Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Optex Systems manufactures optical sighting systems, periscopes, rifle and surveillance sights, night-vision assemblies, and thin-film optical components primarily for U.S. and foreign military customers and defense contractors. Operations are conducted through the Richardson, Texas, Optex Systems segment and the Dallas, Texas, Applied Optics Center segment.
The filing covers the unaudited three and nine months ended June 26, 2016, compared with June 28, 2015. The company had 89 full-time equivalent employees and 1,621,145 common shares outstanding at June 26, 2016.
Key Financial Metrics
| Metric | Three Months Ended June 26, 2016 | Three Months Ended June 28, 2015 | Nine Months Ended June 26, 2016 | Nine Months Ended June 28, 2015 |
|---|---|---|---|---|
| Revenue | $5.344 million | $2.312 million | $11.773 million | $7.814 million |
| Gross margin | $1.083 million; 20.8% | $(0.260) million; (12.6%) | $2.065 million; 17.8% | $0.091 million; 1.3% |
| Operating income (loss) | $0.211 million | $(1.001) million | $(0.329) million | $(2.146) million |
| Net income (loss) after taxes | $0.199 million | $(1.014) million | $(0.357) million | $(0.202) million |
| Net income (loss) applicable to common shareholders | $0.199 million | $(1.014) million | $(0.357) million | $(6.643) million |
| Basic and diluted EPS | $0.12 | $(3.25) | $(0.47) | $(21.33) |
General and administrative expense was $0.872 million for the quarter and $2.394 million for the nine-month period. The company attributed the improvement in gross margin to higher volume, improved labor efficiencies, updated pricing, increased plant utilization, and the absence of prior-year intangible amortization.
Nine-month cash flow from operating activities was approximately zero, compared with $(0.758) million in the prior-year period. Inventory increased by $0.797 million to $6.510 million in support of anticipated fourth-quarter revenue, while accounts receivable declined by $1.029 million.
Cash and cash equivalents were $0.601 million at June 26, 2016, compared with $0.683 million at September 27, 2015. Working capital was approximately $6.0 million, compared with $6.1 million at fiscal year-end. The company used $0.012 million in investing activities and $0.070 million in financing activities during the nine months.
The Avidbank revolving credit facility was amended in April 2016, extends through January 22, 2018, and provides up to $2.0 million based on eligible receivables. Outstanding principal and accrued interest were $0.730 million at June 26, 2016, compared with $0.817 million at September 27, 2015. The facility bears interest at prime plus 2.5%, subject to stated fees and covenants.
Total assets were $10.922 million and total liabilities were $3.009 million at June 26, 2016. Net inventory reserves remained $1.592 million. Customer advance deposits were $0.630 million and no longer included a long-term balance.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 130.4% to $5.344 million, driven primarily by periscope shipments, higher sighting-system revenue, and increased Applied Optics Center activity.
- Nine-month revenue increased 51.3% to $11.773 million. Periscope revenue increased 111.5%, while Applied Optics Center revenue increased 43.3%; sighting-system and other revenue declined modestly.
- The quarterly gross margin improved from negative 12.6% to positive 20.8%; the nine-month gross margin improved from 1.3% to 17.8%.
- The company generated quarterly operating income of $0.211 million, reversing the prior-year operating loss of $1.001 million. The nine-month operating loss narrowed to $0.329 million from $2.146 million.
- The prior-year nine-month results included a $2.110 million bargain-purchase gain related to the Applied Optics Center and $6.441 million of preferred-stock dividend or beneficial-conversion adjustments. No comparable amounts were recognized in 2016.
- Backlog increased 26.1% to $15.0 million from $11.9 million. Approximately $5.1 million was scheduled for delivery in the fourth quarter of fiscal 2016 and $9.9 million in 2017.
- Common shares increased substantially following the March 2016 conversion of $3.125 million of Series A preferred stock into 1,250,000 common shares, plus the issuance of 40,000 restricted shares to IRTH Communications.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected revenue and profitability to increase in the fourth quarter of fiscal 2016 and over the following twelve months, supported by backlog. Management also expected periscope shipments to decline sequentially in the next quarter but remain above prior-year levels, while Applied Optics Center revenue was expected to remain elevated due to ACOG laser-filter and Nightforce orders. Sighting-system shipments were expected to remain constrained in the near term because of customer-requested delivery delays, with increased DDAN deliveries anticipated in the first half of fiscal 2017.
The company stated that continued profitability depends on achieving revenue sufficient to support its cost structure. Uneven customer delivery requirements, first-article inspection requirements, program delays, and working-capital needs could create a shortfall. Management noted that certain assets may not be recoverable if its business plan is not successfully implemented.
Defense spending reductions and sequestration, dependence on government and defense-prime customers, contract timing, foreign military sales, customer concentration, and potential government contract termination provisions remain material business risks. The company reported no known pending contract terminations, no outstanding equitable-adjustment requests, no backlog subject to undefinitized-contract treatment, and no material litigation. Management reported no material changes to previously disclosed risk factors.
The company had approximately $1.826 million of remaining minimum lease and estimated common-area-maintenance payments under its facility leases. The Applied Optics Center lease expired September 30, 2016; renewal negotiations contemplated reduced space. L-3 Mobile Vision notified the company that it would not renew its sublease of approximately 12,000 square feet.
During the quarter, the company established a 2016 Restricted Stock Unit Plan and issued 150,000 RSUs to the chief executive officer and 50,000 RSUs to the chief financial officer. The total grant-date value was approximately $0.372 million. The company also issued 40,000 restricted common shares valued at $0.094 million for investor-relations services.
Subsequent events included a June 30, 2016 conversion of $0.273 million of Series B preferred stock into 109,291 common shares; a July 20, 2016 potential five-year, $6.0 million Defense Logistics Agency IDIQ contract; and an August 2016 amended Form S-1 seeking up to $5.0 million of gross proceeds, plus a possible $0.750 million overallotment.
Important Facts for Investors to Verify
- Whether fourth-quarter shipments and the $15.0 million backlog convert into sustained positive operating cash flow and profitability.
- The availability, borrowing base, covenant compliance, and renewal terms of the Avidbank credit facility relative to the company’s limited cash balance.
- The outcome and dilution effects of the proposed common-stock offering and subsequent preferred-stock conversions.
- The renewal cost and final space commitment for the Applied Optics Center lease after the L-3 sublease expiration.
- Customer and program concentration, including U.S. government, General Dynamics, Nightforce Optics, L-3, and other defense-prime relationships.
- Potential inventory recoverability, contract-loss reserves, and the effect of production delays or customer delivery changes on working capital.
- The terms and award status of the later-reported Defense Logistics Agency IDIQ contract and whether it represents firm orders or only potential future value.