OPTEX SYSTEMS HOLDINGS, INC

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OPTEX SYSTEMS HOLDINGS INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/16/2022 | 04:18pm EDT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is intended to supplement and complement our audited condensed
consolidated financial statements and notes thereto for the fiscal year ended
October 3, 2021 and our unaudited consolidated financial statements and notes
thereto for the quarter ended April 3, 2022, prepared in accordance with U.S.
generally accepted accounting principles (GAAP). You are encouraged to review
our consolidated 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 a non-GAAP
measure is used in this MD&A, it is 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. The operating results for the periods presented were not significantly affected by inflation.

Cautionary Note Regarding Forward-Looking Information




This Quarterly Report on Form 10-Q, in particular the MD&A, contains certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any statements
contained in this Quarterly Report on Form 10-Q that are not statements of
historical fact may be deemed to be forward-looking statements. When used in
this Quarterly Report on Form 10-Q and other reports, statements, and
information we have filed with the Securities and Exchange Commission
("Commission" or "SEC"), in our press releases, presentations to securities
analysts or investors, or in oral statements made by or with the approval of an
executive officer, the words or phrases "believes," "may," "will," "expects,"
"should," "continue," "anticipates," "intends," "will likely result,"
"estimates," "projects" or similar expressions and variations thereof are
intended to identify such forward-looking statements.



These forward-looking statements represent our expectations, beliefs, intentions
or strategies concerning future events, including, but not limited to, any
statements regarding growth strategy; product and development programs;
financial performance (including revenue and net income); backlog; orders; the
impact of the COVID-19 pandemic; supply chain challenges; the continuation of
historical trends; the sufficiency of our cash balances for future liquidity and
capital resource needs; the expected impact of changes in accounting policies on
our results of operations, financial condition or cash flows; anticipated
problems and our plans for future operations; and the economy in general or the
future of the defense industry.



We caution that these statements by their nature involve risks and
uncertainties, certain of which are beyond our control, and actual results may
differ materially depending on a variety of important factors. Some of these
risks and uncertainties are identified in "Risk Factors" in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K and you are urged to
review those sections. You should understand that it is not possible to predict
or identify all such factors. Consequently, you should not consider any such
list to be a complete list of all potential risks or uncertainties.



We do not assume the obligation to update any forward-looking statement. You
should carefully evaluate such statements in light of factors described in this
Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.



3






Background



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).



We are both a prime and sub-prime contractor to the Department of Defense.
Sub-prime contracts are typically issued through major defense contractors such
as General Dynamics Land Systems, Raytheon Corp., BAE, Harris Corp. and others.
We are also a military supplier to foreign governments such as Israel, Australia
and NAMSA and South American countries and as a subcontractor for several large
U.S. defense companies serving foreign governments.



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 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.



Many 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.



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, some 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.



We may be at risk as a result of the current COVID-19 pandemic. Risks that could
affect our business include the duration and scope of the COVID-19 pandemic and
the impact on the demand for our products; actions by governments, businesses
and individuals taken in response to the pandemic; the length of time of the
pandemic and the possibility of its reoccurrence; the timing required to develop
and implement effective treatments; the success of global vaccination efforts;
the eventual impact of the pandemic and actions taken in response to the
pandemic on global and regional economies; and the pace of recovery when the
pandemic subsides.



Beginning in April 2020 through October 3, 2021, we experienced a significant
reduction in new orders and ending customer backlog in our Optex Richardson
segment, resulting in an overall decrease in backlog of 40% between September
29, 2019 and October 3, 2021. We attribute the lower orders to a combination of
factors including a COVID-19 driven slow-down of contract awards for both U.S.
military sales and foreign military sales (FMS), combined with significant
shifting in defense spending budget allocations in US military sales and FMS
away from Army ground system vehicles toward other military agency applications.
In addition, the pandemic has caused several program delays throughout the
defense supply chain as a result of plant shutdowns, employee illnesses, travel
restrictions, remote work arrangements and similar supply chain issues. While
the Applied Optics Center segment experienced a significant decline in orders
during the second half of fiscal year 2020, the segment saw a sizable increase
in new orders during the fiscal year ended October 3, 2021 as a result of
increased military spending in Army infantry optical equipment, a larger
customer base and higher customer demand for commercial optical assemblies. As
of October 3, 2021, the Applied Optics Center segment backlog had increased by
153% as compared to the level on September 29, 2019. As a result of this
significant shift in orders and backlog between segments, we anticipate
corresponding shifts in revenue during the 2022 fiscal year, with revenue from
the Optex Richardson segment decreasing, and revenue from the Applied Optics
Center segment increasing.



Recent Events


D. Schoening Employment Agreement

The Company entered into an amended and restated employment agreement with Danny
Schoening dated December 1, 2021. The term of the agreement commenced as of
December 1, 2021 and the current term ends on November 30, 2022. Mr. Schoening's
base salary is $296,031 per annum. Mr. Schoening will be eligible for a
performance bonus based upon a rolling three-year operating plan adopted by the
Company's Board of Directors (the "Board"). The bonus will be based on operating
metrics decided annually by our Board and tied to such three-year plan. The
target bonus equates to 30% of Mr. Schoening's base salary. Our Board will have
discretion in good faith to alter the performance bonus upward or downward
by
20%.



