (Texas) employees or equity
instruments issued to consultants and vendors during the six months
ended March 29, 2009.
Warrant
Agreements:
Optex
Systems Holdings calculates the fair value of warrants issued with debt or
preferred stock using the Black-Scholes-Merton valuation method. The total
proceeds received in the sale of debt or preferred stock and related warrants
are allocated among these financial instruments based on their relative fair
values. The discount arising from assigning a portion of the total proceeds to
the warrants issued is recognized as interest expense for debt from the date of
issuance to the earlier of the maturity date of the debt or the conversion dates
using the effective yield method.
As of
March 28, 2010, Optex Systems Holdings had the following warrants
outstanding:
Grant Date
|
Warrants
Granted
|
Exercise
Price
|
Outstanding as of
03/28/10
|
Expiration
Date
|
Term
|
||||||||||||
Private
Placement Stock Holders
|
3/30/2009
|
8,131,667 | $ | 0.450 | 8,131,667 |
3/29/2014
|
5 years
|
||||||||||
Finder
Fee on Private Placement
|
3/30/2009
|
717,000 | $ | 0.165 | 717,000 |
3/29/2014
|
5
years
|
||||||||||
Longview
Fund Allonge Agreement
|
1/5/2010
|
100,000 | $ | 0.150 | 100,000 |
1/4/2013
|
3
years
|
||||||||||
Peninsula
Bank Business Funding - Line of Credit
|
3/4/2010
|
1,000,000 | $ | 0.100 | 1,000,000 |
3/3/2016
|
6
years
|
||||||||||
Total
Warrants
|
9,948,667 | 9,948,667 |
During
the three and six months ended March 28, 2010 Optex Systems Holdings recorded a
total of $3,395 in interest expense related to the outstanding warrants and has
an unamortized interest balance of $28,605. These warrants are not
included in the computation of weighted average of shares as it would be
anti-dilutive.
Note
10–Stockholders Equity
Common
stock:
Optex
Systems, Inc. (Texas) was authorized to issue 100,000 shares of no par common
stock. At September 28, 2008, there were 18,870 shares issued and 10,000
shares outstanding.
F-18
The
common stock, treasury stock and additional paid in capital accounts have been
presented to reflect the ownership structure of Optex Systems, Inc. (Texas) as
it existed prior to the acquisition by Irvine Sensors Corporation, since Optex
Systems, Inc. (Texas) is presenting its financial statements as a separate,
stand-alone entity.
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities. The $15 million
of Irvine Sensors Corporation debt was contributed by Longview and Alpha to
Optex Systems, Inc. (Delaware), in exchange for a $6 million note payable from
Optex Systems, Inc. (Delaware) and a $9 million equity interest in Optex
Systems, Inc. (Delaware) (which consisted of the issuance by Optex Systems, Inc.
(Delaware) of 45,081,350 and 4,918,650 shares of its common stock to each of
Longview Fund and Alpha, respectively). On October 30, 2008, Alpha sold its
Optex Systems, Inc. (Delaware) common stock to Arland Holdings, Ltd. There was
no contingent consideration associated with the purchase. In February 20, 2009,
Longview sold 100% of its equity and debt interests in Optex Systems, Inc.
(Delaware) to Sileas (representing 90% of the then outstanding equity interests
in Optex Systems, Inc. (Delaware)), and Sileas became the majority owner of
Optex Systems Holdings.
Stock
Split:
On March
26, 2009, Optex Systems, Inc. (Delaware)’s Board of Directors effected a 1.7:1
forward split of its common stock to holders of record as of February 23,
2009. Accordingly, as a result of the forward split, the 45,081,350 shares
of common stock held by Sileas were split into 76,638,295 shares, and the
4,918,650 shares of common stock held by Arland Holdings, Ltd. were split into
8,361,705 shares.
As of
March 30, 2009, Optex Systems, Inc. (Delaware) was authorized to issue
200,000,000 shares of $0.001 par value common stock, of which 85,000,000 shares
were issued and outstanding as follows:
Sileas
Corp.
|
76,638,295
|
|||
Arland
Holdings, Ltd.
|
8,361,705
|
|||
Total
Outstanding
|
85,000,000
|
Reorganization
& Private Placement:
As a
result of the reorganization agreement and private placement, the 85,000,000
outstanding shares of common stock of Optex Systems, Inc. (Delaware) outstanding
as of March 30, 2009 were exchanged for 113,333,282 shares of common stock of
Optex Systems Holdings (formerly Sustut Exploration, Inc.). An additional
8,131,667 shares of Optex Systems Holdings common stock were issued in
connection with the private placement closed prior to the
reorganization.
On June
29, 2009, 750,000 shares of Optex Systems Holdings common stock were sold to in
a private transaction for gross proceeds of $150,000.
Each
share of common stock entitles the holder to one vote on matters brought to a
vote of the shareholders.
The
company granted an officer at the consummation of the reorganization options to
purchase 1,414,649 shares with an exercise price of $0.15 per share. The options
vest 34% one year following the date of grant, and 33% on each of the second and
third anniversaries following the date of grant. 480,981 of these options vested
on March 30, 2010, subsequent to the March 28, 2010 quarter end. See Note 9 -
Stock Based Compensation.
Series
A preferred stock:
On March
24, 2009, Optex Systems Holdings filed a Certificate of Designation with the
Secretary of State of the State of Delaware authorizing a series of preferred
stock, under its articles of incorporation, known as “Series A preferred stock”.
This Certificate of Designation was approved by Optex Systems Holdings’ Board of
Directors and Shareholders at a Board Meeting and Shareholders Meeting held on
February 25, 2009. The Certificate of Designation sets forth the following terms
for the Series A preferred stock: (i) number of authorized shares: 1,027; (ii)
per share stated value: $6,000; (iii) liquidation preference per share: stated
value; (iv) conversion price: $0.15 per share as adjusted from time to time; and
(v) voting rights: votes along with the common stock on an as converted basis
with one vote per share.
The
Series A preferred stock entitles the holders to receive cumulative dividends at
the rate of 6% per annum, payable in cash at the discretion of Board of
Directors. Each share of preferred stock is immediately convertible into common
shares at the option of the holder which entitles the holder to receive the
equivalent number of common shares equal to the stated value of the preferred
shares divided by the conversion price, which was initially set at $0.15 per
share.
Holders
of preferred shares receive preferential rights in the event of liquidation.
Additionally the preferred stock shareholders are entitled to vote together with
the common stock on an “as-converted” basis.
On March
27, 2009, Sileas and Alpha exchanged their promissory notes in the total
principal amount of $6,000,000 plus accrued and unpaid interest thereon into
1,027 shares of Series A preferred stock. On March 30, 2009, shares of Optex
Systems, Inc. (Delaware) Series A preferred stock were exchanged on a 1:1 basis
for shares of Series A preferred stock of Optex Systems Holdings. As of
the three and six months ended March 28, 2010, Optex Systems Holdings recorded
$96,652 and $191,876 of dividends payable on Series A preferred shares,
respectively.
Cancellation
of Common Stock:
On June
29, 2009, Optex Systems Holdings cancelled an investor relations agreement
resulting in the return of 700,000 shares of common stock previously issued by
Sustut prior to the reverse merger on March 30, 2009. The shares were
valued at $105,000, returned to Optex System Holdings, and then cancelled (see
also Note 9 regarding new investor relations shares issued).
F-19
OPTEX
SYSTEMS INC.
INDEX
TO FINANCIAL STATEMENTS
Reports
of Independent Registered Public Accounting Firm
|
F-20
|
|
Balance
Sheets as of September 27, 2009 (Successor) and September 28, 2008
(Predecessor)
|
F-23
|
|
Statements
of Operations for years ended September 27, 2009 (Successor and
Predecessor) and September 28, 2008 (Predecessor)
|
F-25
|
|
Statements
of Cash Flows for the years ended September 27, 2009 (Successor) and
September 28, 2008 (Predecessor)
|
F-26
|
|
Statements
of Stockholders’ Equity (Deficit) for the years ended September 29, 2009
(Successor and Predecessor) and September 28, 2008
(Predecessor)
|
|
F-28
|
F-20
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Optex Systems Holdings, Inc.
Richardson,
Texas
We have
audited the accompanying balance sheet of Optex Systems Holdings, Inc. (the
Company) as of September 27, 2009, and the related statements of operations,
stockholders’ equity, and cash flows for the period October 15, 2008 through
September 27, 2009. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Optex Systems Holdings, Inc. as of
September 27, 2009, and the results of its operations and its cash flows for the
period October 15, 2008 through September 27, 2009 in conformity with accounting
principles generally accepted in the United States of America.
/s/EFP
Rotenberg, LLP
EFP
Rotenberg, LLP
Rochester,
New York
January
11, 2010
F-21
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Optex Systems, Inc. (Texas)
Richardson,
Texas
As
successor by merger, effective October 1, 2009, of the registered public
accounting firm Rotenberg & Co., LLP, we have audited the accompanying
balance sheet of Optex Systems, Inc. (Texas) (the Company) as of September 28,
2008, and the related statements of operations, stockholders’ equity, and cash
flows for the year then ended and for the period September 29, 2008 through
October 14, 2008. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Optex Systems, Inc. (Texas) as of
September 28, 2008, and the results of its operations and its cash flows for the
year then ended and for the period September 29, 2008 through October 14, 2008
in conformity with accounting principles generally accepted in the United States
of America.
/s/EFP
Rotenberg, LLP
EFP
Rotenberg, LLP
Rochester,
New York
January
11, 2010
F-22
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Balance Sheets
|
Successor
|
Predecessor
|
||||||
|
September 27, 2009
|
September 28, 2008
|
||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$
|
915,298
|
$
|
170,183
|
||||
Accounts
Receivable
|
1,802,429
|
2,454,235
|
||||||
Net
Inventory
|
8,013,881
|
4,547,726
|
||||||
Deferred
Tax Asset
|
711,177
|
-
|
||||||
Prepaid
Expenses
|
318,833
|
307,507
|
||||||
Total
Current Assets
|
$
|
11,761,618
|
$
|
7,479,651
|
||||
Property
and Equipment
|
||||||||
Property
Plant and Equipment
|
$
|
1,341,271
|
$
|
1,314,109
|
||||
Accumulated
Depreciation
|
(1,094,526
|
)
|
(994,542
|
)
|
||||
Total
Property and Equipment
|
$
|
246,745
|
$
|
319,567
|
||||
Other
Assets
|
||||||||
Security
Deposits
|
$
|
20,684
|
$
|
20,684
|
||||
Intangibles
|
1,965,596
|
1,100,140
|
||||||
Goodwill
|
7,110,415
|
10,047,065
|
||||||
Total
Other Assets
|
$
|
9,096,695
|
$
|
11,167,889
|
||||
Total
Assets
|
$
|
21,105,058
|
$
|
18,967,107
|
The
accompanying notes are an integral part of these financial
statements
F-23
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Balance Sheets - Continued
|
Successor
|
Predecessor
|
||||||
|
September 27, 2009
|
September 28, 2008
|
||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
Payable
|
$
|
2,497,322
|
$
|
1,821,534
|
||||
Accrued
Expenses
|
671,045
|
798,974
|
||||||
Accrued
Warranties
|
81,530
|
227,000
|
||||||
Accrued
Contract Losses
|
1,348,060
|
821,885
|
||||||
Loans
Payable
|
-
|
373,974
|
||||||
Income
Tax Payable
|
-
|
4,425
|
||||||
Total
Current Liabilities
|
$
|
4,597,957
|
$
|
4,047,792
|
||||
Other
Liabilities
|
||||||||
Note
Payable
|
-
|
$
|
2,000,000
|
|||||
Accrued
Interest on Note
|
-
|
336,148
|
||||||
Due
to Parent
|
-
|
4,300,151
|
||||||
Total
Other Liabilities
|
$
|
-
|
$
|
6,636,299
|
||||
Total
Liabilities
|
$
|
4,597,957
|
$
|
10,684,091
|
||||
Stockholders'
Equity
|
||||||||
Optex
Systems Holdings, Inc. – (par $0.001, 200,000,000 authorized, 139,444,940
shares issued and outstanding as of September 27,
2009)
|
$
|
139,445
|
||||||
Optex
Systems Holdings, Inc. Preferred Stock ($0.001 par 5,000
authorized, 1027 Series A preferred issued and
outstanding)
|
1
|
|||||||
Optex
Systems, Inc. – Texas Common Stock (no par 100,000 authorized, 18,870
shares issued and 10,000 shares outstanding)
|
164,834
|
|||||||
Optex
Systems, Inc. – Texas Treasury Stock (8,870 shares at
cost)
|
-
|
(1,217,400
|
)
|
|||||
Additional
Paid-in-capital
|
16,643,388
|
15,246,282
|
||||||
Retained
Earnings (Deficit)
|
(275,733
|
)
|
(5,910,700
|
)
|
||||
Total
Stockholders' Equity
|
$
|
16,507,101
|
$
|
8,283,016
|
||||
Total
Liabilities and Stockholders' Equity
|
$
|
21,105,058
|
$
|
18,967,107
|
The
accompanying notes are an integral part of these financial
statements
F-24
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Statements of Operations
|
Successor
|
Predecessor
|
Predecessor
|
|||||||||
|
For the period October
15, 2008 through
September 27, 2009
|
For the period
September 29, 2008
through October 14,
2008
|
Twelve Months
ended September
28, 2008
|
|||||||||
Revenues
|
$
|
26,708,799
|
$
|
871,938
|
$
|
20,017,209
|
||||||
Total
