As
filed with the Securities and Exchange Commission September 25,
2009
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Registration
Statement No.
333-159334
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1 TO REGISTRATION STATEMENT
ON
FORM S-1
UNDER
THE
SECURITIES ACT OF 1933
OPTEX
SYSTEMS HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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33-
143215
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3795
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(State
or other jurisdiction of
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(I.R.S.
Identification Number)
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(Primary
Standard Industrial
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incorporation
or organization)
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Classification
Code Number)
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1420
Presidential Drive
Richardson,
TX 75081-2439
Telephone
(972) 644-0472
(Address,
including zip code, and telephone number, including
area
code, of registrant’s principal executive offices)
Stanley
A. Hirschman
1420
Presidential Drive
Richardson,
TX 75081-2439
Telephone
(972) 644-0472
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Jolie
G. Kahn, Esq.
61
Broadway
Suite
2820
New
York, NY 10006
Telephone
(212) 422-4910
Approximate Date of Commencement of
Proposed Sale to the Public:
At such time or times after the effective
date of this registration statement as the selling stockholders shall
determine.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
þ
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “small
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
o
(Do not check if
a smaller reporting company)
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Smaller
reporting
company
x
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CALCULATION
OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered
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Amount to be
Registered
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Proposed
Maximum
Offering Price
per Unit(1)
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Proposed
Maximum
Aggregate
Offering Price
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Amount of
Registration Fee
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Common
Stock, par value $0.001 per share
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11,784,177
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$
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$0.375
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$
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6,098,750
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$
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$1447.44
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(1)
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Estimated
for the purpose of determining the registration fee pursuant to Rule
457(c), based on the average of the bid and asked price as of May 11,
2009.
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The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until this registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in the prospectus is not complete and may be changed. The selling
stockholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell and is not soliciting an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
Subject
to Completion, dated September 25, 2009
PROSPECTUS
OPTEX
SYSTEMS HOLDINGS, INC.
11,784,177
Shares of Common Stock
This prospectus relates to the offer
and sale of up 11,784,177
shares of common stock
of Optex Systems Holdings, Inc., a Delaware corporation, issued to certain
selling stockholders identified on p. 3 of this Prospectus pursuant to
subscription agreements between the selling stockholders and Optex Systems,
Inc., a subsidiary of Optex Systems Holdings, Inc. and that may be offered and
sold from time to time by the selling stockholders.
Unless otherwise noted, the terms “the
Company,” “our Company,” “we,” “us” and “our” refer to Optex Systems
Holdings, Inc. and its subsidiaries.
The selling stockholders may offer
their shares from time to time directly or through one or more underwriters,
broker-dealers or agents, in the over-the-counter market at market prices
prevailing at the time of sale, in one or more negotiated transactions at prices
acceptable to the selling stockholders, or otherwise.
We will not receive any proceeds from
the sale of shares by the selling stockholders. In connection with any sales of
the common stock offered hereunder, the selling stockholders, any underwriters,
agents, brokers or dealers participating in such sales may be deemed to be
“underwriters” within the meaning of the Securities Act of 1933, as amended (the
“Securities Act”).
We will pay the expenses related to the
registration of the shares covered by this prospectus. The selling stockholders
will pay any commissions and selling expenses they may incur.
On May 1, 2009, our common stock
received a symbol change from FINRA and now trades on the Over the Counter
Bulletin Board under the symbol “OPXS.OB”. The closing sale price on the OTC
Bulletin Board on August 31, 2009, was $0.30 per share.