4






The updated employment agreement also served to amend Mr. Schoening's RSU
Agreement, dated January 2, 2019, by changing the third and final vesting date
for the restricted stock units granted under such agreement from January 1, 2022
to the "change of control date," that being the first of the following to occur
with respect to the Company: (i) any "Person," as that term is defined in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), with certain exclusions, is or becomes the "Beneficial Owner"
(as that term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities;
or (ii) the Company is merged or consolidated with any other corporation or
other entity, other than: (A) a merger or consolidation which would result in
the voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation; or
(B) the Company engages in a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which No "Person"
(as defined above) acquires fifty percent (50%) or more of the combined voting
power of the Company's then outstanding securities. The amended RSU Agreement
contains certain exceptions to the definition of change of control.



The employment agreement events of termination consist of: (i) death or
permanent disability of Mr. Schoening; (ii) termination by the Company 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 by the Company without cause and (iv) termination by Mr.
Schoening for good reason (including breach by the Company 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 Company's then
outstanding securities or those of its successor changing ownership or a sale of
all or substantially all of its assets, without the surviving entity assuming
the obligations under the agreement). For a termination by the Company for cause
or upon death or permanent disability of Mr. Schoening, Mr. Schoening will be
paid salary and for a termination due to his death or permanent disability, also
any bonus earned through the date of termination. For a termination by the
Company without cause or by Mr. Schoening with good reason, Mr. Schoening will
also be paid six months' base salary in effect and, if such termination occurs
prior to a change of control, Mr. Schoening will not forfeit the unvested RSUs
until and unless the change of control does not occur by March 13, 2023.



K. Hawkins Salary Increase

On March 28, 2022, the Board of Directors Compensation Committee approved a salary increase of 4% for Karen Hawkins, CFO to be effective on April 1, 2022. As a result of the increase, the salary has been changed from $205,425 to $213,642.




Recent Stock Repurchases



On September 22, 2021, the Company announced authorization of a $1 million stock
repurchase program. The shares authorized to be repurchased under this
repurchase program may be purchased from time to time at prevailing market
prices, through open market transactions or in negotiated transactions,
depending upon market conditions and subject to Rule 10b-18 as promulgated by
the SEC. During the six months ended April 3, 2022, 115,971 common shares were
repurchased under the September 2021 repurchase program at an aggregate cost of
$222 thousand. As of April 3, 2022, all shares repurchased under the September
2021 stock repurchase program have been cancelled and there were no shares
held
in Treasury.



Results of Operations



Non-GAAP Adjusted EBITDA



We use adjusted earnings before interest, taxes, depreciation and amortization
(EBITDA) as an additional measure for evaluating the performance of our business
as "net income" includes the significant impact of noncash valuation gains and
losses on warrant liabilities, noncash compensation expenses related to equity
stock issues, as well as depreciation, amortization, interest expenses and
federal income taxes. We believe that Adjusted EBITDA is a meaningful indicator
of our operating performance because it permits period-over-period comparisons
of our ongoing core operations before the excluded items, which we do not
consider relevant to our operations. Adjusted EBITDA is a financial measure not
required by, or presented in accordance with, U.S. generally accepted accounting
principles ("GAAP").



Adjusted EBITDA has limitations and should not be considered in isolation or a
substitute for performance measures calculated under GAAP. This non-GAAP measure
excludes certain cash expenses that we are obligated to make. In addition, other
companies in our industry may calculate Adjusted EBITDA differently than we do
or may not calculate it at all, which limits the usefulness of Adjusted EBITDA
as a comparative measure.



5






The table below summarizes our three-and six month operating results for the
periods ended April 3, 2022 and March 28, 2021, in terms of both the GAAP net
income measure and the non-GAAP Adjusted EBITDA measure. We believe that
including both measures allows the reader better to evaluate our overall
performance.



                                                             (Thousands)
                                    Three months ended                           Six months ended
                          April 3, 2022          March 28, 2021        April 3, 2022         March 28, 2021

Net Income (Loss)
(GAAP)                   $           (151 )     $            (602 )   $           (122 )    $            485
Add:
Loss (Gain) on Change
in Fair Value of
Warrants                                -                     169                    -                  (858 )
Federal Income Tax
(Benefit) Expense                     (40 )                    17                  (54 )                  33
Depreciation                           75                      65                  147                   128
Stock Compensation                     35                      57                   92                   114
Interest Expense                        -                       2                    -                     5
Adjusted EBITDA - Non
GAAP                     $            (81 )     $            (292 )   $             63      $            (93 )




Our net income increased by $0.4 million to a ($0.2) million net loss the three
months ended April 3, 2022, as compared to a net loss of ($0.6) million for the
prior year period. Our adjusted EBITDA increased by $0.2 million to a loss of
($0.1) million for the three months ended April 3, 2022, as compared to ($0.3)
million for the prior year period. The increase in the most recent three-month
period is primarily driven by increased revenue during the current year period
as compared to the prior year period. Operating segment performance is discussed
in greater detail throughout the following sections.



Our net income decreased by ($0.6) million to a net loss of ($0.1) million for
the six months ended April 3, 2022, as compared to a net income of $0.5 million
for the prior year period. Our adjusted EBITDA increased by $0.2 million to $0.1
million for the six months ended April 3, 2022, as compared to a loss of ($0.1)
million for the prior year period. The increase in the most recent six-month
period adjusted EBITDA is primarily driven by increased revenue during the
current year period as compared to the prior year period. Operating segment
performance is discussed in greater detail throughout the following sections.



