Business Context and Reporting Period
Optex Systems Holdings, Inc. manufactures optical sighting systems, periscopes, rifle and surveillance sights, night-vision assemblies, laser filters and related components for U.S. and foreign military, defense-prime and commercial customers. The company operates through Optex Systems–Richardson and Applied Optics Center–Dallas.
This unaudited Form 10-Q covers the quarter and six months ended March 31, 2019, compared with the periods ended April 1, 2018. The company had 109 full-time-equivalent employees and 8,388,918 common shares outstanding as of March 31, 2019.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2019 | Prior Comparable Period | Six Months Ended March 31, 2019 | Prior Comparable Period |
|---|---|---|---|---|
| Revenue | $7.088 million | $4.550 million | $12.979 million | $9.327 million |
| Gross margin | $1.981 million; 27.9% | $0.993 million; 21.8% | $3.423 million; 26.4% | $2.109 million; 22.6% |
| Operating income | $1.182 million | $0.207 million | $1.881 million | $0.550 million |
| Net income (loss) | $(0.973) million | $2.631 million | $1.052 million | $2.536 million |
| Net income (loss) applicable to common shareholders | $(0.973) million; $(0.12) per share | $1.723 million; $0.20 per share | $0.704 million; $0.08 per share | $1.665 million; $0.20 per share |
| Adjusted EBITDA | $1.296 million | $0.331 million | $2.123 million | $0.807 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $0.630 million | $0.718 million |
Quarterly revenue increased 55.8%, while six-month revenue increased 39.2%. The Richardson segment generated $4.648 million of quarterly revenue and $8.477 million for six months; Applied Optics Center generated $2.440 million and $4.502 million, respectively.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $1.580 million at March 31, 2019, up from $1.133 million at September 30, 2018.
- Working capital was approximately $10.2 million, compared with $8.5 million at September 30, 2018.
- Accounts receivable were $2.584 million and net inventory was $9.213 million, up from $7.639 million at fiscal year-end. The inventory increase primarily supported higher orders and production.
- The Avidbank revolving credit facility had $0.250 million outstanding, down from $0.300 million. The facility permits borrowings of up to $2.2 million, subject to borrowing-base availability, and matures April 21, 2020.
- Total liabilities were $7.343 million, including a $4.047 million warrant liability. Stockholders’ equity was $7.417 million.
- Six-month investing cash use was $0.096 million for property and equipment. Financing cash use was $0.087 million, primarily credit-facility repayment and taxes withheld on restricted stock units.
Material Changes Versus Prior Comparable Period
- Revenue growth was led by Richardson, where quarterly revenue rose 100.2% and six-month revenue rose 69.9%. Periscope revenue rose 81.4% in the quarter and 70.6% for six months.
- “Other” Richardson products, including MRS collimator, mirror, cell and beam-splitter assemblies, increased substantially, while sighting-system revenue declined following completion of a DDAN contract.
- Applied Optics Center revenue increased 9.5% for the quarter and 3.8% for six months, supported by military laser filters and windows and a shift away from lower-margin commercial products.
- Consolidated gross margin improved by 6.1 percentage points in the quarter and 3.8 percentage points for six months, reflecting product mix, manufacturing efficiency and better absorption of fixed costs.
- Operating income increased by $0.975 million in the quarter and $1.331 million for six months, while general and administrative expense remained approximately flat for the quarter and declined modestly for six months.
- GAAP earnings were materially affected by noncash warrant remeasurement. The company recorded a $1.932 million quarterly loss and a $0.547 million six-month loss, compared with gains of $2.350 million and $2.006 million, respectively, in the prior periods.
Guidance, Outlook, Risks and Unusual Items
- Backlog was $25.8 million at March 31, 2019, up 10.7% from $23.3 million at September 30, 2018. Expected deliveries were $6.7 million in the third quarter, $5.2 million in the fourth quarter and $13.9 million in 2020 and thereafter.
- Management expected strong third-quarter revenue, continued favorable operating-profit trends and second-half gross-margin rates generally consistent with the first half. Management also projected fiscal 2019 periscope revenue growth of approximately 40% to 45% versus fiscal 2018.
- Management expects Applied Optics Center annual revenue to increase, with a continued shift toward military products. Sighting-system revenue was expected to remain lower after completion of the prior DDAN contract, although a $0.9 million follow-on order is scheduled for delivery in fiscal 2020 and 2021.
- Government and defense-prime customers represented the majority of revenue: 56% from the U.S. government, 26% from one major U.S. defense contractor and 10% from one commercial customer. The company also reported significant accounts-receivable concentration with U.S. government agencies and one major defense contractor.
- Management cautioned that increased orders could strain working capital through higher inventory, labor and production requirements. Delivery changes, first-article inspections, program delays, increasing costs or insufficient revenue could create a working-capital shortfall.
- The warrant liability is a Level 3 fair-value measurement based on stock price, volatility and other assumptions. The company had 4.261 million warrants outstanding with a $1.50 exercise price and an August 2021 expiration date.
- The company maintained a full valuation allowance against approximately $2.7 million of deferred tax assets because of historical losses and net operating loss carryforwards.
- No material litigation, subsequent events or material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls were effective as of March 31, 2019.
Important Facts for Investors to Verify
- Whether backlog converts to revenue on the anticipated schedule, particularly the $13.9 million scheduled for 2020 and later.
- Whether the improved gross margins and adjusted EBITDA are sustained as product mix, production volumes and defense-contract timing change.
- The extent to which inventory growth and customer concentration affect liquidity and borrowing-base availability.
- The future cash or equity impact of the 4.261 million outstanding warrants and the volatility of their Level 3 valuation.
- Whether expected defense spending, new orders and IDIQ awards result in firm task orders and timely deliveries.
- The company’s ability to maintain positive operating cash flow while funding inventory, production expansion and lease commitments of approximately $1.629 million.