Cost of Sales
|
24,073,449
|
739,868
|
18,164,019
|
|||||||||
Gross
Margin
|
$
|
2,635,350
|
$
|
132,070
|
$
|
1,853,190
|
||||||
General
and Administrative
|
||||||||||||
Salaries
and Wages
|
$
|
644,861
|
$
|
22,028
|
$
|
910,854
|
||||||
Employee
Benefits & Taxes
|
227,315
|
495
|
190,489
|
|||||||||
Employee
Stock/Option Bonus Plan
|
39,528
|
(4,812
|
)
|
378,716
|
||||||||
Amortization
of Intangible
|
404,634
|
-
|
223,491
|
|||||||||
Rent,
Utilities and Building Maintenance
|
210,258
|
12,493
|
228,694
|
|||||||||
Investor
Relations
|
203,696
|
-
|
-
|
|||||||||
Legal
and Accounting Fees
|
434,309
|
360
|
223,715
|
|||||||||
Consulting
and Contract Service Fees
|
220,090
|
10,527
|
325,723
|
|||||||||
Travel
Expenses
|
47,595
|
-
|
135,821
|
|||||||||
Corporate
Allocations
|
-
|
-
|
2,076,184
|
|||||||||
Board
of Director Fees
|
125,000
|
-
|
-
|
|||||||||
Asset
Impairment of Goodwill
|
-
|
-
|
1,586,416
|
|||||||||
Other
Expenses
|
282,136
|
16,155
|
227,336
|
|||||||||
Total
General and Administrative
|
$
|
2,839,422
|
$
|
57,246
|
$
|
6,507,440
|
||||||
Operating
Income (Loss)
|
$
|
(204,072
|
)
|
$
|
74,824
|
$
|
(4,654,251
|
)
|
||||
Other
Expenses
|
||||||||||||
Other
Income and Expense
|
$
|
-
|
$
|
-
|
$
|
(507
|
)
|
|||||
Interest
(Income) Expense – Net
|
170,078
|
9,492
|
199,753
|
|||||||||
Total
Other
|
$
|
170,078
|
$
|
9,492
|
$
|
199,246
|
||||||
Income
(Loss) Before Taxes
|
$
|
(374,150
|
)
|
$
|
65,332
|
$
|
(4,853,496
|
)
|
||||
Income
Taxes (Benefit)
|
(284,663
|
)
|
-
|
(21,544
|
)
|
|||||||
Net
Income (Loss) After Taxes
|
$
|
(89,487
|
)
|
$
|
65,332
|
$
|
(4,831,952
|
)
|
||||
Less
preferred stock dividend
|
$
|
(186,246
|
)
|
$
|
-
|
$
|
-
|
|||||
Net
income (loss) applicable to common shareholders
|
$
|
(275,733
|
)
|
$
|
65,332
|
$
|
(4,831,952
|
)
|
||||
Basic
and diluted earnings (loss) per share
|
$
|
(0.00
|
)
|
$
|
6.53
|
$
|
(483.20
|
)
|
||||
Weighted
Average Common Shares Outstanding
|
126,290,753
|
10,000
|
10,000
|
The
accompanying notes are an integral part of these financial
statements
F-25
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Statements of Cash Flows
|
Successor
|
Predecessor
|
Predecessor
|
|||||||||
|
For the period
October 15, 2008
through September
27, 2009
|
For the period
September 29,
2008 through
October 14, 2008
|
Year ended
September 28, 2008
|
|||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
Income (Loss)
|
$
|
(89,487
|
)
|
$
|
65,332
|
$
|
(4,831,952
|
)
|
||||
Adjustments
to reconcile net income (loss) to net cash (used in) provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
2,161,486
|
9,691
|
760,801
|
|||||||||
Provision
for (use of) allowance for inventory valuation
|
(146,266
|
)
|
27,363
|
(102,579
|
)
|
|||||||
Noncash
interest expense
|
159,780
|
9,500
|
200,000
|
|||||||||
(Gain)
loss on disposal and impairment of assets
|
-
|
-
|
1,586,416
|
|||||||||
Stock
Option Compensation Expense
|
39,528
|
-
|
-
|
|||||||||
(Increase)
decrease in accounts receivable
|
(397,996
|
)
|
1,049,802
|
(410,602
|
)
|
|||||||
(Increase)
decrease in inventory (net of progress billed)
|
(2,483,686
|
)
|
(863,566
|
)
|
1,667,418
|
|||||||
(Increase)
decrease in other current assets
|
196,633
|
18,541
|
(290,435
|
)
|
||||||||
(Increase)
decrease in deferred tax asset
|
(711,177
|
)
|
-
|
-
|
||||||||
Increase
(decrease) in accounts payable and accrued expenses
|
733,453
|
(186,051
|
)
|
(1,132,319
|
)
|
|||||||
Increase
(decrease) in accrued warranty costs
|
(145,470
|
)
|
-
|
227,000
|
||||||||
Increase
(decrease) in due to parent
|
-
|
1,428
|
2,312,280
|
|||||||||
Increase
(decrease) in accrued estimated loss on contracts
|
541,479
|
(15,304
|
)
|
(555,462
|
)
|
|||||||
Increase
(decrease) in income taxes payable
|
-
|
-
|
(21,544
|
)
|
||||||||
Total
adjustments
|
$
|
(52,236
|
)
|
$
|
51,404
|
$
|
4,240,974
|
|||||
Net
cash (used in)provided by operating activities
|
$
|
(141,723
|
)
|
$
|
116,736
|
$
|
(590,978
|
)
|
||||
Cash
flows from investing activities:
|
||||||||||||
Cash
Received through Optex Systems, Inc. (Texas) acquisition
|
$
|
253,581
|
$
|
-
|
$
|
-
|
||||||
Purchased
of property and equipment
|
(13,824
|
)
|
(13,338
|
)
|
(117,566
|
)
|
||||||
Net
cash (used in) provided by investing activities
|
$
|
239,757
|
$
|
(13,338
|
)
|
$
|
(117,566
|
)
|
||||
Cash
flows from financing activities:
|
||||||||||||
Issuance
of common stock for cash
|
$
|
1,024,529
|
$
|
-
|
$
|
-
|
||||||
Proceeds
(to) from loans payable
|
(207,265
|
)
|
(20,000
|
)
|
373,974
|
|||||||
Net
cash (used in) provided by financing activities
|
$
|
817,264
|
$
|
(20,000
|
)
|
$
|
373,974
|
|||||
Net
increase (decrease) in cash and cash equivalents
|
$
|
915,298
|
$
|
83,398
|
$
|
(334,570
|
)
|
|||||
Cash
and cash equivalents at beginning of period
|
-
|
170,183
|
504,753
|
|||||||||
Cash
and cash equivalents at end of period
|
$
|
915,298
|
$
|
253,581
|
$
|
170,183
|
The
accompanying notes are an integral part of these financial
statements
F-26
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Statements of Cash Flows – continued
|
Successor
|
Predecessor
|
Predecessor
|
|||||||||
|
For the period October
15, 2008 through
September 27, 2009
|
For the period
September 29,
2008 through
October 14,
2008
|
Year ended
September 28,
2008
|
|||||||||
Noncash
investing and financing activities:
|
||||||||||||
Optex
Systems, Inc. (Delaware) (Successor) purchase of Optex Systems, Inc.
(Texas) (Predecessor)
|
||||||||||||
Cash
received
|
$
|
253,581
|
-
|
-
|
||||||||
Accounts
Receivable
|
1,404,434
|
-
|
-
|
|||||||||
Inventory
|
5,383,929
|
-
|
-
|
|||||||||
Intangibles
|
4,036,790
|
-
|
-
|
|||||||||
Other
Assets
|
632,864
|
-
|
-
|
|||||||||
Accounts
Payable
|
(1,953,833
|
)
|
-
|
-
|
||||||||
Other
Liabilities
|
(1,868,180
|
)
|
-
|
-
|
||||||||
Debt
|
(6,000,000
|
)
|
-
|
-
|
||||||||
Goodwill
|
7,110,415
|
-
|
-
|
|||||||||
Issuance
of Stock
|
$
|
9,000,000
|
-
|
-
|
||||||||
Conversion
of Debt to Series A Preferred Stock
|
||||||||||||
Additional
Paid in Capital (6,000,000 Debt Retirement plus accrued interest of
$159,780)
|
$
|
6,159,780
|
-
|
-
|
||||||||
Issuance
of Common shares in exchange for Investor Relations
Services
|
||||||||||||
Prepaid
Expenses (1,030,000 shares issued at $0.001 par)
|
$
|
226,500
|
-
|
-
|
||||||||
Supplemental
cash flow information:
|
||||||||||||
Cash
paid for interest
|
$
|
10,290
|
-
|
-
|
||||||||
Cash
paid for taxes
|
$
|
488,799
|
-
|
-
|
The
accompanying notes are an integral part of these financial
statements
F-27
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Consolidated
Statement of Stockholders' Equity
|
Common
|
Series A
|
Additional
|
Total
|
||||||||||||||||||||||||||||
|
Shares
|
Preferred
|
Common
|
Preferred
|
Treasury Stock
|
Paid in
|
Retained
|
Stockholders
|
||||||||||||||||||||||||
|
Outstanding
|
Shares
|
Stock
|
Series A Stock
|
Optex Texas
|
Capital
|
Earnings
|
Equity
|
||||||||||||||||||||||||
Predecessor Entity
|
||||||||||||||||||||||||||||||||
Balance
at September 28, 2008
|
10,000
|
$
|
164,834
|
$
|
(1,217,400
|
)
|
$
|
15,246,282
|
$
|
(5,910,700
|
)
|
$
|
8,283,016
|
|||||||||||||||||||
Net
Income
|
65,332
|
65,332
|
||||||||||||||||||||||||||||||
Balance
at October 14, 2008
|
10,000
|
-
|
$
|
164,834
|
$
|
-
|
$
|
(1,217,400
|
)
|
$
|
15,246,282
|
$
|
(5,845,368
|
)
|
$
|
8,348,348
|
||||||||||||||||
Successor
Entity
|
||||||||||||||||||||||||||||||||
Balance
at October 15, 2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Issuance
of Common Stock (1)
|
113,333,282
|
-
|
$
|
113,333
|
$
|
-
|
$
|
-
|
$
|
8,886,667
|
$
|
-
|
$
|
9,000,000
|
||||||||||||||||||
Cancellation
of Investor Relations Stock
|
(700,000
|
)
|
(700
|
)
|
(104,300
|
)
|
(105,000
|
)
|
||||||||||||||||||||||||
Investor
Relations Common Stock Issued
|
480,000
|
480
|
143,520
|
144,000
|
||||||||||||||||||||||||||||
Issuance
of Common Stock
|
750,000
|
750
|
149,250
|
150,000
|
||||||||||||||||||||||||||||
Conversion
of 6,000,000 Debt and Interest to Series A preferred
shares
|
1,027
|
1
|
6,159,780
|
6,159,781
|
||||||||||||||||||||||||||||
Sustut
Exploration Reorganization
|
17,449,991
|
17,450
|
170,050
|
187,500
|
||||||||||||||||||||||||||||
Stock
Option Compensation Expense
|
-
|
-
|
-
|
-
|
39,528
|
-
|
39,528
|
|||||||||||||||||||||||||
Private
Placement Sale of Stock
|
8,131,667
|
-
|
8,132
|
-
|
-
|
1,012,647
|
-
|
1,020,779
|
||||||||||||||||||||||||
Accumulated
Dividends on Preferred Stock
|
186,246
|
(186,246
|
)
|
-
|
||||||||||||||||||||||||||||
Net
Earnings (Loss) from continuing operations
|
-
|
-
|
-
|
-
|
-
|
-
|
(89,487
|
)
|
(89,487
|
)
|
||||||||||||||||||||||
Balance
at September 27, 2009
|
139,444,940
|
1,027
|
$
|
139,445
|
$
|
1
|
$
|
-
|
$
|
16,643,388
|
$
|
(275,733
|
)
|
$
|
16,507,101
|
The
accompanying notes are an integral part of these financial
statements
(1)After
giving effect to the equivalent number of shares issued to existing Optex
shareholders due to the reorganization.
F-28
Note 1 - Organization and
Operations
On March
30, 2009, Optex Systems Holdings, Inc., (formerly known as Sustut Exploration,
Inc.), a Delaware corporation, along with Optex Systems, Inc., a privately held
Delaware corporation, which is a wholly-owned subsidiary of Optex
Systems Holdings’ , also known as Successor, entered into a
reorganization agreement and plan of reorganization, pursuant to which Optex
Systems, Inc. (Delaware) was acquired by Optex Systems Holdings in a share
exchange transaction. Optex Systems Holdings became the surviving
corporation. At the closing of the reorganization, the registrant changed its
name from Sustut Exploration Inc. to Optex Systems Holdings, Inc. and its year
end from December 31 to a fiscal year ending on the Sunday nearest September
30.
On
October 14, 2008, certain senior secured creditors of Irvine Sensors
Corporation, Longview Fund, L.P. and Alpha Capital Anstalt, formed Optex
Systems, Inc. (Delaware), which acquired all of the assets and assumed certain
liabilities of Optex Systems, Inc., a Texas corporation and wholly-owned
subsidiary of Irvine Sensors Corporation, also known as Predecessor, in a
transaction that was consummated via purchase at a public
auction. Following this asset purchase, Optex Systems, Inc. (Texas)
remained a wholly-owned subsidiary of Irvine Sensors
Corporation.
In
accordance with FASB ASC 805 (Prior authoritative literature: SFAS
No. 141(R), “Business
Combinations” and EITF 98-3 “Determining Whether a Non-monetary
Transaction Involves Receipt of Productive Assets or of a Business”) Optex
Systems, Inc. (Delaware)’s purchase of substantially all of the assets and
assumption of certain liabilities represented the acquisition of a
business. FASB ASC 805 outlines the guidance in determining whether a
“business” has been acquired in a transaction. For a transferred set of
activities and assets to be a business, it must contain all of the inputs and
processes necessary for it to continue to conduct normal operations after the
transferred set of assets is separated from the transferor, which include the
ability to sustain a revenue stream by providing its outputs to customers. Optex
Systems, Inc. (Delaware) obtained the inputs and processes necessary for normal
operations.
Optex
Systems, Inc. (Texas) was a privately held Subchapter “S” Corporation from
inception in 1987 until December 30, 2005 when 70% of the issued and outstanding
stock was acquired by Irvine Sensors Corporation, and Optex Systems, Inc.
(Texas) was automatically converted to a Subchapter “C”
Corporation. On December 29, 2006, the remaining 30% equity interest
in Optex Systems, Inc. (Texas) was purchased by Irvine Sensors
Corporation.
On
February 20, 2009, Sileas Corporation., a newly-formed Delaware corporation,
owned by present members of Optex Systems Holdings’ management, purchased 100%
of Longview's equity and debt interest in Optex Systems, Inc. (Delaware),
representing 90% of the issued and outstanding common equity interests in Optex
Systems, Inc. (Delaware), in a private transaction. See Note
4.
Optex
Systems, Inc. (Delaware) operated as a privately-held Delaware corporation until
March 30, 2009, when as a result of the reorganization agreement (described
above and also in Note 5), it became a wholly-owned subsidiary of Optex Systems
Holdings. Sileas is the majority owner (parent) of Optex Systems
Holdings owning 73.52% of Optex Systems Holdings. Optex Systems
Holdings plans to carry on the business of Optex Systems, Inc. (Delaware) as its
sole line of business and all of Optex Systems Holdings’ operations are
conducted by and through its wholly-owned subsidiary, Optex Systems, Inc.
(Delaware). Accordingly, in subsequent periods the financial
statements presented will be those of the accounting acquirer. The
financial statements of Optex Systems Holdings represent subsidiary statements
and do not include the accounts of its majority owner.
Optex
Systems Holdings’ operations are based in Richardson, Texas in a leased facility
comprising 49,100 square feet. As of September 27, 2009, Optex
Systems Holdings operated with 107 full-time equivalent
employees.