Investing in the common stock offered
by this prospectus is speculative and involves a high degree of risk. See “Risk
Factors” beginning on page 3.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
The date
of this prospectus is September 25, 2009
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
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2
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RISK
FACTORS
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3
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USE
OF PROCEEDS
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10
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MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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10
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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11
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BUSINESS
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23
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LEGAL
PROCEEDINGS
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33
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MANAGEMENT
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34
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EXECUTIVE
COMPENSATION
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38
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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40
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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41
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THE
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
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43
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DESCRIPTION
OF SECURITIES
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46
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LEGAL
MATTERS
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48
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EXPERTS
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49
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WHERE
YOU CAN FIND MORE INFORMATION
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49
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OPTEX
SYTEMS HOLDINGS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS
OF JUNE 28, 2009 AND JUNE 29, 2008
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F-1
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OPTEX
SYTEMS INC. AND INDEX TO FINANCIAL STATEMENTS AS OF SEPTEMBER 28, 2008 AND
SEPTEMBER 30, 2007
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F-23
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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F-24
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OTHER
EXPENSES
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50
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INDEMNIFICATION
OF OFFICERS AND DIRECTORS
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50
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RECENT
SALES OF UNREGISTERED SECURITIES
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50
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EXHIBITS
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51
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UNDERTAKINGS
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52
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SIGNATURES
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54
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ABOUT
THIS PROSPECTUS
This prospectus is part of a
registration statement that we filed with the Securities and Exchange Commission
using the Commission’s registration rules for a delayed or continuous offering
and sale of securities. Under the registration rules, using this prospectus and,
if required, one or more prospectus supplements, the selling stockholders named
herein may distribute the shares of common stock covered by this prospectus.
This prospectus also covers any shares of common stock that may become issuable
as a result of stock splits, stock dividends or similar
transactions.
A prospectus supplement may add, update
or change information contained in this prospectus. We recommend that you read
carefully this entire prospectus, especially the section entitled “Risk Factors”
beginning on page 3, and any supplements before making a decision to invest in
our common stock.
PROSPECTUS
SUMMARY
This summary highlights important
information about this offering and our business. It does not include all
information you should consider before investing in our common stock. Please
review this prospectus in its entirety, including the risk factors and our
financial statements and the related notes, before you decide to
invest.
Our
Company
On March
30, 2009, Optex Systems Holdings, Inc., (formerly known as Sustut Exploration,
Inc.) , a Delaware corporation (the “Company”), along with Optex Systems, Inc.,
which was a privately held Delaware corporation and has since become the
Company’s wholly-owned subsidiary (“Optex Delaware”), entered into a
Reorganization Agreement and Plan of Reorganization, pursuant to which Optex
Delaware was acquired by the Company in a share exchange transaction. The
Company became the surviving corporation (the “Reorganization”). At the closing,
the Company changed its name from Sustut Exploration Inc. to Optex Systems
Holdings, Inc. and its year end from December 31 to a fiscal year ending on the
Sunday nearest September 30. Optex Delaware shall remain a
wholly-owned subsidiary of the Company, and Optex Delaware’s shareholders are
now shareholders of the Company.
Simultaneously
with closing under the Reorganization Agreement as of March 30, 2009 , the
Company accepted subscriptions from accredited investors for a total of
$1,219,750 in gross proceeds and $874,529 in net proceeds.
Our
Business
The
Company manufactures optical sighting systems and assemblies primarily for
Department of Defense applications. Optical sighting systems are used
to enable a soldier to have improved vision and in some cases, protected
vision. One type of system would be a binocular which would have a
special optical filter applied to the external lens which would block long wave
length light (from a laser) from reaching the soldier’s eyes. Another
type of system would be a periscope where the soldier inside an armored vehicle
needs to view the external environment outside of the tank. In this
case, the visual path is reflected at two 90 degree angles enabling the soldier
to be at a different plane than that of the external lens.
The
Company’s products consist primarily of build-to-customer print products that
are delivered both directly to the armed services and to other
defense prime contractors. Build-to-customer print products are
those devices where the customer completes the design of the product and then
brings these drawings to the supplier for production. In this case,
the supplier would procure the piece parts from suppliers, build the final
assembly, and then supply this product back to the original customer who
designed it.
