Optex Systems Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and six months ended March 30, 2014, with comparisons to March 31, 2013. Optex manufactures optical sighting systems, periscopes, rifle and surveillance sights, and night-vision assemblies primarily for U.S. Department of Defense and foreign military applications. The company had 60 full-time equivalent employees and operated from a 49,100-square-foot Richardson, Texas facility.
Financial Performance and Position
Amounts below are in thousands, except per-share data and percentages.
| Metric | Three Months Ended Mar. 30, 2014 | Three Months Ended Mar. 31, 2013 | Six Months Ended Mar. 30, 2014 | Six Months Ended Mar. 31, 2013 |
|---|---|---|---|---|
| Revenue | $2,182 | $3,770 | $5,536 | $7,620 |
| Gross profit | $364 | $655 | $981 | $1,352 |
| Gross margin | 16.4% | 17.4% | 17.7% | 17.7% |
| Operating loss | $(213) | $(152) | $(224) | $(89) |
| Net loss | $(142) | $(106) | $(155) | $(66) |
| Basic and diluted loss per share | $0.00 | $0.00 | $(0.0010) | $(0.0004) |
- Cash and cash equivalents were $1.157 million at March 30, 2014, compared with $0.882 million at September 29, 2013.
- Net cash provided by operating activities was $1.118 million for the six months, versus $1.250 million used in the prior-year period. The improvement was driven primarily by collections of accounts receivable and inventory reductions.
- Investing activities provided $15 thousand; no property and equipment was purchased during the six months.
- Financing activities used $858 thousand, reflecting repayment of the Avidbank credit facility. The facility balance was zero at March 30, 2014.
- Current assets were $9.379 million and current liabilities were $1.637 million, implying reported current coverage of approximately 5.7 times. Customer advance deposits totaled $2.372 million, including $0.825 million classified as short term and $1.547 million as long term.
- Net inventory was $6.923 million, including $1.275 million of reserves. Inventory reserves increased by $44 thousand for excess inventory.
- Total assets were $10.931 million and total liabilities were $3.184 million. Common shares outstanding were 170,913,943 at May 14, 2014.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined $1.588 million, or 42.1%, primarily because periscope revenue fell 46.7% as U.S. government spending declined. Six-month revenue decreased $2.084 million, or 27.6%.
- Six-month periscope revenue declined 35.5%, while sighting-system revenue increased 60.0% due to higher deliveries and scope-of-work changes on the M36 DDAN contract. Other product revenue decreased 22.2%.
- Quarterly gross margin declined to 16.4% from 17.4%, partly because of the additional excess-inventory reserve. Six-month gross margin remained approximately 17.8%.
- General and administrative expense declined 28.4% in the quarter and 14.3% for the six-month period because of reductions in labor-related costs, research and development, legal expense, advertising, trade shows, and director fees.
- Despite lower expenses, the quarterly operating loss increased to $213 thousand from $152 thousand, and the six-month operating loss increased to $224 thousand from $89 thousand.
- Backlog declined to $11.1 million at March 30, 2014 from $16.5 million at March 31, 2013, a 32.7% decrease. New orders received during the six months totaled $4.4 million.
- Common shares increased principally through conversions of Series A preferred stock and a cashless option exercise. The company also granted 25 million options during the six months and had 63.2 million options outstanding at March 30, 2014.
Guidance, Outlook, Risks, and Unusual Items
- Management expects reduced U.S. government spending and the backlog decline to constrain revenue. It does not expect alternative business to fully offset reduced government spending during the next several months.
- Management expects general and administrative expenses to remain below the prior-year level. M36 sighting-system deliveries are expected to increase to more than 50% of prior-year levels beginning in the fourth quarter of fiscal 2014 based on an accelerated customer delivery schedule.
- The company faces uncertainty from defense sequestration, potential reductions in military spending, competitive pricing pressure, fixed-overhead absorption, and dependence on government and defense-prime customers.
- Optex has an equitable-adjustment claim related to the Howitzer Aiming Circle program pending before the Armed Services Board of Contract Appeals. The contracting agency rejected the claim in 2012, and an amended complaint and alternative dispute resolution process were pending. The company could not predict the outcome; previously recognized program losses mean management expected no future margin impact if unsuccessful.
- The Avidbank revolving facility, previously maturing April 15, 2014, was extended on that date to June 15, 2014. The March 30 balance was zero, but the facility remains an important liquidity source.
- The Richardson facility lease was extended to March 31, 2021. Remaining minimum operating lease payments were $1.914 million, and base rent of approximately $21.2 thousand per month began April 1, 2014.
- The company held approximately $2.4 million of customer advance deposits associated with a contract extending through 2017 and is required to purchase materials and deliver products over the contract term.
- No material changes to previously disclosed risk factors were reported. Management stated that disclosure controls were effective and that no material litigation was known other than the contract appeal described above.
Investor Verification Items
- Verify the sustainability and quality of the $1.118 million in operating cash flow, particularly the reliance on accounts receivable collections and inventory reductions.
- Monitor backlog, new order intake, periscope demand, and the timing of expected M36 deliveries.
- Confirm the renewal or replacement of the Avidbank facility after the June 15, 2014 maturity extension.
- Assess inventory reserves, customer advance deposits, and the company’s obligations to procure materials for the long-term contract.
- Evaluate dilution from 63.2 million outstanding options, 1.0 million warrants, preferred-stock conversion rights, and the increased common share count.
- Review the outcome and timing of the Howitzer Aiming Circle equitable-adjustment appeal and alternative dispute resolution process.