F-29
Optex
Systems Holdings manufactures optical sighting systems and assemblies, primarily
for Department of Defense applications. Its products are installed on
a variety of U.S. military land vehicles such as the Abrams and Bradley fighting
vehicles, light armored and advanced security vehicles and have been selected
for installation on the Stryker family of vehicles. Optex Systems Holdings also
manufactures and delivers numerous periscope configurations, rifle and
surveillance sights and night vision optical assemblies. Optex Systems Holdings’
products consist primarily of build to customer print products that are
delivered both directly to the military and to other defense prime
contractors.
In
February 2009, Optex Systems Holdings’ ISO certification status was
upgraded from 9001:2000 to 9001:2008 bringing Optex Systems Holdings into
compliance with the new ISO standards rewritten to align with ISO
14001.
Note
2 - Accounting Policies
Basis
of Presentation
Principles of
Consolidation: The consolidated financial statements include
the accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex
Systems, Inc. (Delaware). All significant inter-company balances and
transactions have been eliminated in consolidation.
The
accompanying financial statements include the results of operations and cash
flows of Optex Systems, Inc. (Delaware), the accounting acquirer in
the Sustut reorganization and the Successor in the October 14, 2008 Optex
Systems, Inc. (Texas) asset purchase transaction, for the period from October
15, 2008 through September 27, 2009. The accompanying financial
statements include the balance sheet at September 28, 2008 and the results
of operations, changes in stockholders’ equity and cash flows for the period
from September 29, 2008 through October 14, 2008 of Optex Systems, Inc. (Texas),
Predecessor.
The
accompanying financial statements for the balance sheet as of September 28, 2008
and the results of operations and cash flows for the period ending September 28,
2008 include the historical accounts of Optex Systems, Inc. (Texas). These
financial statements have been presented as subsidiary-only financial
statements, reflecting the balance sheets, results of operations and cash flows
of the subsidiary as a stand-alone entity.
Although,
Optex Systems, Inc. (Texas) (Predecessor) has been majority owned by various
parent companies described in the preceding paragraphs, no accounts of the
parent companies or the effects of consolidation with any parent companies have
been included in the accompanying financial statements. The Optex
Systems, Inc. (Texas) accounts have been presented on the basis of push
down accounting in accordance with FASB ASC 805-50-S99 (Prior authoritative
literature: Staff Accounting Bulletin No. 54 Application of “Push Down” Basis of
Accounting in Financial Statements of Subsidiaries Acquired by Purchase).
FASB ASC 805-50-S99 states that the push down basis of accounting should be used
in a purchase transaction in which the entity becomes wholly-owned. Under the
push down basis of accounting certain transactions incurred by the parent
company, which would otherwise be accounted for in the accounts of the parent,
are “pushed down” and recorded on the financial statements of the subsidiary.
Accordingly, items resulting from the Optex Systems, Inc. (Texas) purchase
transaction such as goodwill, debt incurred by the parent to acquire the
subsidiary and other costs related to the purchase have been recorded on the
financial statements of Optex Systems Holdings.
Upon
completing the business combination with Sustut on March 30, 2009, Optex Systems
Holdings elected to change its fiscal year to match that of Optex Systems, Inc.
(Delaware). Accordingly, all activity of the combined companies was presented as
of the quarter’s end of the accounting acquirer, which was March 29,
2009.
Although
the effective date of the merger was March 30, 2009, all transactions related to
the business combination (and only those transactions), with Sustut have been
reflected as if they had taken place one day prior (on March 29, 2009) so as to
coincide with the accounting acquirer’s quarter end of March 29, 2009. See Note
5 for details of the reorganization.
F-30
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.
Segment
Reporting: Management has determined that Optex Systems Holdings, Inc. is
organized, managed and internally reported as one business segment. Segments are
determined based on differences in products, internal reporting and how
operational decisions are made.
Fiscal
Year: Optex Systems Holdings’ fiscal year ends on the Sunday
nearest September 30. Fiscal year 2009 ended on September 27, 2009
and included 52 weeks. Fiscal year 2008 ended on September 28, 2008
and included 52 weeks.
Fair Value of
Financial Instruments: FASB ASC 825-10 (Prior
authoritative literature: FASB No. 107, " Disclosures about Fair Value of
Financial Instruments) ," requires disclosure of fair value information
about certain financial instruments, including, but not limited to, cash and
cash equivalents, accounts receivable, refundable tax credits, prepaid expenses,
accounts payable, accrued expenses, notes payable to related parties and
convertible debt-related securities. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information available to
management as of fiscal years ended September 27, 2009 and September 28, 2008.
The carrying value of the balance sheet financial instruments included in Optex
Systems, Inc. (Texas)’s consolidated financial statements approximated their
fair values.
Cash and Cash
Equivalents: For financial statement
presentation purposes, Optex considers those short-term, highly liquid
investments with original maturities of three months or less to be cash or cash
equivalents.
Concentration of
Credit Risk: Optex Systems Holdings’ cash and cash equivalents are on
deposit with banks. Only a portion of the cash and cash equivalents would be
covered by deposit insurance and the uninsured balances are substantially
greater than the insured amounts. Although cash and cash equivalent balances
exceed insured deposit amounts, management does not anticipate non-performance
by the banks.
Optex
revenues and accounts receivables are derived from sales to U.S. government
agencies (51%), General Dynamics (46%) or other prime government contractors
(3%). Optex does not believe that this concentration results in undue
credit risk because of the financial strength of the payees.
Accounts
Receivable: Optex records its accounts receivable at the original sales
invoice amount less shipment liquidations for previously collected
advance/progress bills and an allowance for doubtful accounts. An account
receivable is considered to be past due if any portion of the receivable balance
is outstanding beyond its scheduled due date. On a quarterly basis, Optex
evaluates its accounts receivable and establishes an allowance for doubtful
accounts, based on its history of past write-offs and collections, and current
credit conditions. No interest is accrued on past due accounts receivable. As
the customer base is primarily U.S. government and government prime contractors,
Optex has concluded that there is no need for an allowance for doubtful accounts
for the years ended September 27, 2009 and September 28, 2008. Optex
charges uncollectible accounts to bad debt expense in the period as they are
first deemed uncollectible. In 2009, Optex Systems Holdings recorded
$35,297 in bad debt expense attributable to one customer that went out of
business.
Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted as
appropriate for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. Cost is determined using the first-in
first-out method. Under arrangements by which progress payments are received
against certain contracts, the customer retains a security interest in the
undelivered inventory identified with these contracts. Payments received
for such undelivered inventory are classified as unliquidated progress payments
and deducted from the gross inventory balance. As of September 27, 2009,
and September 28, 2008 inventory included:
F-31
|
Successor
|
Predecessor
|
||||||
|
As of
September 27, 2009
|
As of
September 28, 2008
|
||||||
Raw
Materials
|
$
|
7,161,241
|
$
|
5,575,520
|
||||
Work
in Process
|
4,043,308
|
4,199,657
|
||||||
Finished
Goods
|
245,056
|
28,014
|
||||||
Gross
Inventory
|
$
|
11,449,605
|
$
|
9,803,191
|
||||
Less:
|
||||||||
Unliquidated
Progress Payments
|
(2,880,898
|
)
|
(4,581,736
|
)
|
||||
Inventory
Reserves
|
(554,826
|
)
|
(673,729
|
)
|
||||
Net
Inventory
|
$
|
8,013,881
|
$
|
4,547,726
|
Warranty
Costs: Some of Optex Systems Holdings’ customers require that the
company warrant the quality of its products to meet customer requirements and be
free of defects for up to fifteen months subsequent to delivery.. In the
year ended September 27, 2009, Optex Systems Holdings, Inc. recognized income of
$145,470 for unrecognized warranty costs due to an improvement in the warranty
experience rate related to warranties expiring in fiscal 2009. In
the year ended September 28, 2008, Optex Systems, Inc. (Texas) incurred $227,000
of warranty expenses representing the estimated cost of repair or replacement
for specific customer returned products still covered under warranty as of the
return date and awaiting repair or replacement, in addition to estimated future
warranty costs for covered shipments occurring during the fifteen months
proceeding September 28, 2008. Future warranty costs are based on the
estimated cost of replacement for expected returns based upon our most recent
experience rate of defects as a percentage of warranty covered
sales.
Property and
Equipment: Property and equipment
are recorded at cost. Depreciation is computed using the straight line method
over the estimated useful lives of the assets, ranging from three to seven
years. Expenditures for renewals and betterments are capitalized.
Expenditures for minor items, repairs and maintenance are charged to operations
as incurred. Gain or loss upon sale or retirement due to obsolescence is
reflected in the operating results in the period the event takes
place.
Goodwill and
Other Intangible Assets: Goodwill represents the cost of
acquired businesses in excess of fair value of the related net assets at
acquisition. (See also notes 4 and 11). Optex Systems Holdings does not amortize
goodwill, but tests it annually for impairment using a fair value approach
during the fiscal fourth quarter and between annual testing periods, if
circumstances warrant. The performance of the test involves a two-step
process. The first step of the impairment test involves comparing the fair
values of the applicable reporting units with their aggregate carrying values,
including goodwill. We generally determine the fair value of our reporting
units using the income approach methodology of valuation that includes the
discounted cash flow method as well as other generally accepted valuation
methodologies, which requires significant judgment by management. If the
carrying amount of a reporting unit exceeds the reporting unit’s fair value, we
perform the second step of the goodwill impairment test to determine the amount
of impairment loss. The second step of the goodwill impairment test
involves comparing the implied fair value of the affected reporting unit’s
goodwill with the carrying value of that goodwill. These impairment tests
may result in impairment charges that could have a material adverse impact on
our results of operations. The goodwill of Optex Systems Holdings, Inc.
was reviewed as of September 27, 2009 and based on the assessment, it was
determined that no impairment was required.
F-32
Optex
amortizes the cost of other intangibles over their estimated useful lives,
unless such lives are deemed indefinite. Amortizable intangible assets are
tested for impairment based on undiscounted cash flows and, if impaired, written
down to fair value based on either discounted cash flows or appraised values.
The identified amortizable intangible assets at September 27, 2009 derived from
the acquisition of Optex Systems, Inc. (Delaware) from Irvine Sensors as of
October 14, 2008 and consisted of customer backlog, with initial useful lives
ranging from one to five years. (See note 4 and 11). The identified amortizable
intangible assets at September 28, 2008 derived from the acquisition of Optex
Systems, Inc. (Texas) by Irvine Sensors and consisted of non-competition
agreements and customer backlog, with initial useful lives ranging from two to
eight years. (See note 4 and 11).
Intangible
assets with indefinite lives are tested annually for impairment, during the
fiscal fourth quarter and between annual periods, if impairment indicators
exist, and are written down to fair value as required.
Impairment or
Disposal of Long-Lived Assets: Optex Systems Holdings adopted the
provisions of FASB ASC 360-10 (Prior authoritative literature FASB No. 144,
“Accounting for the Impairment
or Disposal of Long-lived Assets .”) This
standard requires, among other things, that long-lived assets be reviewed for
potential impairment whenever events or circumstances indicate that the carrying
amounts may not be recoverable. The assessment of possible impairment is based
on the ability to recover the carrying value of the asset from the expected
future pre-tax cash flows (undiscounted and without interest charges) of the
related operations. If these expected cash flows are less than the carrying
value of such asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value. The primary measure of fair value is
based on discounted cash flows. The measurement of impairment requires
management to make estimates of these cash flows related to long-lived assets,
as well as other fair value determinations.
Revenue
Recognition:
Optex
Systems Holdings recognizes revenue based on the modified percentage of
completion method utilizing the units-of-delivery method, in accordance with
FASB ASC 605-35 (Prior authoritative literature: SOP 81-1 “Accounting for Performance of
Construction–Type and certain Production –Type Contracts”):
The
units-of-delivery method recognizes as revenue the contract price of units of a
basic production product delivered during a period and as the cost of earned
revenue the costs allocable to the delivered units; costs allocable to
undelivered units are reported in the balance sheet as inventory or work in
progress. The method is used in circumstances in which an entity produces units
of a basic product under production-type contracts in a continuous or sequential
production process to buyers' specifications.
Optex
Systems Holdings contracts are fixed price production type contracts whereby a
defined order quantity is delivered to the customer during a continuous or
sequential production process tailored to the buyer’s specifications (build to
print). Optex Systems Holdings’ deliveries against these contracts
generally occur in monthly increments across fixed delivery periods spanning
from 3 to 36 months.
Estimated Costs
at Completion and Accrued Loss on Contracts: Optex Systems
Holdings reviews and reports on the performance of its contracts and production
orders against the respective resource plans for such contracts/orders. These
reviews are summarized in the form of estimates at completion. Estimates at
completion include Optex Systems Holdings’ incurred costs to date against the
contract/order plus management's current estimates of remaining amounts for
direct labor, material, other direct costs and subcontract support and indirect
overhead costs based on the completion status and future contractual
requirements for each order. If an estimate at completion indicates a potential
overrun (loss) against a fixed price contract/order, management generally seeks
to reduce costs and /or revise the program plan in a manner consistent with
customer objectives in order to eliminate or minimize any overrun and to secure
necessary customer agreement to proposed revisions.
If an
estimate at completion indicates a potential overrun against budgeted
resources for a fixed price contract/order, management first attempts to
implement lower cost solutions to still profitably meet the requirements of the
fixed price contract. If such solutions do not appear practicable, management
makes a determination whether to seek renegotiation of contract or order
requirements from the customer. If neither cost reduction nor renegotiation
appears probable, an accrual for the contract loss/overrun is recorded against
earnings and the loss is recognized in the first period the loss is identified
based on the most recent estimates at completion of the particular contract or
product order.
F-33
For the
fiscal years ended September 27, 2009 and September 28, 2008, estimated loss
reserves were $1,348,060 and $821,885, respectively. Increases in
estimated loss reserves from fiscal 2008 to fiscal 2009 of $526,175 were
primarily attributable to unanticipated increases in material and production
costs encountered in 2009 due to manufacturing issues on our U.S. government
Howitzer programs.
Government
Contracts: Virtually all of Optex Systems Holdings’ contracts
are prime or subcontracted directly with the federal government and as such, are
subject to Federal Acquisition Regulation (Federal Acquisition Regulation)
Subpart 49.5, “Contract Termination Clauses” and more specifically Federal
Acquisition Regulation clauses 52.249-2 “Termination for
Convenience of the Government (Fixed-Price)”, and 49.504 “Termination of
fixed-price contracts for default”. These clauses are standard clauses on
prime military contracts and are generally, “flowed down” to Optex Systems
Holdings as subcontractors on other military business. It has been Optex
Systems Holdings’ experience that the termination for convenience is rarely
invoked, except where it has been mutually beneficial for both parties.
Optex Systems Holdings is not currently aware of any pending
terminations for convenience or default on its existing
contracts.