Our products are installed
on a majority of 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. The
Company also manufactures and delivers numerous periscope configurations,
rifle and surveillance sights and night vision optical
assemblies. Approximately 30% of our current revenue is in support of
Abrams vehicles, 5% in support of Stryker vehicles, and 25% in support of
Bradley vehicles.
Optex
Delaware, and its Predecessor Optex Texas, have been in business since
1987. The Company is located in Richardson, TX and is ISO 9001:2008
certified.
The
Offering
Common
stock offered by the selling stockholders:
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11,784,177
shares of common
stock, par value $0.001 per share.
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Offering
prices:
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The
shares offered by this prospectus may be offered and sold at prevailing
market prices or such other prices as the selling stockholders may
determine.
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Common
stock outstanding:
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141,464,940 shares
as of August 31, 2009.
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Dividend
policy:
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Dividends
on our common stock may be declared and paid when and as determined by our
board of directors. We have not paid and do not expect to pay dividends on
our common stock.
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OTCBB
symbol:
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OPXS.OB
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Use
of proceeds:
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We
are not selling any of the shares of common stock being offered by this
prospectus and will receive no proceeds from the sale of the shares by the
selling stockholders. All of the proceeds from the sale of common stock
offered by this prospectus will go to the selling stockholders at the time
they sell their shares.
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Risk
Factors
See “Risk Factors” beginning on
page 3 for a discussion of factors you should carefully consider before
deciding to invest in our common stock.
Our
Address
Our principal executive offices are
located at 1420 Presidential Drive, Richardson, TX 75081-2439.
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. Prospective investors should
carefully consider the risks described below, together with all of the other
information included or referred to in this prospectus, before purchasing shares
of our common stock. There are numerous and varied risks, known and unknown,
that may prevent us from achieving our goals. The risks described below are not
the only risks we will face. If any of these risks actually occurs, our
business, financial condition or results of operations may be materially
adversely affected. In such case, the trading price of our common stock could
decline and investors in our common stock could lose all or part of their
investment. The risks and uncertainties described below are not exclusive and
are intended to reflect the material risks that are specific to us , material
risks related to our industry and material risks related to companies that
undertake a public offering or seek to maintain a class of securities that is
registered or traded on any exchange or over-the-counter
market.
Risks Related to our
Business
We
expect that we will need to raise additional capital in the future; additional
funds may not be available on terms that are acceptable to us, or at
all.
We
anticipate we will have to raise additional capital in the future to service our
debt and to finance our future working capital needs. We cannot assure you that
any additional capital will be available on a timely basis, on acceptable terms,
or at all. Future equity or debt financings may be difficult to obtain. If we
are not able to obtain additional capital as may be required, our business,
financial condition and results of operations could be materially and adversely
affected.
We
anticipate that our capital requirements will depend on many factors,
including:
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our
ability to fulfill backlog;
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our
ability to procure additional production
contracts;
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our
ability to control costs;
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the
timing of payments and reimbursements from government and other contracts,
including but not limited to changes in federal government military
spending and the federal government procurement
process;
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increased
sales and marketing expenses;
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technological
advancements and competitors’ response to our
products;
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capital
improvements to new and existing
facilities;
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our
relationships with customers and suppliers;
and
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general
economic conditions including the effects of future economic slowdowns,
acts of war or terrorism and the current international
conflicts.
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Even if
available, financings can involve significant costs and expenses, such as legal
and accounting fees, diversion of management’s time and efforts, and substantial
transaction costs. 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.
Current
economic conditions may adversely affect our ability to continue
operations.
Current
economic conditions may cause a decline in business and consumer spending and
capital market performance, which could adversely affect our business and
financial performance. Our ability to raise funds, upon which we are
fully dependent to continue to expand our operations, may be adversely affected
by current and future economic conditions, such as a reduction in the
availability of credit, financial market volatility and recession.
Our
ability to fulfill our backlog may have an effect on our long term ability to
procure contracts and fulfill current contracts.