During the three and six months ended April 3, 2022, we did not recognize either
a gain or a loss on the change in fair value of warrants, as the warrants had
expired on August 26, 2021 in accordance with their terms. By comparison, during
the three months ended March 28, 2021, we recognized a loss on the change in
fair value of warrants of $0.2 million, and during the six months ended March
28, 2021, we recognized a gain on the change in fair value of warrants of $0.9
million. As this was a non-cash (loss) gain driven by then-current fair market
value of our outstanding warrants and unrelated to our core business operating
performance, the change in fair value losses and gains have historically been
excluded from our adjusted EBITDA calculations presented above. Further
discussion regarding the changes in fair value of the warrants and the related
warrant liability can be found in Item 1, "Unaudited Condensed Consolidated
Financial Statements, Note 6 - Warrant Liabilities".



                                                                                                     Results of Operations Selective Financial Info
                                                                                                                      (Thousands)
                                                                                                                   Three months ended
                                                                           April 3, 2022                                                                      March 28, 2021
                                                                 Applied                                                                            Applied
                                                                 Optics                 Other                                                       Optics                  Other
                                               Optex             Center    
    (non-allocated costs                              Optex            

Center (non-allocated costs

                                             Richardson          Dallas     

and eliminations) Consolidated Richardson Dallas

            and eliminations)        Consolidated

Revenue from External Customers             $      2,078       $     3,058 
    $                   -      $       5,136       $      2,805       $     1,441       $                   -      $       4,246
Intersegment Revenues                                  -               255                       (255 )                -                  -               530                        (530 )                -
Total Segment Revenue                              2,078             3,313                       (255 )            5,136              2,805             1,971                        (530 )            4,246

Total Cost of Sales                                1,903             2,772                       (255 )            4,420              2,561             1,837                        (530 )            3,868

Gross Margin                                         175               541                          -                716                244               134                           -                378
Gross Margin %                                       8.4 %            16.3 %                        -               13.9 %              8.7 %             6.8 %                         -                8.9 %
General and Administrative Expense                   716               156 
                       35                907                586               149                          57                792
Segment Allocated G&A Expense                       (298 )             298                          -                  -               (153 )             153                           -                  -
Net General & Administrative Expense                 418               454                         35                907                433               302                          57                792

Operating Income (Loss)                             (243 )              87                        (35 )             (191 )             (189 )            (168 )                       (57 )             (414 )
Operating Income (Loss) %                          (11.7 )%            2.6 %                        -               (3.7 )%            (6.7 )%           (8.5 )%                        -               (9.8 )%

Loss on Change in Fair Value of Warrants               -                 - 
                        -                  -                  -                 -                        (169 )             (169 )
Interest Expense                                       -                 -                          -                  -                  -                 -                          (2 )               (2 )
Net Income (Loss) before taxes              $       (243 )     $        87      $                 (35 )    $        (191 )     $       (189 )     $      (168 )     $                (228 )    $        (585 )
Net Income (Loss) %                                (11.7 )%            2.6 %                        -               (3.7 )%            (6.7 )%           (8.5 )%                        -              (13.8 )%




6






                                                                                         Results of Operations Selected Financial Info by Segment
                                                                                                                (Thousands)
                                                                                                             Six months ended
                                                                     April 3, 2022                                                                      March 28, 2021
                                                           Applied                                                                           Applied
                                                           Optics                 Other                                                      Optics                  Other
                                         Optex             Center         (non-allocated costs                              Optex            Center          (non-allocated costs
                                       Richardson          Dallas          

and eliminations) Consolidated Richardson Dallas

and eliminations) Consolidated

Revenue from External Customers $ 3,934 $ 5,541 $

                  -      $       9,475       $      5,833      $     2,884       $                   -      $       8,717
Intersegment Revenues                            -               435                       (435 )                -                  -              896                        (896 )                -
Total Segment Revenue                        3,934             5,976                       (435 )            9,475              5,833            3,780                        (896 )            8,717

Total Cost of Sales                          3,569             4,802                       (435 )            7,936              5,003            3,397                        (896 )            7,504

Gross Margin                                   365             1,174                          -              1,539                830              383                           -              1,213
Gross Margin %                                 9.3 %            19.6 %                        -               16.2 %             14.2 %           10.1 %                         -               13.9 %
General and Administrative Expense           1,359               264       
                 92              1,715              1,159              275                         114              1,548
Segment Allocated G&A Expense                 (534 )             534                          -                  -               (353 )            353                           -                  -
Net General & Administrative
Expense                                        825               798                         92              1,715                806              628                         114              1,548

Operating Income (Loss)                       (460 )             376                        (92 )             (176 )               24             (245 )                      (114 )             (335 )
Operating Income (Loss) %                    (11.7 )%            6.3 %                        -               (1.9 )%             0.4 %           (6.5 )%                        -               (3.8 )%

Gain on Change in Fair Value of
Warrants                                         -                 -                          -                  -                  -                -                         858                858
Interest Expense                                 -                 -                          -                  -                  -                -                          (5 )               (5 )

Income (Loss) before taxes            $       (460 )     $       376      $                 (92 )    $        (176 )     $         24      $      (245 )     $                 739      $         518
Income (loss) before taxes %                 (11.7 )%            6.3 %                        -               (1.9 )%             0.4 %           (6.5 )%                        -                5.9 %




For the three months ended April 3, 2022, our total revenues increased by $0.9
million, or 21.0%, compared to the prior year period. The increase in revenue
was primarily driven by a $1.6 million increase in external revenue at the
Applied Optics Center segment, partially offset by a decrease in revenue at the
Optex Richardson segment of ($0.7) million, respectively, over the prior year
period.



