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 related optical products for the U.S. Department of Defense, foreign military customers, defense contractors, and commercial markets. Operations are conducted through the Richardson, Texas, Optex Systems segment and the Dallas, Texas, Applied Optics Center segment.
The unaudited filing covers the three and nine months ended June 27, 2021, compared with the periods ended June 28, 2020. The fiscal year ends September 27, 2021. The company had 85 full-time equivalent employees and 8,483,295 common shares outstanding as of August 16, 2021.
Financial Results and Key Metrics
| Metric | Three Months Ended June 27, 2021 | Three Months Ended June 28, 2020 | Nine Months Ended June 27, 2021 | Nine Months Ended June 28, 2020 |
|---|---|---|---|---|
| Revenue | $4.433 million | $5.849 million | $13.149 million | $18.682 million |
| Gross margin | $746 thousand; 16.8% | $1.481 million; 25.3% | $1.959 million; 14.9% | $4.568 million; 24.5% |
| Operating income (loss) | $57 thousand | $626 thousand | $(279) thousand | $2.126 million |
| Net income (loss) | $1.374 million | $(95) thousand | $1.859 million | $1.170 million |
| Net income (loss) applicable to common shareholders | $910 thousand | $(95) thousand | $1.237 million | $798 thousand |
| Basic and diluted EPS | $0.11 | $(0.01) | $0.15 | $0.09 |
The company recorded non-cash gains on warrant fair value of $1.167 million for the quarter and $2.025 million for the nine-month period, compared with losses of $585 thousand and $504 thousand, respectively, in the prior-year periods. These gains materially increased reported net income but did not represent operating cash flow.
The filing’s adjusted EBITDA table reports $181 thousand for the quarter and $87 thousand for the nine months, compared with $750 thousand and $2.431 million, respectively, in the prior-year periods. The MD&A narrative describes the nine-month adjusted EBITDA as approximately negative $0.1 million, which is inconsistent with the table and should be verified.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $4.758 million at June 27, 2021, compared with $4.700 million at September 27, 2020.
- Operating activities generated $1.116 million of cash during the nine months, versus $1.861 million in the prior-year period.
- Investing activities used $214 thousand, primarily for property and equipment purchases.
- Financing activities used $844 thousand, including $800 thousand for share repurchases and $44 thousand for taxes withheld on net-settled restricted stock units.
- Working capital was $12.3 million at June 27, 2021, compared with $11.7 million at September 27, 2020.
- Accounts receivable declined to $1.382 million from $2.953 million, while net inventory declined modestly to $8.645 million from $8.791 million.
- The BBVA revolving credit facility has a $2.25 million capacity and matures April 15, 2022. The outstanding balance was $377 thousand, and the company reported compliance with its covenants.
- Operating lease liabilities totaled $3.783 million, including $529 thousand current and $3.254 million long-term. Lease amendments resulted in recognition of a $3.721 million right-of-use asset during the period.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 24.2% for the quarter and 29.6% for the nine months, driven by reduced customer demand, slower defense contract awards, and shifts in military spending priorities.
- Quarterly revenue declined in both segments: Richardson decreased 18.8% to $3.126 million and Applied Optics Center decreased 34.6% to $1.307 million.
- Nine-month revenue declined 24.8% in Richardson and 38.0% in Applied Optics Center.
- Gross margin contracted from 25.3% to 16.8% for the quarter and from 24.5% to 14.9% for the nine months, reflecting lower volume, unfavorable product mix, and under-absorbed manufacturing overhead.
- Nine-month operating results shifted from $2.126 million of operating income to a $279 thousand operating loss, despite an 8.4% reduction in general and administrative expense.
- Backlog declined 20.9% to $12.9 million from $16.3 million at fiscal year-end. Richardson backlog fell 34.1% to $8.7 million, while Applied Optics Center backlog increased 35.5% to $4.2 million.
- The company repurchased 519,266 shares for $1.0 million under its repurchase program; the repurchased shares were cancelled in June 2021, and no authorization remained.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated fiscal 2021 performance would be approximately 30% to 32% below fiscal 2020 and expected an operating loss for fiscal 2021.
- Management expected positive operating cash flow in the final quarter, but stated that uneven revenue, production requirements, customer delays, and increasing inventory or production costs could create a working-capital shortfall.
- Management reported increased proposal activity and anticipated higher orders over the next three to twelve months, but stated that the timing and nature of new awards remained uncertain.
- Subsequent to June 27, 2021, the company reported $11.7 million of additional customer orders, including an $8.4 million, 24-month laser-filter purchase order announced August 3, 2021. These awards were not included in June 27 backlog.
- COVID-19 effects included delayed government procurement, longer award cycles, supply-chain disruptions, and reduced demand. The company remained operational with limited workforce disruption.
- The company implemented reductions in force, employee compensation, and discretionary spending, and was evaluating further cost reductions.
- On July 13, 2021, the company experienced a ransomware attack. Operations and data access were restored without material day-to-day impact, but the company stated that sensitive data may have been breached and that its investigation remained ongoing.
- On August 10, 2021, an investor exercised warrants for 148,300 shares at $1.50 per share, generating $222,450.
- The company reported no material pending or threatened litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 27, 2021.
Important Facts for Investors to Verify
- Reconcile the inconsistency between the adjusted EBITDA table and the MD&A narrative for the nine-month period.
- Assess whether the subsequent $11.7 million of orders will convert to revenue on the expected schedule and offset the reduced backlog existing at June 27.
- Monitor the impact of the 30% to 32% expected fiscal-year revenue decline on fixed-cost absorption, margins, and operating cash flow.
- Review the status and potential consequences of the July 2021 ransomware investigation, including any confirmed data breach or customer impact.
- Evaluate liquidity relative to the $377 thousand credit-facility balance, $2.25 million borrowing capacity, lease obligations, and management’s stated risk of a working-capital shortfall.
- Consider the effect of warrant exercises and the remaining warrant liability, which was $519 thousand at June 27, 2021 and was measured using Level 3 valuation inputs.