Our ability to fulfill our backlog may
be limited by our ability to devote sufficient financial and human capital
resources and limited by available material supplies. If we do not
fulfill backlog in a timely manner, we may experience delays in product delivery
which would postpone receipt of revenue from those delayed
deliveries. Additionally, if we are consistently unable to fulfill
our backlog, this may be a disincentive to customers to award large contracts to
us in the future until they are comfortable that we can effectively manage our
backlog.
Our
historical operations depend on government contracts and
subcontracts. We face risks related to contracting with the federal
government, including federal budget issues and fixed price
contracts.
General political and economic
conditions, which cannot be accurately predicted, may directly and indirectly
affect the quantity and allocation of expenditures by federal agencies. Even the
timing of incremental funding commitments to existing, but partially funded,
contracts can be affected by these factors. Therefore, cutbacks or
re-allocations in the federal budget could have a material adverse impact on our
results of operations. Obtaining government contracts may also involve long
purchase and payment cycles, competitive bidding, qualification requirements,
delays or changes in funding, budgetary constraints, political agendas,
extensive specification development, price negotiations and milestone
requirements. In addition, our government contracts are primarily fixed price
contracts, which may prevent us from recovering costs incurred in excess of
budgeted costs. Fixed price contracts require us to estimate the total project
cost based on preliminary projections of the project’s requirements. The
financial viability of any given project depends in large part on our ability to
estimate such costs accurately and complete the project on a timely
basis. Some of those contracts are for products that are new to our
business and are thus subject to unanticipated impacts to manufacturing
costs. Given the current economic conditions, it is also possible
that even if our estimates are reasonable at the time made, that prices of
materials are subject to unanticipated adverse fluctuation. In the
event our actual costs exceed fixed contractual costs of our product contracts,
we will not be able to recover the excess costs which could have a material
adverse effect on our business and results of operations. As of June
28, 2009 we had approximately $0.7 million of loss provision accrued for these
fixed price contracts.
If
we fail to scale our operations appropriately in response to growth and changes
in demand, we may be unable to meet competitive challenges or exploit potential
market opportunities, and our business could be materially and adversely
affected.
Our past
growth has placed, and any future growth in our historical business is expected
to continue to place, a significant strain on our management personnel,
infrastructure and resources. To implement our current business and product
plans, we will need to continue to expand, train, manage and motivate our
workforce, and expand our operational and financial systems, as well as our
manufacturing and service capabilities. All of these endeavors will require
substantial management effort and additional capital. If we are unable to
effectively manage our expanding operations, we may be unable to scale our
business quickly enough to meet competitive challenges or exploit potential
market opportunities, and our current or future business could be materially and
adversely affected.
We
do not have long-term employment agreements with our key personnel, other than
our Chief Operating Officer. If we are not able to retain our key personnel or
attract additional key personnel as required, we may not be able to implement
our business plan and our results of operations could be materially and
adversely affected.
We
depend to a large extent on the abilities and continued participation of our
executive officers and other key employees. The loss of any key employee could
have a material adverse effect on our business. We currently have only one
employment agreement, with our Chief Operating Officer, and do not presently
maintain “key man” insurance on any key employees. We believe that, as our
activities increase and change in character, additional, experienced personnel
will be required to implement our business plan. Competition for such personnel
is intense and we cannot assure you that they will be available when required,
or that we will have the ability to attract and retain them. In addition, we do
not presently have depth of staffing in our executive, operational and financial
management. Until additional key personnel can be successfully integrated with
its operations, the timing or success of which we cannot currently predict, our
results of operations and ultimate success will be vulnerable to difficulties in
recruiting a new executive management team and losses of key
personnel.
Our
intangible assets or goodwill may suffer impairment in the future.