For the six months ended April 3, 2022, our total revenues increased by $0.8
million, or 8.7%, compared to the prior year period. The increase in revenue was
primarily driven by a $2.7 million increase in external revenue at the Applied
Optics Center segment, partially offset by a decrease in revenue at the Optex
Richardson segment of ($1.9) million, respectively, over the prior year period.



During the year ended October 3, 2021, we realized a significant increase in
customer orders and backlog for the Applied Optics Center segment. For the first
six months of fiscal year 2022, new orders were 22.4% higher than in the prior
year period primarily driven by increases in the Optex Systems - Richardson
segment. We expect revenue for the Applied Optics Center to increase over the
course of the 2022 fiscal year as compared to the prior year periods consistent
with the increases in customer demand for optical assemblies and laser filter
units. Based on our current customer orders, we anticipate a 30-35% increase in
consolidated revenue for the six months ending October 2, 2022 as compared to
the six months ended April 3, 2022 and a total increase for fiscal year 2022 of
20-25% as compared to the prior year.



Consolidated gross margin for the three months ended April 3, 2022 increased by
$0.3 million, or 89.4%, compared to the prior year period. The increase in
margin was primarily attributable to increased revenue at the Applied Optics
Center segment.


Consolidated gross margin for the six months ended April 3, 2022 increased by
$0.3 million, or 26.9%, compared to the prior year period. The increase in
margin was primarily attributable to increased revenue at the Applied Optics
Center segment.



Our operating loss for the three months ended April 3, 2022 decreased by $0.2
million, or 53.9%, compared to the prior year period. The decrease in operating
loss was primarily driven by increases in revenue and gross margin at the
Applied Optics Center segment.



Our operating loss for the six months ended April 3, 2022 decreased by $0.2 million, or 47.5%, compared to the prior year period. The decrease in operating loss was primarily driven by increases in revenue and gross margin at the Applied Optics Center segment.



Backlog


During the six months ended April 3, 2022, the Company booked $10.4 million in
new orders, representing a 22.4% increase over the prior year period. The
increase in orders is primarily attributable to an increase in the Optex Systems
- Richardson segment orders over the prior year period.



The orders for the most recently completed six months consist of $6.1 million
for our Optex Richardson segment and $4.3 million attributable to the Applied
Optics Center.



7





The following table depicts the new customer orders for the six months ending April 3, 2022 as compared to the prior year period in millions of dollars:



                                                      (Millions)
                                                          Six months
                                  Six months ended       ended March
         Product Line              April 3, 2022           28, 2021         Variance         % Chg
Periscopes                       $              4.6     $          3.0     $       1.6           53.3 %
Sighting Systems                                0.5                0.3     
       0.2           66.7 %
Howitzer                                          -                  -               -              - %
Other                                           1.0                  -             1.0          100.0 %
Optex Systems - Richardson                      6.1                3.3             2.8           84.8 %
Optical Assemblies                              2.4                3.1     
      (0.7 )        (22.6 )%
Laser Filters                                   0.8                1.6            (0.8 )        (50.0 )%
Day Windows                                     0.3                  -             0.3         (100.0 )%
Other                                           0.8                0.5             0.3           60.0 %
Applied Optics Center - Dallas                  4.3                5.2            (0.9 )        (17.3 )%
Total Customer Orders            $             10.4     $          8.5    
$       1.9           22.4 %




Backlog as of April 3, 2022, was $28.2 million, compared to a backlog of $27.3
million as of October 3, 2021, representing an increase of $0.9 million or 3.3%.
The following table depicts the April 3, 2022 backlog as compared to the backlog
on October 3, 2021:



                                                     (Millions)
                                  Total Backlog       Total Backlog
         Product Line               4/3/2022            10/3/2021         Variance         % Chg
Periscopes                       $           7.7     $           5.6     $       2.1           37.5 %
Sighting Systems                             1.9                 1.7             0.2           11.8 %
Howitzer                                     2.2                 2.3            (0.1 )         (4.3 )%
Other                                        1.4                 1.4               -              - %
Optex Systems - Richardson                  13.2                11.0             2.2           20.0 %
Optical Assemblies                           5.4                 5.0             0.4            8.0 %
Laser Filters                                8.2                 9.9            (1.7 )        (17.2 )%
Day Windows                                  0.7                 1.1            (0.4 )        (36.4 )%
Other                                        0.7                 0.3             0.4          133.3 %
Applied Optics Center - Dallas              15.0                16.3       
    (1.3 )         (8.0 )%
Total Backlog                    $          28.2     $          27.3     $       0.9            3.3 %



