OPTEX SYSTEMS HOLDINGS, INC 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 endedOctober 3, 2021 and our unaudited consolidated financial statements and notes thereto for the quarter endedApril 3, 2022 , prepared in accordance withU.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 theSecurities 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 BackgroundOptex Systems, Inc. (Delaware ) manufactures optical sighting systems and assemblies, primarily forDepartment of Defense applications. Its products are installed on various types ofU.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 byOptex Systems, Inc. (Delaware ). We are both a prime and sub-prime contractor to theDepartment of Defense . Sub-prime contracts are typically issued through major defense contractors such asGeneral Dynamics Land Systems ,Raytheon Corp. , BAE, Harris Corp. and others. We are also a military supplier to foreign governments such asIsrael ,Australia and NAMSA and South American countries and as a subcontractor for several largeU.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 theU.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 onOptex 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 inApril 2020 throughOctober 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% betweenSeptember 29, 2019 andOctober 3, 2021 . We attribute the lower orders to a combination of factors including a COVID-19 driven slow-down of contract awards for bothU.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 endedOctober 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 ofOctober 3, 2021 , the Applied Optics Center segment backlog had increased by 153% as compared to the level onSeptember 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 withDanny Schoening datedDecember 1, 2021 . The term of the agreement commenced as ofDecember 1, 2021 and the current term ends onNovember 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% ofMr. 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 amendMr. Schoening's RSU Agreement, datedJanuary 2, 2019 , by changing the third and final vesting date for the restricted stock units granted under such agreement fromJanuary 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 ofMr. Schoening ; (ii) termination by the Company for cause (including conviction of a felony, commission of fraudulent acts, willful misconduct byMr. 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 byMr. Schoening for good reason (including breach by the Company of its obligations under the agreement, the requirement forMr. 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 ofMr. 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 byMr. 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 byMarch 13, 2023 .
K. Hawkins Salary Increase
On
Recent Stock Repurchases OnSeptember 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 theSEC . During the six months endedApril 3, 2022 , 115,971 common shares were repurchased under theSeptember 2021 repurchase program at an aggregate cost of$222 thousand . As ofApril 3, 2022 , all shares repurchased under theSeptember 2021 stock repurchase program have been cancelled and there were no shares
held inTreasury . 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 endedApril 3, 2022 andMarch 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 onAugust 26, 2021 in accordance with their terms. By comparison, during the three months endedMarch 28, 2021 , we recognized a loss on the change in fair value of warrants of$0.2 million , and during the six months endedMarch 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
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
and eliminations) Consolidated
Revenue from External Customers
- $ 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 endedApril 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 endedApril 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
Backlog
During the six months endedApril 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 theOptex 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
(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 ofApril 3, 2022 , was$28.2 million , compared to a backlog of$27.3 million as ofOctober 3, 2021 , representing an increase of$0.9 million or 3.3%. The following table depicts theApril 3, 2022 backlog as compared to the backlog onOctober 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 ofApril 3, 2022 , was$28.2 million as compared to a backlog of$16.0 million as ofMarch 28, 2021 , representing an increase of$12.2 million or 76.3%. The following table depicts the current expected delivery by period of all contracts awarded as ofApril 3, 2022 in millions of dollars, as well as theApril 3, 2022 backlog as compared to the backlog onMarch 28, 2021 : (Millions) Q3 Q4 2022 2023+ Total Backlog Total Backlog Product Line 2022 2022 Delivery Delivery 4/3/2022 3/28/2021 Variance % Chg Periscopes$ 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
8 Applied Optics Center backlog as ofApril 3, 2022 , was$15.0 million as compared to a backlog of$5.4 million as ofMarch 28, 2021 , representing an increase
of$9.6 million or 177.8%. During the fourth quarter of the fiscal year endedOctober 3, 2021 , we booked significant new orders in both commercial optical assemblies and laser filter units including a significant new defense contract customer. OnApril 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 withU.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
Revenues. For the three months endedApril 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 46.4Applied 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
Applied Optics Center revenue increased by$1.6 million or 112.2% for the three months endedApril 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 endedApril 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 endedApril 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 endedApril 3, 2022 andMarch 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 endedApril 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 endedMarch 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 endedApril 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 onAugust 26, 2021 in accordance with their terms. By comparison, during the three months endedMarch 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 endedApril 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 endedMarch 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
Revenues. For the six months endedApril 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 endedApril 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, endingOctober 2, 2022 , as compared to the six months endingApril 3, 2022 . We anticipate future awards for these programs, however at reduced levels from 2021 based on the most recentU.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 endedApril 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 endingOctober 2, 2022 as compared to the six months endedApril 3, 2022 . Day window revenues are projected at rates comparable to the year endedOctober 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 endedApril 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 endedApril 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 endedApril 3, 2022 as compared to the prior year period of$7.5 million on higher period revenue. G&A Expenses. During the six months endedApril 3, 2022 andMarch 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 endedApril 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 endedMarch 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 endedApril 3, 2022 as compared to the prior year period. Other (Expense) Income. During the six months endedApril 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 onAugust 26, 2021 in accordance with their terms. By comparison, during the six months endedMarch 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 endedApril 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 endedMarch 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 ofApril 3, 2022 , the Company had working capital of$12.6 million , as compared to$12.9 million as ofOctober 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
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
OnApril 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") withPNC Bank, National Association , successor toBBVA 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 fromApril 15, 2022 toApril 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 ofApril 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 endingOctober 2, 2022 as compared to the six months endedApril 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. OnSeptember 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 theSEC . During the three and six months endedApril 3, 2022 , 78,733 and 115,971 common shares, were repurchased under theSeptember 2021 repurchase program at an aggregate cost of$149 thousand and$222 thousand , respectively. As ofApril 3, 2022 , all of the shares repurchased under theSeptember 2021 stock repurchase program have been canceled and there were zero shares held inTreasury .
On
As of
OnJanuary 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. TheRichardson lease amendment commenced onApril 1, 2021 for an eighty-six (86) month term ending onMay 31, 2028 . TheDallas lease amendment commenced onNovember 1, 2021 for an eighty-six (86) month term ending onDecember 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 endedJune 27, 2021 .
Cash Flows for the Period from
Cash and Cash Equivalents: As of
Net Cash Provided by Operating Activities. Net cash provided by operating activities during the three months fromOctober 3, 2021 toApril 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 endedApril 3, 2022 , cash used in investing activities was$0.1 million for purchases of equipment and leasehold improvements. 11Net Cash Used in Financing Activities. Net cash used in financing activities was$0.2 million during the three months endedApril 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 theyear endedOctober 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 ofApril 3, 2022 , the Company had accrued warranty costs of$155 thousand , as compared to$78 thousand as ofOctober 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 endedApril 3, 2022 , combined with an increase in customer returned backlog pending repair or replacement to our customer as compared to the warranty backlog as ofOctober 3, 2021 . As ofApril 3, 2022 andOctober 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 endedApril 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 ofApril 3, 2022 andOctober 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.
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