Goodwill
represents the cost of acquired businesses in excess of fair value of the
related net assets at acquisition. Valuation of intangible assets,
such as goodwill, requires us to make significant estimates and assumptions
including, but not limited to, estimating future cash flows from product sales,
developing appropriate discount rates, maintaining customer relationships and
renewing customer contracts, and approximating the useful lives of the
intangible assets acquired. To the extent actual results differ from these
estimates, our intangible assets or goodwill may suffer impairment in the future
that will impact our results of operations. We reviewed the fair
market value of our goodwill and intangible assets as September 28, 2008, based
on the fair market values established in connection with the Optex Delaware
acquisition as of October 14, 2008, and as a result, determined that the current
carrying value of goodwill had been impaired by $1.6
million. Subsequent to the review, there have been no material
changes to our assumptions or estimates that would suggest any further
impairment is currently warranted. However, we intend to continue to
monitor the value of our intangible assets and goodwill in order to identify any
impairment that may occur in the future.
Certain
of our products are dependent on specialized sources of supply that are
potentially subject to disruption which could have a material, adverse impact on
our business.
The
Company has selectively single sourced some of our material components in
order to mitigate excess procurement costs associated with significant tooling
and startup costs. Furthermore, because of the nature of government
contracts, we are often required to purchase selected items from Government
approved suppliers, which may further limit our ability to utilize multiple
supply sources for these key components.
To the extent any of these single
sourced or government approved suppliers should have disruptions in deliveries
due to production, quality, or other issues, the Company may also experience
related production delays or unfavorable cost increases associated with
retooling and qualifying alternate suppliers. The impact of delays
resulting from disruptions in supply for these items could negatively impact our
revenue, our customer reputation, and our results of operations. In
addition, significant price increases from single-source suppliers could have a
negative impact on our profitability to the extent that we are unable to recover
these cost increases on our fixed price contracts. Essentially, all
of our existing backlog requirements for specialized sources of supply are
currently covered by material contracts with our suppliers.
The
defense technology supply industry is subject to technological change and if we
are not able to keep up with our competitors and/or they develop advanced
technology as response to our products, we may be at a competitive
disadvantage.
The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short product life cycles and severe price competition. Our
competitors could also develop new, more advanced technologies in reaction to
our products. Currently accepted industry standards may change. Our
success depends substantially on our ability, on a cost-effective and timely
basis, to continue to enhance our existing products and to develop and introduce
new products that take advantage of technological advances and adhere to
evolving industry standards. An unexpected change in one or more of the
technologies related to our products, in market demand for products based on a
particular technology or of accepted industry standards could materially and
adversely affect our business. We may or may not be able to develop new products
in a timely and satisfactory manner to address new industry standards and
technological changes, or to respond to new product announcements by others. In
addition, new products may or may not achieve market
acceptance.
Unexpected
warranty and product liability claims could adversely affect our business and
results of operations.
The
possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products. Some of our
customers require that we warrant the quality of our products to meet customer
requirements and be free of defects for up to fifteen months subsequent to
delivery. Approximately 50% of our current contract deliveries are covered
by these warranty clauses. We establish reserves for warranty claims based on
our historical rate of less than one percent of returned shipments against these
contracts. There can be no assurance that this reserve will be
sufficient if we were to experience an unexpectedly high incidence of problems
with our products. Significant increases in the incidence of such
claims may adversely affect our sales and our reputation with
consumers. Costs associated with warranty and product liability
claims could materially affect our financial condition and results of
operations.
We
derive almost all of our revenue from two customers and the loss of either
customer or both customers could have a material adverse effect on our
revenues.
At present, we derive approximately
90% of the gross revenue from our business from two customers, General Dynamics
Land System Division (“GDLS”) and Tank-automotive and Armaments Command
(“TACOM”). Procuring new customers and contracts may partially mitigate
this risk. A decision by either GDLS or TACOM to cease issuing contracts could
have a significant material impact on our business and results of
operations. There can be no assurance that we could replace these
customers on a timely basis or at all.
We
do not possess any patents and rely solely on trade secrets to protect our
intellectual property.