Backlog as of April 3, 2022, was $28.2 million as compared to a backlog of $16.0
million as of March 28, 2021, representing an increase of $12.2 million or
76.3%. The following table depicts the current expected delivery by period of
all contracts awarded as of April 3, 2022 in millions of dollars, as well as the
April 3, 2022 backlog as compared to the backlog on March 28, 2021:



                                                                         (Millions)
                             Q3         Q4          2022          2023+         Total Backlog       Total Backlog
      Product Line          2022       2022       Delivery       Delivery         4/3/2022            3/28/2021         Variance       % Chg
Periscopes                 $  2.5     $  2.8     $      5.3     $      2.4     $           7.7                 4.8            2.9        60.4 %
Sighting Systems              0.2        0.1            0.3            1.6                 1.9                 1.9              -           - %
Howitzer                        -          -              -            2.2                 2.2                 2.3           (0.1 )      (4.3 )%
Other                         0.1        0.2            0.4            1.0                 1.4                 1.6           (0.2 )     (12.5 )%
Optex Systems -
Richardson                    2.8        3.1            6.0            7.2                13.2                10.6            2.6        24.5 %
Optical Assemblies            1.1        1.5            2.6            2.8                 5.4                 2.8            2.6        92.9 %
Laser Filters                 1.7        1.5            3.2            5.0                 8.2                 1.3            6.9       530.8 %
Day Windows                   0.2        0.1            0.3            0.4                 0.7                 0.8           (0.1 )     (12.5 )%
Other                         0.2        0.1            0.3            0.4                 0.7                 0.5            0.2        40.0 %
Applied Optics Center -
Dallas                        3.2        3.2            6.4            8.6                15.0                 5.4            9.6       177.8 %
Total Backlog              $  6.0     $  6.3     $     12.4     $     15.8     $          28.2                16.0           12.2        76.3 %



Optex Systems Richardson backlog as of April 3, 2022, was $13.2 million as compared to a backlog of $10.6 million as of March 28, 2021, representing an increase of $2.6 million or 24.5%.



8






Applied Optics Center backlog as of April 3, 2022, was $15.0 million as compared
to a backlog of $5.4 million as of March 28, 2021, representing an increase
of
$9.6 million or 177.8%.



During the fourth quarter of the fiscal year ended October 3, 2021, we booked
significant new orders in both commercial optical assemblies and laser filter
units including a significant new defense contract customer. On April 20, 2022,
the Company announced an additional $1.1 million Applied Optics Center order for
premium optical devices.



As a result of the significant backlog increases in our Applied Optics Center,
we have expanded our presentation of backlog, order and revenue data to include
comparative period product line information for the segment. Furthermore, the
period end backlog is now presented as compared to the prior year period end
backlog in addition to the previous fiscal year-end backlog as we believe it
provides a better indication of the twelve-month market trends by product line
and segment.


Please refer to "-Background" above or "Liquidity and Capital Resources" below for more information on recent developments and trends with respect to our orders and backlog, which information is incorporated herein by reference.




The Company continues to aggressively pursue international and commercial
opportunities in addition to maintaining its current footprint with U.S. vehicle
manufactures, with existing as well as new product lines. We are also reviewing
potential products, outside our traditional product lines, which could be
manufactured using our current production facilities in order to capitalize on
our existing excess capacity.



Three Months Ended April 3, 2022 Compared to the Three Months Ended March 28, 2021




Revenues. For the three months ended April 3, 2022, revenues increased by $0.9
million or 21.0% compared to the prior year period as set forth in the table
below:



                                                           Three months ended
                                                               (Thousands)
Product Line                        April 3, 2022       March 28, 2021       Variance         % Chg
Periscopes                         $         1,564     $          1,613     $       (49 )         (3.0 )
Sighting Systems                               176                  405            (229 )        (56.5 )
Howitzers                                        -                   95             (95 )       (100.0 )
Other                                          338                  692            (354 )        (51.2 )
Optex Systems - Richardson                   2,078                2,805    
       (727 )        (25.9 )
Optical Assemblies                             830                  244             586          240.2
Laser Filters                                1,524                  704             820          116.5
Day Windows                                    420                  299             121           40.5
Other                                          284                  194              90           46.4
Applied Optics Center - Dallas               3,058                1,441    
      1,617          112.2
Total Revenue                      $         5,136     $          4,246     $       890           21.0



Optex Systems Richardson revenue decreased by $0.7 million or 25.9% for the three months ended April 3, 2022 as compared to the prior year period on lower customer demand across all product groups as compared to the prior year period.




Applied Optics Center revenue increased by $1.6 million or 112.2% for the three
months ended April 3, 2022 as compared to the prior year period. The revenue
increase is primarily attributable to increased customer demand across all
product groups as compared to the prior year period.



Gross Margin. The gross margin during the three-month period ended April 3, 2022
was 13.9% of revenue as compared to a gross margin of 8.9% of revenue for the
prior year period. The gross margin increased by $0.3 million to $0.7 million
for the three months ended April 3, 2022 as compared to $0.4 million in the
prior year three months. The increase in gross margin is primarily attributable
to higher consolidated revenue and changes in mix between products and operating
segments. Cost of sales increased to $4.4 million for the current period as
compared to the prior year period of $3.9 million.