In the
event a termination for convenience were to occur, these Federal
Acquisition Regulation clause 52.249-2 provides for full recovery of
all contractual costs and profits reasonably occurred up to and as a result of
the terminated contract. In the event a termination for default were to
occur, Optex Systems Holdings could be liable for any excess cost incurred by
the government to acquire supplies from another supplier similar to those
terminated from Optex Systems Holdings. Optex Systems Holdings would not
be liable for any excess costs if the failure to perform the contract arises
from causes beyond the control and without the fault or negligence of the
company as defined by Federal Acquisition Regulation clause 52.249-8.
In addition, the government may require Optex Systems Holdings to transfer title
and deliver to the government any completed supplies, partially completed
supplies and materials, parts, tools, dies, jigs, fixtures, plans, drawings,
information, and contract rights that Optex Systems Holdings has specifically
produced or acquired for the terminated portion of this contract. The
government shall pay contract price for completed supplies delivered and
accepted, and Optex Systems Holdings and the government would negotiate an
agreed upon amount of payment for manufacturing materials delivered and accepted
and for the protection and preservation of the property. Failure to agree on an
amount for manufacturing materials is subject to the Federal Acquisition
Regulation Disputes clause 52.233-1.
In some
cases, Optex Systems Holdings may receive orders subject to subsequent price
negotiation on contracts exceeding the $650,000 federal government simplified
acquisition threshold. These “undefinitized” contracts are considered firm
contracts but as Cost Accounting Standards Board covered contracts, they are
subject to the Truth in Negotiations Act disclosure requirements and downward
only price negotiation. As of September 27, 2009 and September 28, 2008
zero and approximately $4.0 million of booked orders fell under this
criteria. Optex Systems Holdings’ experience has been that the
historically negotiated price differentials have been immaterial and
accordingly, it does not anticipate any significant downward adjustments on
these booked orders.
Shipping and
Handling Costs: All shipping and handling costs are included as a
component of Cost of Goods sold.
Stock-Based
Compensation: In December 2004, FASB issued FASB ASC 718
(Prior authoritative literature: SFAS No. 123R, “Share-Based
Payment”). FASB ASC 718 establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity’s equity instruments or that may be settled by the issuance of
those equity instruments. FASB ASC 718 focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. FASB ASC 718 requires that the compensation cost relating to
share-based payment transactions be recognized in the financial
statements. That cost will be measured based on the fair value of the
equity or liability instruments issued.
F-34
Optex
Systems Holdings’ accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of FASB
ASC 505-50 (Prior authoritative literature: EITF 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services” and EITF 00-18, “Accounting Recognition for
Certain Transactions Involving Equity Instruments Granted to Other Than
Employees”). The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting agreement.
Stock-based compensation related to non-employees is accounted for based on the
fair value of the related stock or options or the fair value of the services,
whichever is more readily determinable in accordance with FASB ASC
718
Income
Tax/Deferred Tax: FASB ASC 740 (Prior Authoritative
Literature: SFAS No. 109, “Accounting for Income
Taxes”), requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on differing treatment of items for financial
reporting and income tax reporting purposes. The deferred tax balances are
adjusted to reflect tax rates by tax jurisdiction, based on currently enacted
tax laws, which will be in effect in the years in which the temporary
differences are expected to reverse. Optex Systems Holdings has recognized
deferred income tax benefits on net operating loss carry-forwards to the extent
Optex Systems Holdings believes it will be able to utilize them in future tax
filings.
Earnings per
Share: Basic earnings per share is computed by dividing
income available to common shareholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) for the period.
Diluted earnings per common share gives effect to the assumed exercise of stock
options when dilutive. Diluted earnings per share is computed by assuming
that any dilutive convertible securities outstanding were converted, with
related preferred stock dividend requirements and outstanding common shares
adjusted accordingly. It is also assumes that outstanding common shares
were increased by shares issuable upon exercise of those stock options for which
market price exceeds the exercise price, less shares which could have been
purchased by us with the related proceeds. In period of losses, diluted loss per
share is computed on the same basis as basic loss per share as the inclusion of
any other potential shares outstanding would be anti-dilutive.
If Optex
Systems Holdings had recorded income applicable to common shareholders for the
period October 15, 2008 through September 27, 2009, the weighted average number
of common shares outstanding would have increased by 42,570,745 shares,
reflecting the addition of dilutive securities in the calculation of diluted
earnings per share. There were no dilutive convertible securities for the
2008 fiscal year.
Note
3 - Recent Accounting Pronouncements
In June
2008, FASB issued FASB ASC 260-10-55 (Prior authoritative
literature: FASB Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”). FASB ASC 260-10-55 clarifies that share-based payment
awards that entitle their holders to receive nonforfeitable dividends or
dividend equivalents before vesting should be considered participating
securities. As participating securities, we will be required to include these
instruments in the calculation of our basic earnings per share, and we will need
to calculate basic earnings per share using the "two-class method." Restricted
stock is currently included in our dilutive earnings per share calculation using
the treasury stock method. The two-class method of computing earnings per share
is an earnings allocation formula that determines earnings per share for each
class of common stock and participating security according to dividends declared
(or accumulated) and participation rights in undistributed earnings. FASB ASC
260-10-55 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those fiscal
years. As such, Optex Systems Holdings is required to adopt these provisions at
the beginning of the fiscal year ending October 3, 2010. Optex Systems Holdings
does not expect adoption of FASB ASC 260-10-55 to have a material
effect on Optex Systems Holdings’ financial
statements.
F-35
In May
2009, FASB issued FASB ASC 855-10 (Prior authoritative
literature: SFAS No. 165, "Subsequent Events"). FASB
ASC 855-10 establishes principles and requirements for the reporting of events
or transactions that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. FASB ASC 855-10 is
effective for financial statements issued for fiscal years and interim periods
ending after June 15, 2009. As such, Optex Systems Holdings adopted these
provisions at the beginning of the interim period ended June 28, 2009. Adoption
of FASB ASC 855-10 did not have a material effect on Optex
Systems Holdings’ financial statements.
In June
2009, FASB issued ASC 105-10 (Prior authoritative literature: SFAS
No. 168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10
establishes the FASB Accounting Standards Codification TM (Codification) as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. FASB ASC 105-10 is effective for financial statements
issued for fiscal years and interim periods ending after September 15, 2009. As
such, Optex Systems Holdings is required to adopt these provisions at the
beginning of the interim period ending September 27, 2009. Adoption of
FASB ASC 105-10 did not have a material effect on Optex Systems Holding’s
financial statements.
In June
2006, FASB issued FASB ASC 740-10 (Prior authoritative
literature: FASB Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 ”).
This Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB No.
109, “ Accounting
for Income Taxes ” . FASB ASC
740-10 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FASB ASC 740-10 is effective for fiscal
years beginning after December 15, 2006. The adoption of FASB ASC 740-10 did not
have a material impact on Optex Systems Holdings’ financial position,
results of operations, or cash flows.
In
September 2006, the FASB issued FASB ASC 820-10 (Prior authoritative
literature: FASB Statement 157, “Fair Value Measurements”).
FASB ASC 820-10 defines fair value, establishes a framework for measuring fair
value under GAAP and expands disclosures about fair value measurements. FASB ASC
820-10 applies under other accounting pronouncements that require or permit fair
value measurements. Accordingly, FASB ASC 820-10 does not require any new fair
value measurements. However, for some entities, the application of FASB ASC
820-10 will change current practice. The changes to current practice resulting
from the application of FASB ASC 820-10 relate to the definition of fair value,
the methods used to measure fair value and the expanded disclosures about fair
value measurements. The provisions of FASB ASC 820-10 are effective as of
January 1, 2008, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. However,
delayed application of this statement is permitted for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
until fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The adoption of FASB ASC 820-10 did not have a material
impact on Optex Systems Holdings’ financial position, results of operations, or
cash flows.
In
February 2007, FASB ASC 825-10 (Prior authoritative
literature: Statement of Financial Accounting Standards No. 159,
“ The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115 ,”) was issued. This standard allows a
company to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities on
a contract-by-contract basis, with changes in fair value recognized in earnings.
The provisions of this standard were effective as of the beginning of fiscal
year 2008, with early adoption permitted. The adoption of FASB ASC 825-10 did
not have a material impact on Optex Systems Holdings’ financial
position, results of operations, or cash flows.
F-36
In March
2007, FASB ASC 715-60 (Prior authoritative literature: EITF Issue No.
06-10, "Accounting for
Collateral Assignment Split-Dollar Life Insurance Agreements”). FASB ASC
715-60 provides guidance for determining a liability for the postretirement
benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment agreement. FASB ASC
715-60 is effective for fiscal years beginning after December 15, 2007. The
adoption of FASB ASC 715-60 did not have a material impact on Optex Systems
Holdings’ financial position, results of operations, or cash flows.
In
December 2007, FASB issued FASB ASC 805 (Prior authoritative
literature: SFAS No. 141(R), “Business Combinations”) and
FASB ASC 810-10-65 (Prior authoritative literature: SFAS No.
160, “Accounting and Reporting
of Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB No. 51”) . These new standards will significantly change the
accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. FASB ASC 805 and FASB
ASC 810-10-65 are required to be adopted simultaneously and are effective for
the first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited. Optex Systems Holdings is currently evaluating
the impact of adopting FASB ASC 805 and FASB ASC 810-10-65 on its financial
statements.
In
December 2007, the SEC issued FASB ASC 718-10-S99-1 (Prior authoritative
literature: Staff Accounting Bulletin No. 110). FASB ASC 718-10-S99-1
permits companies to continue to use the simplified method, under certain
circumstances, in estimating the expected term of “plain vanilla” options beyond
December 31, 2007. FASB ASC 718-10-S99-1 updates guidance provided in SAB 107
that previously stated that the Staff would not expect a company to use the
simplified method for share option grants after December 31, 2007. Optex
Systems Holdings does not have any outstanding stock options issued before
December 31, 2007.
In March
2008, FASB issued FASB ASC 815-10 (Prior authoritative
literature: SFAS No. 161, " Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”). FASB ASC 815-10 requires enhanced disclosures about an entity’s
derivative and hedging activities. FASB ASC 815-10 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008 with early application encouraged. As such, Optex Systems Holdings is
required to adopt these provisions at the beginning of the fiscal year ended
September 27, 2009. The adoption of FASB ASC 815-10 did not have a
material impact Optex Systems Holdings’ financial position, results
of operations, or cash flows.
In May
2008, FASB issued FASB ASC 944 (Prior authoritative literature: SFAS
No. 163, "Accounting for
Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No.
60"). FASB ASC 944 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. FASB ASC 944 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. As such, Optex Systems
Holdings is required to adopt these provisions at the beginning of the fiscal
year ended September 30, 2011. Optex Systems Holdings is currently evaluating
the impact of FASB ASC 944 on its financial statements but does not expect it to
have a material effect.
Note
4 — Acquisition of Substantially All of the Assets of Optex Systems, Inc.
(Texas)
Acquisition
of Assets of Optex Systems, Inc. (Texas) by Optex Systems, Inc. (Delaware) on
October 14, 2008
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities. The $15 million
of Irvine Sensors Corporation debt was contributed by Longview and Alpha to
Optex Systems, Inc. (Delaware), in exchange for a $6 million note payable
from Optex Systems, Inc. (Delaware) and a $9 million equity interest in Optex
Systems, Inc. (Delaware) (which consisted of the issuance by Optex Systems, Inc.
(Delaware) of 45,081,350 and 4,918,650 shares of its common stock to each of
Longview Fund and Alpha, respectively). On October 30, 2008, Alpha sold its
Optex Systems, Inc. (Delaware) common stock to Arland Holdings, Ltd. There was
no contingent consideration associated with the purchase. Longview and Arland
Holdings, Ltd. owned Optex Systems, Inc. (Delaware) together until February 20,
2009, when Longview sold 100% of its equity interests in Optex Systems, Inc.
(Delaware) to Sileas, as discussed below.
F-37
Optex
Systems, Inc. (Delaware) purchased all of the assets of Optex Systems, Inc.
(Texas), including: intellectual property, production processes and know-how,
and outstanding contracts and customer relationships. Optex Systems, Inc.
(Delaware) also assumed certain liabilities of Optex Systems, Inc. (Texas)
consisting of accounts payable and accrued liabilities. Optex Systems Holdings’
management intends to improve the business’s ability to serve its existing
customers and to attract new customers by providing quality products and
superior service which will be achieved by improving Optex Systems Holdings’
working capital availability as opposed to the limited working capital that was
available during the time period in which the assets were owned by Irvine
Sensors Corporation.
Pro forma
revenue and earnings per share information is presented cumulatively in Note
5.
Secured
Promissory Note Issued in Connection with Purchase by Optex Systems, Inc.
(Delaware) (Successor)
In
connection with the public sale of the Optex Systems, Inc. (Texas) (Predecessor)
assets to Optex Systems, Inc. (Delaware) (Successor), Optex Systems, Inc.
(Delaware) delivered to Longview and Alpha Secured Promissory Notes, due
September 19, 2011, in the principal amounts of $5,409,762 and $540,976,
respectively. On February 20, 2009, Longview sold its Optex Systems, Inc.
(Delaware) promissory note to Sileas, as described below. On March 27, 2009,
Sileas and Alpha exchanged their Notes plus accrued and unpaid interest of
$159,780 for 1,027 shares of Optex Systems, Inc. (Delaware) Series A preferred
stock.
Acquisition
by Sileas on February 20, 2009
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc.
(Delaware). Currently, Sileas is the majority owner of Optex Systems
Holdings.
Secured
Promissory Note Due February 20, 2012/Longview Fund, LP
As a
result of the transaction described above between Sileas and Longview Fund, LP
on February 20, 2009, Sileas, currently majority owner of Optex Systems Holdings
executed and delivered to Longview, a Secured Promissory Note due February 20,
2012 in the principal amount of $13,524,405. The Note bears simple interest at
the rate of 4% per annum, and the interest rate upon an event of default
increases to 10% per annum. In the event Optex Systems Holdings sells or conveys
all or substantially all its assets to a third party entity for more than
nominal consideration, other than a reorganization into Sileas or
reincorporation in another jurisdiction, then this Note shall be immediately due
and owing without demand. In the event that such a major transaction occurs
prior to the maturity date resulting in Sileas receiving net consideration with
a fair market value in excess of the principal and interest due under the terms
of the secured note (the “Optex Consideration”), then in addition to paying the
principal and interest due, Sileas shall also pay an amount equal to 90% of the
Optex Consideration. The obligations of Sileas under the note are secured by a
security interest in Optex Systems Holdings’ common and preferred stock
owned by Sileas that was granted to Longview pursuant to a Stock Pledge
Agreement delivered by Sileas to Longview and also by a lien on all of the
assets of Sileas.
Optex
Systems Holdings has not guaranteed the note and Longview is not entitled to
pursue Optex Systems Holdings in the event of a default by Sileas. Therefore,
there are no actual or potential cash flow commitments from Optex Systems
Holdings. In the event of default by Sileas on its obligations under the note,
Longview would only be entitled to receive the Optex Systems Holdings common and
preferred stock held by Sileas.