We
utilize several highly specialized and unique processes in the manufacture of
our products, for which we rely solely on trade secrets to protect our
innovations. We cannot assure you that we will be able to maintain
the confidentiality of our trade secrets or that our non-disclosure agreements
will provide meaningful protection of our trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or other disclosure. The confidentiality agreements that are designed
to protect our trade secrets could be breached, and we might not have adequate
remedies for the breach.
It is
also possible that our trade secrets will otherwise become known or
independently developed by our competitors, many of which have substantially
greater resources, and may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with our
ability to make and sell some of our products. Although we believe that our
products do not infringe on the patents or other proprietary rights of third
parties, we cannot assure you that third parties will not assert infringement
claims against us or that such claims will not be successful.
In
the future, we may look to acquire other businesses in our industry and the
acquisitions will require us to use substantial resources, among other
things.
At some time in the future, we may
decide to pursue a consolidation strategy with other businesses in our
industry. In order to successfully acquire other businesses, we would
be forced to spend significant resources in both acquisition and transactional
costs, which could divert substantial resources in terms of both financial and
personnel capital from our current operations. Additionally, we might
assume liabilities of the acquired business, and the repayment of those
liabilities could have a material adverse impact on our cash
flow. Furthermore, when a new business is integrated into our ongoing
business, it is possible that there would be a period of integration and
adjustment required which could divert resources from ongoing business
operations.
Conversion
of our Series A Preferred stock could cause substantial dilution to our existing
common stock holders.
As of August 31, 2009, we had
141,994,940 shares of our common stock issued and outstanding, as well as 1,027
shares of our Series A Preferred stock issued and outstanding. The
Series A Preferred stock is convertible into 41,080,000 shares of our common
stock, and upon conversion, the Series A Preferred stock would own 22.5% of our
common stock. This would greatly dilute the holdings of our existing
common stockholders.
Risks
Relating to the Reorganization
A Company director and a
certain executive officer beneficially owns a substantial percentage of the
Company’s outstanding common stock, which gives him control over certain major
decisions on which the Company’s stockholders may vote, which may discourage an
acquisition of the Company
.
As a
result of the Reorganization, Sileas Corp. (“Sileas”) which is owned by the
Company’s three officers (one of whom is also one of the Company’s three
directors), beneficially owns, in the aggregate, approximately 73% of the
Company’s outstanding common stock. One director who is also an
executive officer,
Stanley
Hirschman, also owns the majority equity interest in Sileas.
The
interests of the Company’s management may differ from the interests of other
stockholders. As a result, the Company’s executive management will have the
right and ability to control virtually all corporate actions requiring
stockholder approval, irrespective of how the Company’s other stockholders may
vote, including the following actions:
|
·
|
confirming or
defeating the election of
directors;
|
|
·
|
amending or preventing amendment
of the Company’s certificate of incorporation or
bylaws;
|
|
·
|
effecting or preventing a
Reorganization, sale of assets or other corporate transaction; and
controlling the outcome of any other matter submitted to the stockholders
for vote.
|
The
Company’s management’s beneficial stock ownership may discourage a potential
acquirer from seeking to acquire shares of the Company’s common stock or
otherwise attempting to obtain control of the Company, which in turn could
reduce the Company’s stock price or prevent the Company’s stockholders from
realizing a premium over the Company’s stock price.
Public company compliance may make it
more difficult to attract and retain officers and directors
.
The
Sarbanes-Oxley Act of 2002 and new rules subsequently implemented by the SEC
have required changes in corporate governance practices of public companies. As
a public entity, the Company expects these new rules and regulations to increase
compliance costs in 2010 and beyond and to make certain activities more time
consuming and costly. As a public entity, the Company also expects that these
new rules and regulations may make it more difficult and expensive for the
Company to obtain director and officer liability insurance in the future and it
may be required to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. As a result,
it may be more difficult for the Company to attract and retain qualified persons
to serve as directors or as executive officers.