G&A Expenses. During the three months ended April 3, 2022 and March 28, 2021, we
recorded operating expenses of $0.9 million and $0.8 million, respectively.
Operating expenses increased by 14.5% between the respective periods primarily
due to increased office expenses, legal expenses, audit fees and selling
expenses, partially offset by lower salary expenses.



Operating Loss. During the three months ended April 3, 2022, we recorded an
operating loss of $0.2 million, as compared to an operating loss of $0.4 million
during the three months ended March 28, 2021. The $0.2 million decrease in
operating loss for the current year period from the prior year period is
primarily due to increased gross margin, partially offset by higher general and
administrative costs in the current year quarter as compared to the prior year
quarter.


Other (Expense) Income. During the three months ended April 3, 2022, we did not
recognize either a gain or a loss on the change in fair value of warrants, as
the warrants had expired on August 26, 2021 in accordance with their terms. By
comparison, during the three months ended March 28, 2021, we recognized a loss
on the change in fair value of warrants of $0.2 million. Further discussion
regarding the changes in fair value of the warrants and the related warrant
liability can be found in Item 1, "Consolidated Financial Statements, Note
6 -
Warrant Liabilities".



9






Net Loss applicable to common shareholders. During the three months ended April
3, 2022, we recorded a net loss applicable to common shareholders of $0.2
million as compared to a net loss applicable to common shareholders of $0.6
during the three months ended March 28, 2021. The decrease in net loss of $0.5
million is primarily attributable to the lower operating loss, combined with the
expiration of the warrants, which eliminated the fair value impacts on net
income for the current year period.



Six Months Ended April 3, 2022 Compared to the Six Months Ended March 28, 2021




Revenues. For the six months ended April 3, 2022, revenues increased by $0.8
million or 8.7% compared to the prior year period as set forth in the table
below:



                                                            Six months ended
                                                               (Thousands)
Product Line                        April 3, 2022       March 28, 2021       Variance         % Chg
Periscopes                         $         2,629     $          3,567     $      (938 )        (26.3 )
Sighting Systems                               449                1,183            (734 )        (62.0 )
Howitzers                                        -                  200            (200 )       (100.0 )
Other                                          856                  883             (27 )         (3.1 )
Optex Systems - Richardson                   3,934                5,833          (1,899 )        (32.6 )
Optical Assemblies                           1,975                  442           1,533          346.8
Laser Filters                                2,461                1,603             858           53.5
Day Windows                                    640                  527             113           21.4
Other                                          465                  312             153           49.0
Applied Optics Center - Dallas               5,541                2,884    
      2,657           92.1
Total Revenue                      $         9,475     $          8,717     $       758            8.7



Optex Systems Richardson revenue decreased by $1.9 million or 32.6% for the six
months ended April 3, 2022 as compared to the prior year period on lower
customer demand across all product lines. Based on current customer periscope
orders, we are anticipating a 50-55% increase in the Optex Richardson segment
revenue during the next six months, ending October 2, 2022, as compared to the
six months ending April 3, 2022. We anticipate future awards for these programs,
however at reduced levels from 2021 based on the most recent U.S. defense budget
for ground systems programs, more specifically reductions in government spending
on the Abrams tank platform. Deliveries against our howitzer program have been
delayed by our customer pending resolution of issues related to customer
furnished materials. Sighting systems and other products are expected to be
below our prior year levels for the remainder of the fiscal year as several
previous contracts have completed or are nearing completion.



Applied Optics Center revenue increased by $2.7 million or 92.1% for the six
months ended April 3, 2022 as compared to the prior year period. The revenue
increase is primarily attributable to increased customer demand across all
product lines as compared to the prior year period. Based on our current
backlog, We are anticipating an 18-23% increase in revenue for the six months
ending October 2, 2022 as compared to the six months ended April 3, 2022. Day
window revenues are projected at rates comparable to the year ended October 3,
2021, with the current orders expected to be completed in the first fiscal
quarter of 2023. We anticipate additional orders for delivery in 2023.



Gross Margin. The gross margin during the six-month period ended April 3, 2022
was 16.2% of revenue as compared to a gross margin of 13.9% of revenue for the
prior year period. The gross margin increased by $0.3 million to $1.5 million
for the six months ended April 3, 2022 as compared to $1.2 million for the prior
year period. The increase in gross margin is primarily attributable to higher
revenue at the Applied Optics Center segment combined with changes in mix
between products and operating segments. Cost of sales increased to $7.9 million
for the six months ended April 3, 2022 as compared to the prior year period of
$7.5 million on higher period revenue.



G&A Expenses. During the six months ended April 3, 2022 and March 28, 2021, we
recorded operating expenses of $1.7 million and $1.5 million, respectively.
Operating expenses increased by 10.8% between the respective periods primarily
due to increased office expenses, legal expenses, audit fees and selling
expenses, partially offset by lower salary expenses.



Operating Loss. During the six months ended April 3, 2022, we recorded an
operating loss of $0.2 million, as compared to an operating loss of $0.3 million
during the six months ended March 28, 2021. The $0.1 million decrease in
operating loss is primarily due to increased gross margin, partially offset by
higher general and administrative costs in the period ended April 3, 2022 as
compared to the prior year period.