F-38
Note
5 –Reorganization Plan and Private Placement
Reorganization/Share
Exchange
On March
30, 2009, the reorganization occurred whereby the then existing shareholders of
Optex Systems, Inc. (Delaware) exchanged their shares of common stock with the
shares of common stock of Optex Systems Holdings as follows: (i) the outstanding
85,000,000 shares of Optex Systems, Inc. (Delaware) common stock were exchanged
by Optex Systems Holdings for 113,333,282 shares of Optex Systems Holdings
common stock, (ii) the outstanding 1,027 shares of Optex Systems, Inc.
(Delaware) Series A preferred stock were exchanged by Optex Systems Holdings for
1,027 shares of Optex Systems Holdings Series A preferred stock and (iii) the
8,131,667 shares of Optex Systems, Inc. (Delaware) common stock purchased in the
private placement were exchanged by Optex Systems Holdings for 8,131,667 shares
of Optex Systems Holdings common stock. Following the reorganization, Optex
Systems, Inc. (Delaware) remained a wholly-owned subsidiary of Optex Systems
Holdings.
Shares
outstanding of Optex Systems Holdings just prior to the closing of the
reorganization consisted of 17,449,991 shares which included 1,250,000 shares
issued on March 27, 2009 as payment for Investor Relations
Services. On June 29, 2009, 700,000 of the issued investor relations
shares were surrendered to Optex Systems Holdings and cancelled upon termination
of one of the Investor Relations contracts.
Private
Placement
Prior to
the closing of the reorganization agreement, as of March 30, 2009 , Optex
Systems, Inc. (Delaware) accepted subscriptions from accredited investors for a
total of 27.1 units, for $45,000 per unit, with each unit consisting of 300,000
shares of common stock, of Optex Systems, Inc. (Delaware) and warrants to
purchase 300,000 shares of common stock for $0.45 per share for a period of five
years from the initial closing, which were issued by Optex Systems, Inc.
(Delaware) after the closing referenced above. Gross proceeds to Optex Systems,
Inc. (Delaware) were $1,219,750, and after deducting (i) a cash finder’s fee of
$139,555, (ii) non-cash consideration of indebtedness owed to an investor of
$146,250, and (iii) stock issuance costs of $59,416, net proceeds were $874,529.
The finder also received five year warrants to purchase 2.39 units, at an
exercise price of $49,500 per unit.
The
following table represents the reorganization and private placement transactions
which occurred on March 30, 2009 reflected in March 29, 2009 statements due to
the election to report as of the accounting acquirers’ period end:
Optex
Systems Holdings, Inc.
Balance
Sheet Adjusted for Reorganization and Private Placement
|
|
Unaudited
Quarter
Ended March 29,
2009
|
|
|
Reorganization
Adjustments
(1)
|
|
|
Private
Placement
Adjustments
|
|
|
Unaudited Quarter
Ended March 29,
2009
|
|
||||
Assets
|
||||||||||||||||
Current
Assets
|
$
|
8,880,436
|
$
|
187,500
|
$
|
929,738
|
$
|
9,997,674
|
||||||||
Non-current
Assets
|
10,422,425
|
-
|
-
|
10,422,425
|
||||||||||||
Total
Assets
|
$
|
19,302,861
|
$
|
187,500
|
$
|
929,738
|
$
|
20,420,099
|
||||||||
Liabilities
|
||||||||||||||||
Loans
Payable
|
146,709
|
(146,250
|
)
|
459
|
||||||||||||
Other
Current Liabilities
|
4,416,403
|
-
|
55,209
|
4,471,612
|
||||||||||||
Total
Liabilities
|
$
|
4,563,112
|
$
|
-
|
$
|
(91,041
|
)
|
$
|
4,472,071
|
|||||||
Equity
|
||||||||||||||||
Optex
Systems Holdings, Inc. – (par $0.001per share, 200,000,000 shares
authorized, 138,914,940 shares issued and outstanding as of March 29,
2009)
|
113,333
|
17,450
|
8,132
|
138,915
|
||||||||||||
Optex
Systems Holdings, Inc. preferred stock (par value $0.001per
share, 5,000 shares authorized, 1027 shares of Series A
Preferred issued and outstanding)
|
1
|
1
|
||||||||||||||
Additional
Paid in Capital
|
15,046,446
|
170,050
|
1,012,647
|
16,229,143
|
||||||||||||
Retained
Earnings
|
(420,031
|
)
|
(420,031
|
)
|
||||||||||||
Total
Stockholders Equity
|
$
|
14,739,749
|
$
|
187,500
|
$
|
1,020,779
|
$
|
15,948,028
|
||||||||
Total
Liabilities and Stockholders Equity
|
$
|
19,302,861
|
$
|
187,500
|
$
|
929,738
|
$
|
20,420,099
|
F-39
(1) Sustut
Exploration, Inc. Balance Sheet as of the March 30, 2009 reorganization. Other
assets include $187,500 in prepaid expenses for investor relation services to be
realized over the next 12 months. The services were prepaid by the issuance of
1,250,000 Sustut shares by Sustut prior to March 30, 2009. The original prepaid
expense covered April 2009 through April 2010. On June 29, 2009
700,000 of these shares were returned to Optex Systems Holdings due to the
cancellation of one of the investor relations agreements. The
amortized expense related to the remaining 550,000 shares has been reflected on
the Consolidated Statement of Operations for Optex Systems Holdings as
expensed.
The
expenses reflected by Optex Systems Holdings on its Statement of Operations were
increased by $63,750 for fiscal year 2009 and are expected to increase for 2010
by $18,750 (as a non-cash expense) as a result of the issuance of the 1,250,000
shares for Investor Relations Services by Sustut and subsequent return of
700,000 shares to Optex Systems Holdings and are carried on the Optex Systems
Holdings’ Balance Sheet as a prepaid expense. The same Investor Relations
agreements also called for an aggregate cash payment $36,000 for 2009.
Therefore, the total pre-tax impact of the agreements for Investor Relations
Services was $99,750 for fiscal 2009 including both the cash expense and the
amortization of the prepaid expense which is carried on the Condensed
Consolidated Balance Sheet of Optex Systems Holdings.
The
accompanying unaudited pro forma financial information for the consolidated
successor and predecessor year ended September 27, 2009 and successor year ended
September 28, 2008 present the historical financial information of the
accounting acquirer. The pro forma financial information is presented for
information purposes only. Such information is based upon the standalone
historical results of each company and does not reflect the actual results that
would have been reported had the acquisition been completed when assumed, nor is
it indicative of the future results of operations for the combined
enterprise.
The
following represents condensed pro forma revenue and earnings information for
the fiscal years ended September 27, 2009 and September 28, 2008 as if the
acquisition of Optex Systems, Inc. (Texas) and the reorganization had occurred
on the first day of each of the fiscal years.
|
Unaudited, Pro forma
|
|||||||
|
Years Ended
|
|||||||
|
September 27,
2009
|
September 28,
2008
|
||||||
Revenues
|
$ | 27,580,737 | $ | 20,017,209 | ||||
Net
Income (Loss) applicable to common shareholders
|
$ | (362,149 | ) | $ | (4,461,601 | ) | ||
Diluted
earnings per share
|
$ | (0.00 | ) | $ | (0.03 | ) | ||
Weighted
Average Shares Outstanding
|
139,045,625 | 138,914,940 |
F-40
The
unaudited, pro forma information depicted above reflect the impacts of reduced
interest expense, increased intangible amortization expenses, the elimination of
corporate allocation costs from Irvine Sensors Corporation and the elimination
of employee stock bonus compensation previously allocated from Irvine Sensors
Corporation to reflect the costs of the ongoing entity. There is no
expected tax effect of the proforma adjustments for the periods affected in 2008
due to net loss and accumulated retained deficit of Irvine Sensors
Corporation.
Note
6 - Property and Equipment
A summary
of property and equipment at September 27, 2009 and September 28, 2008 is as
follows:
|
Estimated Useful Life
|
|
Successor
Year Ended
September 27, 2009
|
|
|
Predecessor
Year Ended
September 28, 2008
|
|
|||
Property
and Equipment
|
||||||||||
Furniture
and Equipment
|
3-5yrs
|
$
|
159,724
|
$
|
145,071
|
|||||
Machinery
and Equipment
|
5
yrs
|
1,034,440
|
1,026,250
|
|||||||
Leasehold
Improvements
|
7
yrs
|
147,107
|
142,788
|
|||||||
Less:
Accumulated Depreciation
|
(1,094,526
|
)
|
(994,542
|
)
|
||||||
Net
Property & Equipment
|
$
|
246,745
|
$
|
319,567
|
||||||
Depreciation
Expense
|
$
|
99,984
|
$
|
164,434
|
Depreciation
expense included in cost of goods sold and general and administrative expense
for fiscal 2009 is $61,628 and $38,356, respectively. Depreciation
expense included in cost of goods sold and general and administrative expense
for fiscal 2008 is $104,837 and 59,597, respectively.
Note
7 – Accrued Liabilities
The
components of accrued liabilities for years ended September 27, 2009 and
September 28, 2008 are summarized below:
|
Successor
|
Predecessor
|
||||||
|
Year Ended
|
Year Ended
|
||||||
|
September 27, 2009
|
September 28, 2008
|
||||||
Customer
Advance Payments
|
$
|
80,753
|
$
|
-
|
||||
Deferred
Rent Expense
|
27,860
|
84,435
|
||||||
Accrued
Vacation
|
153,291
|
94,311
|
||||||
Property
Taxes
|
17,532
|
17,557
|
||||||
Contract
Settlement
|
-
|
351,217
|
||||||
Franchise
Taxes
|
5,100
|
-
|
||||||
Operating
Expenses
|
244,884
|
128,717
|
||||||
Payroll
& Payroll Related
|
141,625
|
122,737
|
||||||
Total
Accrued Expenses
|
$
|
671,045
|
$
|
798,974
|
F-41
Contract
Settlement Costs represent amounts due to the U.S. government in relation to a
progress billed contract that was cancelled prior to completion. The
remaining government-owned (progress billed) materials on the contract were
subsequently used to satisfy other existing and new contracts at full value,
although the unliquidated progress payments for the original contract have yet
to be refunded. Optex Systems, Inc. (Texas) settled the contract
overpayment with the customer in fiscal year 2009.Accrued operating expenses
include additional operating costs for estimated costs not yet invoiced or
invoices not vouched into accounts payable as of year-end period
close.
Note
8 - Commitments and Contingencies
Leases
As of
September 27, 2009, Optex Systems Holdings leased its office and manufacturing
facilities under two non-cancellable operating leases expiring November 2009 and
February 2010, in addition to maintaining several non-cancellable operating
leases for office and manufacturing equipment. Optex Systems Holdings
concluded negotiations on a new lease on the existing facilities effective as of
January 4, 2010 (see subsequent events). Total expenses under the
existing facility lease agreements as of the fiscal year ended September 27,
2009 was $309,693. Total expenses for manufacturing and office
equipment for fiscal year ended 2009 was $2,726. Total expenses under
these facility lease agreements for the fiscal year ended September 28, 2008 was
$313,032 and total expenses for manufacturing and office equipment was
$21,830.
At
September 27, 2009, the remaining minimum lease payments under the
non-cancelable operating leases for equipment, office and facility space were as
follows:
|
Operating
|
|||
|
Leases
|
|||
Fiscal
year
|
||||
2010
|
$
|
79,867
|
||
2011
|
16,753
|
|||
2012
|
-
|
|||
2013
|
-
|
|||
Thereafter
|
-
|
|||
Total
minimum lease payments
|
$
|
96,620
|
Note
9 - Transactions with a Related Party
Corporate Cost
Allocations: In accordance with government contracting
regulations, Irvine Sensors Corporation was required to allocate some
portion of its corporate general and administrative expense to its operating
subsidiaries, such as Optex Systems. Irvine Sensors Corporation
elected to use Cost Accounting Standards 403.40, a recognized government
contract allocation methodology, to satisfy this requirement in which the
proportional contribution of Optex to Irvine Sensors’ total revenues, payroll
expense and net book value of tangible assets determined a percentage of
corporate general and administrative expense for allocation to Optex
Systems. The Cost Accounting Standards Board allocation
methodology was chosen as the most reasonable method because adequate historical
information was not available at the time to allow for the use of alternative
allocation methodologies.
F-42
The
estimated total General and Administrative expenses assuming Optex Systems, Inc.
(Texas) was operated on a stand-alone basis during the 2008 fiscal year
are:
|
|
Year- Ended
|
|
|
|
|
September 28,
2008
|
|
|
Accounting
& Auditing Fees
|
$
|
250,000
|
||
Legal
Fees
|
60,000
|
|||
Consulting
Fees
|
60,000
|
|||
Workers
Comp & General Insurance
|
70,000
|
|||
Total
|
$
|
440,000
|
As a
result of the purchase of Optex Systems, Inc. (Texas) on October 14, 2008, these
general and administrative costs were incurred and paid directly by Optex
Systems, Inc. (Delaware) for the 2009 fiscal year, and have been reflected in
the financial statements.
Due to Parent
(Irvine Sensors Corporation): Due to Parent relates to
expenses of Optex Systems, Inc. (Texas) incurred by or shared with Irvine
Sensors and pushed down to Optex Systems, Inc. (Texas) through an intercompany
payable account, “Due to Parent,” during the fiscal year ended September 28,
2008. The ending balance as of September 28, 2008 represents the
cumulative expenses incurred, net of any cash transfers made to/from Irvine
Sensors since inception in January 2006. Significant amounts charged
through this account include Irvine Sensors corporate cost allocations, legal
expenses, accounting and audit fees, travel expenses, consulting fees, and
insurance costs. As a result of the asset purchase on October 14,
2008, the balance was eliminated and no longer applicable to Optex Systems, Inc.
(Texas) during the 2009 fiscal year.
Note
10 - Debt Financing
Related
Parties
Note
Payable/Timothy Looney - In
January 2007, Irvine Sensors Corporation amended its earn-out agreement
with Timothy Looney in consideration for Mr. Looney providing Optex Systems,
Inc. (Texas) with a secured subordinated term note providing for advances of up
to $2 million, bearing interest at 10% per annum and maturing on the earlier of
February 27, 2009 or sixty days after retirement of Irvine Sensors Corporation’s
senior debt. Aggregate advances of $2 million were provided to Optex Systems,
Inc. (Texas) in January 2007 pursuant to the secured subordinated term note, and
the advances and accrued interest were outstanding at September 28,
2008. This Note was secured by the assets of Optex Systems, Inc.
(Texas), but was subordinated to the liens of Alpha and Longview that were
secured by the assets of Irvine Sensors Corporation, including Optex Systems,
Inc. (Texas), its wholly-owned subsidiary. Following the public sale
of the assets of Optex Systems, Inc. (Texas) to Optex Systems, Inc. (Delaware)
on October 14, 2008, the entire $2,000,000 Note Payable with accrued interest of
$345,648 remained a liability of Optex Systems, Inc. (Texas) and as such in not
included in the Optex Systems Holdings, Inc. fiscal 2009 financial
statements.