Other (Expense) Income. During the six months ended April 3, 2022, we did not
recognize either a gain or a loss on the change in fair value of warrants, as
the warrants had expired on August 26, 2021 in accordance with their terms. By
comparison, during the six months ended March 28, 2021, we recognized a gain on
the change in fair value of warrants of $0.9 million. Further discussion
regarding the changes in fair value of the warrants and the related warrant
liability can be found in Item 1, "Consolidated Financial Statements, Note
6 -
Warrant Liabilities".


Net (Loss) Income applicable to common shareholders. During the six months ended
April 3, 2022, we recorded a net loss applicable to common shareholders of
($0.1) million as compared to a net income applicable to common shareholders of
$0.3 during the six months ended March 28, 2021. Despite the decrease in
operating loss and reduction in income tax expense, net income decreased by $0.4
million, primarily due to the expiration of the warrants, which eliminated the
fair value and deemed dividend impacts on net income for the current year
period.



10





Liquidity and Capital Resources




As of April 3, 2022, the Company had working capital of $12.6 million, as
compared to $12.9 million as of October 3, 2021. Some of our contracts may allow
for government contract financing in the form of contract progress payments
pursuant to Federal Acquisition Regulation 52.232-16, "Progress Payments."
Subject to certain limitations, this clause provides for government payment of
up to 90% of incurred program costs prior to product delivery for small
businesses like us. To the extent any contracts allow for progress payments and
the respective contracts would result in significant preproduction cash
requirements for design, process development, tooling, material or other
resources which could exceed our current working capital or line of credit
availability, we intend to utilize this benefit to minimize any potential
negative impact on working capital prior to receipt of payment for the
associated contract deliveries.



Backlog as of April 3, 2022 has increased by $0.9 million or 3.3% to $28.2 million as compared to backlog of $27.3 million as of October 3, 2021. Backlog has increased 76.3%, or $12.2 million, from $16.0 million as of March 28, 2021.




The Company has historically funded its operations through cash from operations,
convertible notes, common and preferred stock offerings and bank debt. The
Company's ability to generate positive cash flows depends on a variety of
factors, including the continued development and successful marketing of the
Company's products.


At April 3, 2022, the Company had $4.9 million in cash and an outstanding payable balance of zero against its line of credit at that time.




On April 12, 2022, the Company and its subsidiary, Optex Systems, Inc. ("Optex",
and with the Company, the "Borrowers"), entered into an Amended and Restated
Loan Agreement (the "Loan Agreement") with PNC Bank, National Association,
successor to BBVA USA (the "Lender"), pursuant to which the Borrowers' existing
revolving line of credit facility was decreased from $2.25 million to $1.125
million, and the maturity date was extended from April 15, 2022 to April 15,
2023. Obligations outstanding under the credit facility will accrue interest at
a rate equal to the Lender's prime rate minus 0.25%.



The Loan Agreement contains customary events of default and negative covenants,
including but not limited to those governing indebtedness, liens, fundamental
changes, investments, and restricted payments. The Loan Agreement also requires
the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1. The
credit facility is secured by substantially all of the operating assets of the
Borrowers as collateral. The Borrowers' obligations under the credit facility
are subject to acceleration upon the occurrence of an event of default as
defined in the Loan Agreement. 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.



As of April 3, 2022, our outstanding accounts receivable balance was $1.9
million. The Company currently expects to generate net income and positive cash
flow from operating activities for fiscal year 2022. Based on firm customer
orders, the Company anticipates a consolidated revenue increase of 30-35% for
the six months ending October 2, 2022 as compared to the six months ended April
3, 2022 combined with increased operating profit and net income. To remain
profitable, we need to maintain a level of revenue adequate to support the
Company's cost structure. Management intends to manage operations commensurate
with its level of working capital and line of credit during the next twelve
months and beyond; however, uneven revenue levels driven by changes in customer
delivery demands, first article inspection requirements or other program delays
associated with the pandemic could create a working capital shortfall. In the
event the Company does not successfully implement its ultimate business plan,
certain assets may not be recoverable.



On September 22, 2021, the Company announced authorization of a $1 million stock
repurchase program. The shares authorized to be repurchased under this
repurchase program may be purchased from time to time at prevailing market
prices, through open market transactions or in negotiated transactions,
depending upon market conditions and subject to Rule 10b-18 as promulgated by
the SEC. During the three and six months ended April 3, 2022, 78,733 and 115,971
common shares, were repurchased under the September 2021 repurchase program at
an aggregate cost of $149 thousand and $222 thousand, respectively. As of April
3, 2022, all of the shares repurchased under the September 2021 stock repurchase
program have been canceled and there were zero shares held in Treasury.



On August 26, 2021, 3,936,391 outstanding warrants expired worthless, resulting in the elimination of the balance sheet warrant liability.

As of October 3, 2021, and April 3, 2022, there were no outstanding declared and unpaid dividends.

On January 11, 2021, the Company executed amendments for each of its leased
facilities extending the terms for eighty-six (86) months, commencing at the end
of the current lease agreements. The Richardson lease amendment commenced on
April 1, 2021 for an eighty-six (86) month term ending on May 31, 2028. The
Dallas lease amendment commenced on November 1, 2021 for an eighty-six (86)
month term ending on December 31, 2028. Each of the leases include two full
months of rent abatement at the beginning of the commencement term. The new
lease agreements resulted in the balance sheet recognition of a right-of-use
asset of $3.7 million and corresponding operating lease liabilities of
approximately $3.7 million as of the period ended June 27, 2021.



Cash Flows for the Period from October 3, 2021 through April 3, 2022

Cash and Cash Equivalents: As of April 3, 2022, and October 3, 2021, we had cash and cash equivalents of $4.9 million and $3.9 million, respectively.




Net Cash Provided by Operating Activities. Net cash provided by operating
activities during the three months from October 3, 2021 to April 3, 2022 totaled
$1.3 million. The primary sources of cash during the period relate to decreases
in accounts receivable of $1.3 million, increased accounts payable of $0.7
million, increased inventory of ($0.8) million and other changes in working
capital of $0.1 million.



Net Cash Used in Investing Activities. In the three months ended April 3, 2022,
cash used in investing activities was $0.1 million for purchases of equipment
and leasehold improvements.



11






Net Cash Used in Financing Activities. Net cash used in financing activities was
$0.2 million during the three months ended April 3, 2022 and relates to
primarily to the repurchases of common stock of as part of our stock repurchase
program.


Critical Accounting Estimates

A critical accounting estimate is an estimate that:

? is made in accordance with generally accepted accounting principles,

? involves a significant level of estimation uncertainty, and

? has had or is reasonably likely to have a material impact on the company's

    financial condition or results of operation.




Our significant accounting policies are fundamental to understanding our results
of operations and financial condition. Some accounting policies require that we
use estimates and assumptions that may affect the value of our assets or
liabilities and financial results. These policies are described in "Critical
Policies and Accounting Pronouncements" and Note 2 (Accounting Policies) to
consolidated financial statements in our Annual Report on Form 10-K for the
year
ended October 3, 2021.



Our critical accounting estimates include warranty costs, contract losses and
the deferred tax asset valuation. 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. Our
warranty covered sales primarily include the Applied Optics Center optical
assemblies. While our warranty period is 12 months, our reserve balances assume
a general 90-day return period for optical assemblies previously delivered plus
any returned backlog in-house that has not yet been repaired or replaced to our
customer. If our actual warranty returns should significantly exceed our
historical rates on new customer products, significant production changes, or
substantial customer changes to the 90-day turn-around times on returned goods,
the impact could be material to our operating profit. We have not experienced
any significant changes to our warranty trends in the preceding three years and
do not anticipate any significant impacts in the near term. We monitor the
actual warranty costs incurred to the expected values on a quarterly basis and
adjust our estimates accordingly. As of April 3, 2022, the Company had accrued
warranty costs of $155 thousand, as compared to $78 thousand as of October 3,
2021. The primary reason for the $77 thousand increase in reserve balances
relates to higher revenue on warrantied product being sold during the six months
ended April 3, 2022, combined with an increase in customer returned backlog
pending repair or replacement to our customer as compared to the warranty
backlog as of October 3, 2021.



As of April 3, 2022 and October 3, 2021, we had $43 thousand, and $51 thousand,
respectively, of contract loss reserves included in our balance sheet accrued
expenses. These loss contracts are related to some of our older legacy periscope
IDIQ contracts which were priced in 2018 through early 2020, prior to Covid-19
and the significant downturn in defense spending on ground system vehicles. Due
to inflationary price increases on component parts and higher internal
manufacturing costs (as a result of escalating labor costs and higher burden
rates on reduced volume), some of these contracts are in a loss condition, or at
marginal profit rates. These contracts are typically three-year IDIQ contracts
with two optional award years, and as such, we are obligated to accept new task
awards against these contracts until the contract expiration. Should contract
costs continue to increase above the negotiated selling price, or in the event
the customer should release substantial quantities against these existing loss
contracts, the losses could be material. For contracts currently in a loss
status based on the estimated per unit contract costs, losses are booked
immediately on new task order awards. During the six months ended April 3, 2022,
there was no significant change to the accrued contract losses. There is no way
to reasonably estimate future inflationary impacts, or customer awards on the
existing loss contracts.


As of April 3, 2022 and October 3, 2021, our deferred tax assets consisted of
$2.1 million, partially offset by a valuation reserve of $0.8 million against
those assets for a net deferred tax asset of $1.3 million. The valuation
allowance covers certain deferred tax assets where we believe we will be
unlikely to recover those tax assets through future operations. The valuation
reserve includes assumptions related to future taxable income which would be
available to cover net operating loss carryforward amounts. Because of the
uncertainties of future income forecasts combined with the complexity of some of
the deferred assets, these forecasts are subject to change over time. While we
believe our current estimate to be reasonable, changing market conditions and
profitability, changes in equity structure and changes in tax regulations may
impact our estimated reserves in future periods.

© Edgar Online, source Glimpses

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Financials ()
Sales 2021 18,2 M - -
Net income 2021 2,13 M - -
Net cash 2021 0,24 M - -
P/E ratio 2021 11,1x
Yield 2021 -
Capitalization 16,3 M 16,3 M -
EV / Sales 2020 0,54x
EV / Sales 2021 0,89x
Nbr of Employees 83
Free-Float 61,8%
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Managers and Directors
Danny R. Schoening Chairman, CEO & Chief Operating Officer
Karen L. Hawkins Chief Financial Officer
Lawrence F. Hagenbuch Independent Director
Dale E. Lehmann Independent Director
Rahul Rimmy Malhotra Independent Director