Short Term Note
Payable/Longview Fund - On September 23, 2008, Optex Systems,
Inc. (Delaware) borrowed $146,709 from Longview and issued a promissory note
dated September 23, 2008, to Longview in connection therewith.
Pursuant to an Allonge No. 1 to the promissory note, dated January 20, 2009, the
maturity date was extended until March 31, 2009. On March 30, 2009 in
conjunction with the reorganization and private placement, Longview Fund
purchased 3.25 units of the private placement using $146,250 of the outstanding
note payable as consideration for the purchase. (See Note 5). In the
year ended 2009, Optex Systems paid $459 against the principal balance,
recorded interest expenses, and paid $7,557 as a result of the interest
accrued on the note prior to its conversion to common stock.
F-43
Short term note
payable (Qioptic) - On November 20, 2008, Optex Systems, Inc. (Delaware)
issued a promissory note to Qioptiq Limited in the amount of $117,780. The note
originated as a trade payable as of September 28, 2008 in the amount of
$227,265, and was paid in full including accrued interest expense of $2,733, as
of March 29, 2009.
Note
11 – Intangible Assets and Goodwill
Fiscal
year ended September 27, 2009
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities (see Note 4).
Optex Systems, Inc. (Delaware) has allocated the consideration for its
acquisition of the Purchased Assets among tangible and intangible assets
acquired and liabilities assumed based upon their fair values. Assets that met
the criteria for recognition as intangible assets apart from goodwill were also
valued at their fair values.
The
purchase price was assigned to the acquired interest in the assets and
liabilities of Optex Systems Holdings as of October 14, 2008 as
follows:
Assets:
|
||||
Current
assets, consisting primarily of inventory of $5,383,929 and accounts
receivable of $1,404,434
|
$
|
7,330,910
|
||
Identifiable
intangible assets
|
4,036,789
|
|||
Purchased
Goodwill
|
7,110,416
|
|||
Other
non-current assets, principally property and equipment
|
343,898
|
|||
Total
assets
|
$
|
18,822,013
|
||
Liabilities:
|
||||
Current
liabilities, consisting of accounts payable of $1,953,833 and accrued
liabilities of $1,868,180
|
3,822,013
|
|||
Acquired
net assets
|
$
|
15,000,000
|
Goodwill
was tested for impairment as of September 27, 2009 using a fair value approach
and based on the review no impairment was present and therefore no adjustment to
the carrying value was required.
The
following table summarizes the estimate of the fair values of the intangible
assets as of the asset transfer date:
Total
|
||||
Contracted
Backlog - Existing Orders
|
$
|
2,763,567
|
||
Program
Backlog - Forecasted Indefinite Delivery/Indefinite Quantity
awards
|
1,273,222
|
|||
Total
Intangible Asset to be amortized
|
$
|
4,036,789
|
The
amortization of identifiable intangible assets associated with the Optex Systems
Inc. (Texas) acquisition on October 14, 2008 expensed for fiscal year 2009 was
$2,071,194. The expenses split between manufacturing cost of sales
and general and administrative cost were $1,666,558 and $404,635, respectively.
The identifiable intangible assets and recorded goodwill are amortized over five
years for book purposes and is deductible over 15 years for income tax
purposes.. As of the year ended September 27, 2009, the total
unamortized balance of intangible assets was $1,965,596. The
amortizable intangible assets were tested for impairment as of September 27,
2009 based on undiscounted cash flows and no impairment was
required.
F-44
Identifiable
intangible assets primarily consist of customer and program
backlog. The remaining unamortized balance of intangible assets will
be amortized between general and administrative expenses and costs of sales over
their remaining respective estimated useful lives as follows:
2010
|
2011
|
2012
|
2013
|
|||||||||||||||
Contracted
backlog amortized by delivery schedule
|
COS
|
$
|
718,290
|
$
|
126,158
|
$
|
19,614
|
$
|
4,762
|
|||||||||
Contracted
backlog amortized by delivery schedule
|
G&A
|
64,646
|
11,354
|
1,765
|
427
|
|||||||||||||
Program
backlog amortized straight line across 5 years
|
G&A
|
254,645
|
254,645
|
254,645
|
254,645
|
|||||||||||||
Total
Amortization by Year
|
$
|
1,037,581
|
$
|
392,157
|
$
|
276,024
|
$
|
259,834
|
Fiscal
year ended September 28, 2008
On
December 30, 2005, Irvine Sensors Corporation entered into an agreement
with Optex Systems, Inc. (Texas) pursuant to which Irvine Sensors Corporation
purchased 70% of the issued and outstanding common stock of Optex Systems, Inc.
(Texas), thereby becoming its majority shareholder. On
December 29, 2006, Irvine Sensors Corporation exercised a buyer option to
acquire the remaining 30% ownership interest in Optex Systems, Inc.
(Texas).
Optex
Systems, Inc. (Texas) allocated the purchase consideration for the purchase to
tangible and intangible assets acquired and liabilities assumed based on the
valuation determinations made in connection with the initial acquisition of
Optex Systems, Inc. (Texas) in December 2005 and the purchase of the remaining
minority interest in December 2006 as shown in the following table, which sets
forth the estimated amounts related to the acquisition of all of the issued and
outstanding stock of Optex Systems, Inc. (Texas) by Irvine Sensors
Corporation. The excess of the purchase price over such values is
presented as goodwill in the accompanying balance sheet for the fiscal year
ended September 28, 2008.
Assets:
|
||||||||
Current
assets, consisting primarily of inventory of $5,734,500 and accounts
receivable of $2,191,800
|
$
|
8,070,300
|
||||||
Identifiable
intangible assets
|
3,180,000
|
|||||||
Other
non-current assets, principally property and equipment
|
455,100
|
|||||||
Total
assets
|
11,705,400
|
|||||||
Liabilities:
|
||||||||
Current
liabilities, consisting of accounts payable of $1,638,600, tax liabilities
of $112,800 and accrued liabilities of $682,100
|
2,433,481
|
|||||||
Acquired
net assets
|
9,271,919
|
|||||||
Purchase
price
|
||||||||
Total
consideration to seller
|
$
|
19,865,400
|
||||||
Direct
acquisition costs
|
1,040,000
|
|||||||
20,905,400
|
||||||||
Excess
purchase price reported as goodwill
|
$
|
11,633,481
|
Goodwill
related to the Irvine Sensors Corporation acquisition of Optex Systems, Inc.
(Texas) was reviewed as of September 28, 2008, and it was determined that an
impairment charge of $1,586,416 was required. The fair values assigned to the
assets of Optex Systems, Inc. (Texas) and the goodwill was based upon the most
recent value of Optex Systems, Inc. (Texas) as determined by the asset sale via
public auction to third party purchasers on October 14, 2008.
F-45
Identifiable
intangible assets as of September 28, 2008 included non-competition agreements
and customer backlog, and were amortized over their respective estimated useful
lives as follows:
|
|
Useful Life in
Years
|
|
|
Acquired
Fair Value
|
|
||
Non-competition
agreement
|
2
|
$
|
80,000
|
|||||
Contractual
backlog
|
2
|
$
|
1,570,000
|
|||||
Program
backlog
|
8
|
$
|
1,530,000
|
The
amortization of identifiable intangible assets associated with the Optex
Systems, Inc. (Texas) acquisition in fiscal 2008 was $596,367. The identifiable
intangible assets and recorded goodwill are deductible over 15 years for income
tax purposes. As of the year ended September 28, 2008, the total unamortized
balance of intangible assets was $1,100,140.
The
September 28, 2008 unamortized balance of intangible assets was estimated to be
amortized as follows:
Year
|
|
Annual
Amortization
|
|
|
2009
|
|
266,365
|
||
2010
|
204,490
|
|||
2011
|
204,490
|
|||
2012
|
204,490
|
|||
2013
|
186,837
|
|||
2014
|
33,468
|
|||
Total
|
$
|
1,100,140
|
Note
12-Stock Based Compensation
On March
26, 2009, the Board of Directors adopted the 2009 Stock Option Plan providing
for the issuance of up to 6,000,000 shares to Optex Systems Holdings officers,
directors, employees and to independent contractors who provide services to
Optex Systems Holdings.
Options
granted under the 2009 Stock Option Plan vest as determined by the Board of
Directors of Optex Systems Holdings or committee set up to act as a compensation
committee of the Board of Directors and terminate after the earliest of the
following events: (i) expiration of the option as provided in the option
agreement, (ii) 90 days following the date of termination of the employee, or
(iii) ten years from the date of grant (five years from the date of grant for
incentive options granted to an employee who owns more than 10% of the total
combined voting power of all classes of Optex Systems Holdings stock at the date
of grant). In some instances, granted stock options are immediately
exercisable into restricted shares of common stock, which vest in accordance
with the original terms of the related options. Optex Systems Holdings
recognizes compensation expense ratably over the requisite service
period.
The
option price of each share of common stock is determined by the Board of
Directors or compensation committee (when one is established), provided that
with respect to incentive stock options, the option price per share will in all
cases be equal to or greater than 100% of the fair value of a share of common
stock on the date of the grant, except an incentive option granted under the
2009 Stock Option Plan to a shareholder that owns more than 10% of the total
combined voting power of all classes of Optex Systems Holdings’ stock, will have
an exercise price of not less than 110% of the fair value of a share of common
stock on the date of grant. No participant may be granted incentive stock
options, which would result in shares with an aggregate fair value of more than
$100,000 first becoming exercisable in one calendar year.
F-46
On March
30, 2009, 1,414,649 stock options with an exercise price of $0.15 were granted
to an officer of Optex Systems Holdings which vest as follows: 34% after
the first year, and 33% each after the second and third years. These
options carry a grant expiration date of seven years after
issuance. On May 14, 2009, 1,267,000 stock options were issued to
other Optex Systems Holdings employees, including 250,000 shares to one
officer. These stock options vest 25% per year after each year
of employment and carry a grant expiration date of seven years after
issuance. For shares granted as of May 14, 2009, Optex Systems
Holdings anticipates an annualized employee turnover rate of 3% per year, and as
such anticipates that only 1,174,786 of the 1,267,000 shares will vest as of the
end of the contract term. As of September 27, 2009 none of the stock
options had vested and 14,000 shares had been forfeited due to employee
turnover.
Optex
Systems Holdings recorded compensation costs for options and shares granted
under the plan amounting to $39,528 for the fiscal year ended September 27,
2009. There were no stock options or shares granted or outstanding
prior to September 28, 2008, therefore no compensation expense was recorded in
fiscal 2008. The impact of this expense was immaterial to the basic
and diluted net loss per share for the fiscal year ended September 27,
2009. A deduction is not allowed for income tax purposes until
nonqualified options are exercised. The amount of this deduction will be the
difference between the fair value of Optex Systems Holdings’ common stock
and the exercise price at the date of exercise. For the year ended September 27,
2009 estimated deferred tax assets related to option compensation costs were
$13,440 and have been recorded for the tax effect of the financial statement
expense. There was no tax effect of the income tax deduction in excess of the
financial statement expense for 2009 related to these stock
options. No tax deduction is allowed for incentive stock options.
Accordingly no deferred tax asset is recorded for GAAP expense related to these
options.
Management
has valued the options at their date of grant utilizing the Black-Scholes-Merton
option pricing model. The fair value of the underlying shares was
determined based on the opening price of Optex Systems Holdings’
publicly-traded shares as of September 28, 2009. Further, the
expected volatility was calculated using the historical volatility of
a diversified index of companies in the defense, homeland
security, and space industry in accordance with FASB ASC 718-10-S99-1 (Prior
authoritative literature: Question 6 of SAB Topic
14.D.1). In making this determination and trying to find another
comparable company, Optex Systems Holdings considered the industry, stage of
life cycle, size and financial leverage of such other entities. Based
on the development stage of Optex Systems Holdings, similar companies with
sufficient historical data were not available. Optex Systems Holdings
utilized the three year volatility of the SPADE Defense Index, which is a
diversified index of 58 companies in the same industry as Optex Systems
Holdings. The risk-free interest rate is based on the implied yield
available on U.S. Treasury issues with an equivalent term approximating the
expected life of the options depending on the date of the grant and expected
life of the options. The expected life of options used was based on
the contractual life of the option grant. Optex Systems Holdings
determined the expected dividend rate based on the assumption and expectation
that earnings generated from operations are not expected to be adequate to allow
for the payment of dividends in the near future and the assumption that Optex
Systems Holdings does not presently have any intention of paying cash dividends
on its common stock. The following weighted-average assumptions were utilized in
the fair value calculations for options granted:
|
|
Year ended
|
|
|
|
|
September 27, 2009
|
|
|
Expected
dividend yield
|
0%
|
|||
Expected
stock price volatility
|
23.6%
|
|||
Risk-free
interest rate (1)
|
2.8%-4.07%
|
|||
Expected
life of options
|
4.5
to 7 Years
|
(1)
|
2.8% for grant expected life less
than 7 years
|
(2)
|
4.07% for grant expected life of
7 years.
|
F-47
Optex
Systems Holdings has granted stock options to officers and employees as
follows:
Date of
|
|
Shares
|
|
|
Exercise
|
|
|
Shares Outstanding
|
|
Expiration
|
Vesting
|
||||
Grant
|
|
Granted
|
|
|
Price
|
|
|
As of 09/27/09
|
|
Date
|
Date
|
||||
|
|||||||||||||||
03/30/09
|
480,981
|
$
|
0.15
|
480,981
|
03/29/2016
|
03/30/2010
|
|||||||||
03/30/09
|
466,834
|
0.15
|
466,834
|
03/29/2016
|
03/30/2011
|
||||||||||
03/30/09
|
466,834
|
0.15
|
466,834
|
03/29/2016
|
03/30/2012
|
||||||||||
05/14/09
|
316,750
|
0.15
|
313,250
|
05/13/2016
|
05/14/2010
|
||||||||||
05/14/09
|
316,750
|
0.15
|
313,250
|
05/13/2016
|
05/14/2011
|
||||||||||
05/14/09
|
316,750
|
0.15
|
313,250
|
05/13/2016
|
05/14/2012
|
||||||||||
05/14/09
|
316,750
|
0.15
|
313,250
|
05/13/2016
|
05/14/2013
|
||||||||||
Total
|
2,681,649
|
2,667,649
|
|
The
following table summarizes the status of Optex Systems Holdings’ aggregate stock
options granted under the incentive stock option plan:
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
||||||
|
|
of Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|||||
|
|
Remaining
|
|
|
Intrinsic
|
|
|
Average
|
|
|
Aggregate
|
|
||||
Subject to Exercise
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
||||
Outstanding
as of September 28, 2008
|
-
|
$
|
-
|
-
|
-
|
|||||||||||
Granted
– 2009
|
2,681,649
|
$
|
0.21
|
5.14
|
.
|
$
|
563,146
|
|||||||||
Forfeited
– 2009
|
(14,000
|
)
|
$
|
0.21
|
5.14
|
(2,940
|
)
|
|||||||||
Exercised
– 2009
|
-
|
$
|
-
|
-
|
-
|
|||||||||||
Outstanding
as of September 27, 2009
|
2,667,649
|
$
|
0.21
|
5.14
|
$
|
560,206
|
||||||||||
Exercisable
as of September 27, 2009
|
0
|
$
|
-
|
-
|
$
|
-
|
The
weighted-average grant date fair value of options granted during the year ended
September 27, 2009 was $0.14. The total intrinsic value of options
exercised during the year ended September 27, 2009 was $0.
The
following table summarizes the status of Optex Systems Holdings’ aggregate
non-vested shares granted under the 2009 Stock Option Plan (See Note
9):
|
|
Number of
Non-
vested
Shares
Subject to
Options
|
|
|
Weighted-
Average
Grant-
Date
Fair Value
|
|
||
Non-vested
as of September 27, 2009
|
-
|
$
|
||||||
Non-vested
granted — year ended September 27, 2009
|
2,681,649
|
$
|
0.14
|
|||||
Vested —
year ended September 27, 2009
|
-
|
$
|
0.00
|
|||||
Forfeited — year
ended September 27, 2009
|
(14,000
|
)
|
$
|
|||||
Non-vested
as of September 29, 2009
|
2,667,649
|
$
|
0.14
|
As of
September 27, 2009, the unrecognized compensation cost related to
non-vested share based compensation arrangements granted under the plan that was
approximately $320,973. These costs are expected to be recognized on
a straight line basis from March 30, 2009 through May 13, 2013. The total
fair value of options and shares vested during the year ended September 27, 2009
was $0.0.
Total
stock-based compensation expense of Optex Systems, Inc. (Texas) (Predecessor)
associated with Irvine Sensors Corporation stock grants during fiscal years 2009
and 2008 was ($4,812) and $378,716, respectively. These amounts
were pushed down by Irvine Sensors Corporation and charged to general and
administrative expense for 2009 and 2008.
F-48
For the
fiscal year ended September 27, 2009, Optex Systems issued 480,000 shares of
common stock at a market value of $0.30 per share for a total $144,000 and paid
$150,000 cash to a vendor in support of an investor relations agreement executed
on June 29, 2009. Pursuant to the agreement, the shares are earned over the life
of the contract at the rate of 40,000 shares per month through June
2010. During 2009, Optex Systems expensed $36,000 for shares earned
and the unamortized balance of shares issued against the contract is $108,000 to
be expensed in fiscal year 2010.
There
were no stock options issued to Optex Systems, Inc. (Texas) employees or equity
instruments issued to consultants and vendors in fiscal 2008.
Note
13 – Stockholders Equity
Common
stock:
Optex
Systems, Inc. (Texas) was authorized to issue 100,000 shares of no par common
stock. At September 28, 2008, there were 18,870 shares issued, 10,000
shares outstanding and 8,870 treasury shares.
The
common stock, treasury stock and additional paid in capital accounts have been
presented to reflect the ownership structure of Optex Systems, Inc. (Texas) as
it existed prior to the acquisition by Irvine Sensors Corporation, since Optex
Systems, Inc. (Texas) is presenting its financial statements as a separate,
stand-alone entity.
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Systems, Inc. (Delaware) (Successor) purchased all of the assets
of Optex Systems, Inc. (Texas) (Predecessor) in exchange for $15 million of
Irvine Sensors Corporation debt owned by it and the assumption of approximately
$3.8 million of certain Optex Systems, Inc. (Texas) liabilities. The $15 million
of Irvine Sensors Corporation debt was contributed by Longview and Alpha to
Optex Systems, Inc. (Delaware), in exchange for a $6 million note payable from
Optex Systems, Inc. (Delaware) and a $9 million equity interest in Optex
Systems, Inc. (Delaware) (which consisted of the issuance by Optex Systems, Inc.
(Delaware) of 45,081,350 and 4,918,650 shares of its common stock to each of
Longview Fund and Alpha, respectively). On October 30, 2008, Alpha sold its
Optex Systems, Inc. (Delaware) common stock to Arland Holdings, Ltd. There was
no contingent consideration associated with the purchase. Longview and Arland
Holdings, Ltd. both owned Optex Systems, Inc. (Delaware) until February 20,
2009, when Longview sold 100% of its equity interests in Optex Systems, Inc.
(Delaware) to Sileas Corp., as discussed below.
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Systems, Inc. (Delaware). As of the date of
this transaction, Sileas was the majority owner of Optex Systems
Holdings.
Stock
Split
On March
26, 2009, Optex Systems, Inc. (Delaware)’s Board of Directors reconfirmed a
1.7:1 forward split of its common stock to holders of record as of February 23,
2009. Accordingly, as a result of the forward split, the 45,081,350
shares of common stock held by Sileas were split into
76,638,295 shares, and the 4,918,650 shares of common stock held by
Arland Holdings, Ltd. were split into 8,361,705 shares.
As of
March 30, 2009, Optex Systems, Inc. (Delaware) was authorized to issue
200,000,000 shares of $0.001 par value common stock, of which 85,000,000 shares
were issued and outstanding as follows:
Sileas
Corporation
|
76,638,295
|
|||
Arland
Holdings, Ltd.
|
8,361,705
|
|||
Total
Outstanding
|
85,000,000
|
F-49
Reorganization
& Private Placement:
On March
29, 2009, as a result of the reorganization agreement and private placement, the
85,000,000 outstanding shares of Optex Systems, Inc. (Delaware) as of March 30,
2009 were exchanged for 113,333,282 shares of Optex Systems Holdings (formerly
Sustut Exploration, Inc.). An additional 8,131,667 shares were issued in
connection with the private placement closed prior to the
reorganization.
On June
29, 2009, 750,000 common shares were sold to in a private transaction for gross
proceeds of $150,000.
Each
share of stock entitles the holder to one vote on matters brought to a vote of
the shareholders.
Optex
Systems Holdings granted an officer at the consummation of the reorganization,
options to purchase 1,414,649 shares with an exercise price of $0.15 per share.
The options vest 34% one year following the date of grant, and 33% on each of
the second and third anniversaries following the date of grant. See Note 12 -
Stock Based Compensation.
Series
A preferred stock
On
March 24, 2009, Optex Systems Holdings filed a Certificate of Designation with
the Secretary of State of the State of Delaware authorizing a series of
preferred stock, under its articles of incorporation, known as “Series A
preferred stock”. This Certificate of Designation was approved by Optex
Systems’ Board of Directors and Shareholders at a Board Meeting and
Shareholders Meeting held on February 25, 2009. The Certificate of Designation
sets forth the following terms for the Series A preferred stock: (i) number of
authorized shares: 1,027; (ii) per share stated value: $6,000; (iii) liquidation
preference per share: stated value; (iv) conversion price: $0.15 per share as
adjusted from time to time; and (v) voting rights: votes along with the common
stock on an as converted basis with one vote per share.
The
Series A preferred stock entitles the holders to receive cumulative dividends at
the rate of 6% per annum, payable in cash at the discretion of Board of
Directors. Each share of preferred stock is immediately convertible into common
shares at the option of the holder which entitles the holder to receive the
equivalent number of common shares equal to the stated value of the preferred
shares divided by the conversion price, which was initially set at $0.15 per
share.
Holders
of preferred shares receive preferential rights in the event of liquidation.
Additionally the preferred stock shareholders are entitled to vote together with
the common stock on an ”as-converted” basis.
On March
27, 2009, Sileas and Alpha exchanged their promissory notes in the total amount
of $6,000,000 plus accrued and unpaid interest thereon into 1,027 shares of
Series A preferred stock. On March 30, 2009, shares of Optex Systems, Inc.
Series A preferred stock was exchanged on a 1:1 basis for Series A preferred
stock of Optex Systems Holdings. As of the year ended September 27,
2009 Optex Systems has recorded $186,246 of dividends payable on Series A
preferred shares.
Cancellation
of Common Stock
On June
29, 2009 Optex cancelled an investor relations agreement resulting in the return
of 700,000 shares of common stock previously issued by Sustut prior to the
reverse Merger on March 30, 2009. The shares were valued at $105,000,
returned to Optex System Holdings, Inc., and then cancelled. (see also Note 12
on new investor relations shares issued).
F-50
Note
14 - Income Taxes
The
income tax provision as of September 27, 2009 includes the
following:
2009
|
||||
Current
income tax expense:
|
||||
Federal
|
$ | 426,514 | ||
State
|
- | |||
426,514 | ||||
Deferred
income tax provision (benefit):
|
||||
Federal
|
(711,177 | ) | ||
State
|
- | |||
Change
in valuation allowance
|
- | |||
(711,177 | ) | |||
Provision
for (Benefit from) income taxes, net
|
$ | (284,663 | ) |
The
income tax provision for Optex Systems as of September 27, 2009 differs from
those computed using the statutory federal tax rate of 34%, due to the following
permanent differences:
2009
|
%
|
|||||||
Tax benefit at statutory federal
rate
|
$ | (127,211 | ) | 34 | % | |||
Nondeductible expenses
|
(157,452 | ) | 42 | % | ||||
$ | (284,663 | ) | 76 | % |
Deferred
income taxes recorded in the balance sheets results from differences between
financial statement and tax reporting of income and deductions. A
summary of the composition of the deferred income tax assets (liabilities)
follows:
2009
|
||||
Stock
Options
|
$ | 13,440 | ||
Inventory
Reserve
|
(40,427 | ) | ||
Unicap
|
54,494 | |||
Contract
Loss Reserve
|
178,900 | |||
Fixed
assets
|
(58,476 | ) | ||
Intangible
Asset Amortization
|
612,707 | |||
Other
|
(49,461 | ) | ||
Subtotal
|
$ | 711,177 | ||
Valuation
allowance
|
- | |||
Net
deferred asset (liability)
|
$ | 711,177 |
Optex
Systems Holdings has no loss carryforwards available as of October 15,
2008.
As the
result of the assessment of FASB ASC 740-10 (Prior Authoritative Literature:
FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement No. 109”),
Optex Systems Holdings has no unrecognized tax benefits. By statute, the tax
year ending September 27, 2009 is open to examination by the major taxing
jurisdictions to which the Optex Systems Holdings is subject.
Cash paid
for income taxes for the fiscal years ended September 27, 2009 and September 28,
2008 were $488,799, and $0, respectively.
As of
September 28, 2008 Optex Systems, Inc. (Texas) had generated net losses for
financial accounting purposes in the amount of approximately
$4,831,952. During this period Optex Systems, Inc. (Texas) was a
member of a consolidated entity for tax reporting purposes. As such, any losses
that would have qualified as net operating losses for federal income tax
purposes as potential deductions were available to the consolidated entity. Such
losses may have been utilized by the consolidated entity and are not available
to Optex Systems, Inc. (Delaware) to offset its future taxable
income. Additionally, since Optex Systems, Inc. (Texas) was acquired
in a transaction effected as an asset purchase, Optex Systems, Inc. (Delaware)
would only be entitled to tax deductions generated after the date of the
acquisition. Accordingly, no deferred tax assets have been recorded in the
accompanying financial statements for net operating losses generated by Optex
Systems, Inc. (Texas). There was no provision for income taxes in
fiscal 2008.
F-51
Note
15 — Subsequent Events
On
October 27, 2009, Optex Systems Holdings borrowed $250,000 from Longview
pursuant to a promissory note, which originally expired on December 1, 2009, but
was extended until July 15, 2010. The note bears interest at the rate
of 10% per annum, and all accrued and unpaid interest will be due upon
maturity. Optex will make a prepayment equal to 50% of the then
outstanding principal amount plus accrued and unpaid interest thereon upon the
closing of a credit facility or other equity or debt financing from which the
net proceeds are at least $900,000, with any remaining unpaid balance due on
July 15, 2010. In exchange for the extension, Optex Systems Holdings
granted Longview a warrant to purchase 100,000 shares of restricted
common stock with an exercise price of $0.15 per share and a term of three
years. On March 22, 2010, $125,000 plus accrued interest to
date was repaid and the balance of the principal amount and the associated
accrued and unpaid interest thereon was paid in full on June 4,
2010 .
Effective
as of January 4, 2010, Optex Systems Holdings, Inc. renewed its Richardson, TX
lease. Under the terms of the amendment:
|
·
|
The lease term is extended until
July 31, 2015.
|
|
·
|
The base rent is as follows:
until 7/31/2010, $0.00 per square foot, from 8/1/2010 – 7/31/2013, $4.70
per square foot and from 8/1/2013 – 7/31/2015, $4.95 per square
foot.
|
|
·
|
A $195,352.00 improvement
allowance is included.
|
|
·
|
For the first two years of the
extended term, the landlord has granted the option to take over additional
space at similar terms as in the
amendment.
|
Optex
Systems Holdings has evaluated subsequent events for the period September 28,
2009 through January 11, 2010, the date its financial statements were issued,
and concluded there were no other events or transactions occurring during this
period that required recognition of disclosure in its financial
statements.
F-52
PART II –
INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
We
estimate that our expenses in connection with this offering, other than
underwriting discounts and commissions, will be as follows:
Securities and Exchange
Commission registration fee
|
$ | 1,447 | ||
Printing and engraving
expenses
|
1,000 | |||
Legal fees and expenses
|
- | |||
Accountant fees and
expenses
|
2,500 | |||
Total
|
$ | 4,947 |
Item
14. Indemnification of Directors and Officers
Indemnification
of Directors and Officers
Section
145 of the Delaware General Corporation Law provides, in general, that a
corporation incorporated under the laws of the State of Delaware, such as Optex
Systems Holdings, may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than a derivative action by or in the right of the
corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
enterprise, against expenses (including attorneys’ fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person’s conduct was
unlawful. In the case of a derivative action, a Delaware corporation may
indemnify any such person against expenses (including attorneys’ fees) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification will be made in
respect of any claim, issue or matter as to which such person will have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnity for such expenses.
Item
15. Recent Sales of Unregistered Securities
Reorganization
On March
30, 2009, in reliance upon Section 4(2) of the Securities Act, a reorganization
occurred whereby the then existing shareholders of Optex Systems, Inc.
(Delaware) exchanged their shares of common stock with the shares of common
stock of Optex Systems Holdings, Inc. as follows: (i) the outstanding
85,000,000 shares of Optex Systems, Inc. (Delaware) common stock were exchanged
by Optex Systems Holdings for 113,333,282 shares of Optex Systems Holdings
common stock, (ii) the outstanding 1,027 shares of Optex Systems, Inc.
(Delaware) Series A preferred stock were exchanged by Optex Systems Holdings for
1,027 shares of Optex Systems Holdings Series A preferred stock and (iii)
the 8,131,667 shares of Optex Systems, Inc. (Delaware) common stock purchased in
the private placement were exchanged by Optex Systems Holdings for 8,131,667
shares of Optex Systems Holdings common stock. Optex Systems, Inc.
(Delaware) will remain a wholly-owned subsidiary of Optex Systems Holdings. The
number of shareholders involved in the reorganization was 20.
Immediately
prior to the closing of the reorganization agreement (and the shares are
included above), as of March 30, 2009, in a transaction exempt from registration
pursuant to Regulation D, for which a Form D was filed with the Commission on
December 16, 2008, Optex Systems, Inc. (Delaware) accepted subscriptions from
accredited investors for a total 27.1 units, for $45,000 per unit, with each
unit consisting of 300,000 shares of common stock, no par value of Optex and
warrants to purchase 300,000 shares of common stock for $0.45 per share for a
period of five years from the initial closing. Gross proceeds were
$1,219,750, and after deducting (i) a cash finder’s fee of $139,555, (ii)
non-cash consideration of indebtedness owed to an investor of $146,250, and
(iii) stock issuance costs of $59,416, the net proceeds were
$874,529. The finder also received five year warrants to purchase
2.39 units, at an exercise price of $49,500 per unit.
Neither
Optex Systems Holdings nor Optex Systems, Inc. (Delaware) had any options or
warrants to purchase shares of capital stock outstanding immediately prior to or
following the reorganization, except for 8,941,667 warrants issued in the
private placement. Immediately prior to the closing, Optex Systems Holdings
adopted the 2009 Stock Option Plan providing for the issuance of up to 6,000,000
shares for the purpose of having shares available for the granting of options to
officers, directors, employees and to independent contractors who provide
services. Each share of stock entitles the holder to one vote on
matters brought to a vote of the shareholders.
Optex
Systems Holdings granted an officer at the consummation of the reorganization,
options to purchase 1,414,649 shares at an exercise price of $0.15 per share
that vest as follows: 34% of the options vesting one year following the date of
grant, and 33% vesting on each of the second and third anniversaries following
the date of grant.
70
Series
A preferred stock
On March
24, 2009, Optex Systems Holdings filed a Certificate of Designation with the
Secretary of State of the State of Delaware authorizing a series of preferred
stock, under its articles of incorporation, known as “Series A preferred stock”.
The terms and provisions of the Series A preferred stock are set forth in
“Description of Securities” – “preferred stock” above.
On March
27, 2009, Sileas and Alpha exchanged their promissory notes in the total amount
of $6,000,000 plus accrued and unpaid interest thereon into 1,027 shares of
Series A preferred stock. On March 30, 2009, the shares of Optex
Systems, Inc. (Delaware) preferred stock were exchanged on a 1:1 basis for
Series A preferred stock of Optex Systems Holdings.
All of
the above equity transactions were made in reliance on Section 4(2) of the
Securities Act, with the exception of the equity sale completed just prior to
the closing of the reorganization agreement, which was exempt from registration
pursuant to Regulation D and for which a Form D was filed with the Commission on
December 16, 2008.
Investor
Relations Issuances
American
Capital Ventures, Inc. with offices at 2875 N.E. 191st Street,
Suite 904, Aventura, Florida 33180 was issued 1,000,000 shares of Optex Systems
Holdings’ common stock for services to be provided from April 1, 2009 through
March 31, 2010.On June 26, 2009, Optex Systems Holdings terminated its Investor
Relations Agreement with American Capital Ventures, Inc., and pursuant to this
termination, American Capital Ventures returned 700,000 of the 1,000,000
restricted shares of Optex Systems Holdings common stock it received pursuant to
the agreement.
ECON
Corporate Services, Inc. was issued 250,000 shares of restricted stock for
services to be rendered.
Effective
as of June 29, 2009, Optex Systems Holdings entered into a Consulting Agreement
with ZA Consulting, Inc. for the provision of consulting services to Optex
Systems For services rendered, ZA Consulting received 480,000 shares
of restricted common stock with 40,000 shares vesting per month.
All of
the above equity transactions were made in reliance on Section 4(2) of the
Securities Act.
The
following table summarizes the transactions.
IR
Shares issued & cancelled
3/27/09
|
1,000,000
shares issued to American Venture Capital
|
(prior
to reverse merger)
|
3/27/09
|
250,000
shares issued to Dawn Van Zandt
|
(prior
to reverse merger)
|
7/20/09
|
(700,000)
shares cancelled from American Capital Ventures
|
(contract
cancelled on 6/29/09)
|
9/2/09
|
480,000
shares issued to ZA Consulting
|
(contract
signed on 6/30/09)
|
Private
Placement
On June
29, 2009, Optex Systems Holdings sold 750,000 shares of its common stock to
private investors at a price of $0.20 per share for a total purchase price of
$150,000 in a transaction exempt from registration under Section 4(2) of the
Securities Act.
Warrants
Issued
In
exchange for an allonge issued on January 15, 2010 with respect to the extension
of the maturity date of a note issued by Optex Systems Holdings to Longview
(which was satisfied in full on June 4, 2010), Optex Systems Holdings granted
Longview a warrant to purchase 100,000 shares of its restricted common stock
with an exercise price of $0.15 per share and with a term of three
years.
On
March 10, 2010, Optex Systems Holdings issued a warrant to Peninsula Bank
Business Funding to purchase 1,000,000 shares of its common stock. The warrant
bears an exercise price of $0.10 per share and expires on March 3, 2016 and was
issued in conjunction with the revolving credit facility entered into by
Peninsula Bank Business Funding for the benefit of Optex Systems Holdings on
that date.
Registration
Exemptions Claimed – Explanation
The
registration exemption claimed in each instance for the referenced issuances is
Section 4(2) of the Securities Act. The facts relied upon are that
each case involved a discrete issuance of legended, restricted securities to one
entity upon direct communication to the service provider in each instance (with
no offers to any other persons and no solicitations/public announcements, etc.)
in exchange for services rendered. It was not made with a view toward
distribution and was made for a specific discrete purpose. The
recipients, in each case, were deemed sophisticated as to the nature of their
business, and there is public information available to the recipient in each
case, through our SEC filings. The services rendered in each case
were for a period of one year.
71
For the
March 30, 2009 transaction, the exemption claimed is again Section 4(2), and the
facts relied upon were that it was a contemplated share exchange on a restricted
basis without a view toward distribution of securities. This was
limited to the shareholders in Optex Systems, Inc. (Delaware) who represented as
to their accredited status as well as to not entering into the transactions with
a view toward distribution. The share exchange was done through
direct communication (the shares were directly exchanged by Optex Systems
Holdings for Optex Systems Holdings shares) and there was no general
solicitation or offer to any parties other than the discrete number of
shareholders in Optex Systems, Inc. (Delaware). All shares issued are
legended, restricted shares, and there was available information on Sustut in
its SEC filings. The number of shareholders of Optex Systems, Inc.
(Delaware) involved was 19.
With
regard to the June 29, 2009 transaction, the exemption claimed is again Section
4(2), and this was again a discrete issuance to three investors without a view
toward distribution with a discrete purpose and not tied to another
transaction. Again, there was direct communication to the three
investors and no offers made to any other investors. All three are
known to be sophisticated investors, and all shares issued are legended,
restricted shares, and there was available information on Optex Systems Holdings
in its SEC filings.
Item
16. Exhibits and Financial Statement Schedules
Exhibits
Exhibit
No.
|
|
Description
|
2.1
|
Agreement
and Plan of Reorganization, dated as of the March 30, 2009, by and between
registrant, a Delaware corporation and Optex Systems, Inc., a Delaware
corporation (1).
|
|
3.1
|
Certificate
of Incorporation, as amended, of Optex Systems Holdings, Inc
(2).
|
|
3.2
|
Bylaws
of Optex Systems Holdings (1).
|
|
5.1
|
Opinion
as to Legality of the Shares (3)
|
|
10.1
|
2009
Stock Option Plan (1).
|
|
10.2
|
Employment
Agreement with Danny Schoening (1).
|
|
10.3
|
Lease
for 1420 Presidential Blvd., Richardson, TX (1).
|
|
10.4
|
Form
of Warrant (3)
|
|
10.5
|
Specimen
Stock Certificate (3)
|
|
10.6
|
Contract
W52H0905D0248 with Tank-automotive and Armaments Command, dated July 27,
2005 (5) (6)
|
|
10.7
|
Contract
W52H0909D0128 with Tank-automotive and Armaments Command, dated March 24,
2009 (5)
|
|
10.8
|
Contract
W52H0905D0260 with Tank-automotive and Armaments Command, dated August 3,
2005 (5) (6)
|
|
10.9
|
PO#
40050551 with General Dynamics, dated June 8, 2009 (5)
(6)
|
|
10.10
|
Contract
9726800650 with General Dynamics, dated April 9, 2007 (5)
(6)
|
72
10.11
|
Form
of Subscription Agreement (4)
|
|
10.12
|
Single
Source Supplier Purchase Orders with TSP Inc. (5)
|
|
10.13
|
Single
Source Supplier Purchase Orders with SWS Trimac (5)
|
|
10.14
|
Since
Source Supplier Purchase Orders with Danaher Controls
(5)
|
|
10.15
|
Single
Source Supplier Purchase Orders with Spartech Polycast
(5)
|
|
10.16
|
Third
Amendment to Lease, between Aquiport DFWIP and Optex Systems, Inc., dated
January 7, 2010 (5)
|
|
10.17
|
$250,000
principal amount Note in favor of the Longview Fund, L.P., dated October
27, 2009
|
|
10.18
|
Investor
Relations Agreement, dated April 1, 2009 between Optex Systems and
American Capital Ventures, Inc.
|
|
10.19
|
Form
of Loan and Security Agreement between Optex Systems, Inc. and Peninsula
Bank Business Funding, dated March 4, 2010 (5)
|
|
10.20
|
Form
of Unconditional Guaranty executed by Optex Systems Holdings, Inc. in
favor of Peninsula Bank Business Funding, dated March 4, 2010
(5)
|
|
10.21
|
Form
of Warrant issued by Optex Systems Holdings, Inc. to Peninsula Bank
Business Funding, dated March 4, 2010 (5)
|
|
10.22
|
Allonge
to Promissory Note, dated January 5, 2010
|
|
10.23
|
Showcase
Agreement between Optex Systems, Inc. and ECON Corporate Services,
Inc., dated April 1, 2009
|
|
10.24
|
Consulting
Agreement dated June 29, 2009, between ZA Consulting, Inc. and Optex
Systems, Inc.
|
|
|
||
14.1
|
Code
of Ethics (3)
|
|
16
|
Letter
re: Change in Certifying Accountant
|
|
21.1
|
List
of Subsidiaries – Optex Systems, Inc. (1)
|
|
23.1
|
Consent
of EFP Rotenberg, LLP
|
(1)
|
Incorporated by reference from
our Current Report on Form 8-K dated April 3,
2009.
|
(2)
|
Incorporated by reference from
our Amendment No. 1 to Registration Statement on Form S-1 filed on
September 28, 2009
|
(3)
|
Incorporated by reference from
our Registration Statement on Form S-1 filed on May 19,
2009
|
(4)
|
Incorporated by reference from
our Form 10-K for the fiscal year ended September 27, 2009, filed on
January 11, 2010
|
(5)
|
Incorporated by reference from
our Amendment No. 4 to Registration Statement on Form S-1 filed
on June 14, 2010
|
(6) | This exhibit is missing part of the original bid/solicitation package as such information can only be obtained from third parties with which the registrant has no affiliation, and registrant has made requests from such third parties for such information, and such parties have not been able to provide such information. |
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
1.
|
To file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
|
|
i.
|
To include any prospectus
required by section 10(a)(3) of the Securities
Act;
|
73
|
ii.
|
To reflect in the prospectus any
facts or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
|
iii.
|
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
2.
|
That, for the purpose of
determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
|
3.
|
To remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the
offering.
|
4.
|
That, for the purpose of
determining liability under the Securities Act to any
purchaser:
|
|
i.
|
If the registrant is relying on
Rule 430B (Section 430B of this
chapter):
|
|
A.
|
Each prospectus filed by the
registrant pursuant to Rule 424(b)(3)shall be deemed to be part of the
registration statement as of the date the filed prospectus was deemed part
of and included in the registration statement;
and
|
|
B.
|
Each prospectus required to be
filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a
registration statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act
shall be deemed to be part of and included in the registration statement
as of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in
the offering described in the prospectus. As provided in Rule 430B, for
liability purposes of the issuer and any person that is at that date an
underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time of contract
of sale prior to such effective date, supersede or modify any statement
that was made in the registration statement or prospectus that was part of
the registration statement or made in any such document immediately prior
to such effective date; or
|
|
ii.
|
If the registrant is subject to
Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made
in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to
such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of
first use.
|
74
5.
|
That, for the purpose of
determining liability of the registrant under the Securities Act to any
purchaser in the initial distribution of the securities: The undersigned
registrant undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser,
if the securities are offered or sold to such purchaser by means of any of
the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities
to such purchaser:
|
|
i.
|
Any preliminary prospectus or
prospectus of the undersigned registrant relating to the offering required
to be filed pursuant to Rule
424;
|
|
ii.
|
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned
registrant or used or referred to by the undersigned
registrant;
|
iii.
|
The portion of any other free
writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities provided by
or on behalf of the undersigned registrant;
and
|
|
iv.
|
Any other communication that is
an offer in the offering made by the undersigned registrant to the
purchaser.
|
6. Item 512(h)
Undertaking:
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Richardson, State of
Texas, on July 22, 2010.
OPTEX
SYSTEMS HOLDINGS, INC.
|
|
By:
|
/s/ Stanley A. Hirschman
|
Stanley
A. Hirschman, Principal Executive Officer and Director
|
|
Date:
July 22, 2010
|
|
By:
|
/s/ Karen Hawkins
|
Karen
Hawkins, Principal Financial Officer and Principal Accounting
Officer
|
|
Date:
July 22,
2010
|
75
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature
|
Title
|
Date
|
||
/s/ Stanley A.
Hirschman
|
||||
Stanley
A. Hirschman
|
Principal
Executive Officer and Director
|
July
22, 2010
|
||
/s/ Karen Hawkins
|
||||
Karen
Hawkins
|
Principal
Financial Officer and Principal
|
July
22, 2010
|
||
Accounting Officer | ||||
/s/ Ronald F. Richards
|
||||
Ronald
F. Richards
|
Director
|
July
22, 2010
|
||
/s/ Merrick Okamoto
|
||||
Merrick
Okamoto
|
Director
|
July
22, 2010
|
76