Risks
Relating to the Common Stock
The Company’s stock price may be
volatile
.
The
market price of the Company’s common stock is likely to be highly volatile and
could fluctuate widely in price in response to various factors, many of which
are beyond the Company’s control, including the following:
|
·
|
additions or departures of key
personnel;
|
|
·
|
limited “public float” following
the Reorganization, in the hands of a small number of persons whose sales
or lack of sales could result in positive or negative pricing pressure on
the market price for the common
stock;
|
|
·
|
operating results that fall below
expectations;
|
|
·
|
economic and other external
factors, including but not limited to changes in federal government
military spending and the federal government procurement process;
and
|
|
·
|
period-to-period fluctuations in
the Company’s financial
results.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and
adversely affect the market price of the Company’s common stock.
There is currently no liquid trading
market for the Company’s common stock and the Company cannot ensure that one
will ever develop or be sustained
.
The
Company’s common stock is currently approved for quotation on the OTC Bulletin
Board trading under the symbol OPXS.OB. However, there is limited trading
activity and not currently a liquid trading market. There is no assurance
as to when or whether a liquid trading market will develop, and if such a market
does develop, there is no assurance that it will be maintained.
Furthermore, for companies whose securities are quoted on the
Over-The-Counter Bulletin Board maintained by the National Association of
Securities Dealers, Inc., it is more difficult (1) to obtain accurate
quotations, (2) to obtain coverage for significant news events because major
wire services generally do not publish press releases about such companies, and
(3) to raise needed capital. As a result, purchasers of the Company’s
common stock may have difficulty selling their shares in the public market, and
the market price may be subject to significant volatility.
Offers or
availability for sale of a substantial number of shares of the Company’s common
stock may cause the price of the Company’s common stock to decline or could
affect the Company’s ability to raise additional working
capital
.
Under
Rule 144(i)(2), the Company’s stockholders can avail themselves of Rule 144 and
commence selling significant amounts of shares into the market one year after
the filing of “Form 10” information with the SEC as long as the other
requirements of Rule 144(i)(2) are met. While affiliates would be
subject to volume limitations under Rule 144(e), which is one percent of the
shares outstanding as shown by our then most recent report or statement
published, nonaffiliates would then be able to sell their stock without volume
limitations. If the Company’s current stockholders seek to sell
substantial amounts of common stock in the public market either upon expiration
of any required holding period under Rule 144 or pursuant to an effective
registration statement, it could create a circumstance commonly referred to as
“overhang,” in anticipation of which the market price of the Company’s common
stock could decrease substantially. The existence of an overhang, whether
or not sales have occurred or are occurring, could also make it more difficult
for the Company to raise additional financing in the future through sale of
securities at a time and price that the Company deems
acceptable.
The elimination of monetary liability
against the Company’s directors, officers and employees under Delaware law and
the existence of indemnification rights to the Company’s directors, officers and
employees may result in substantial expenditures by the Company and may
discourage lawsuits against the Company’s directors, officers and
employees
.
The Company’s certificate of
incorporation does not contain any specific provisions that eliminate the
liability of directors for monetary damages to the Company and the Company’s
stockholders; however, the Company provides such indemnification to its
directors and officers to the extent provided by Delaware law. The Company may
also have contractual indemnification obligations under its employment
agreements with its executive officers. The foregoing indemnification
obligations could result in the Company incurring substantial expenditures to
cover the cost of settlement or damage awards against directors and officers,
which the Company may be unable to recoup. These provisions and resultant costs
may also discourage the Company from bringing a lawsuit against directors and
officers for breaches of their fiduciary duties and may similarly discourage the
filing of derivative litigation by the Company’s stockholders against the
Company’s directors and officers even though such actions, if successful, might
otherwise benefit the Company and its stockholders.
USE
OF PROCEEDS
We are not selling any of the shares of
common stock being offered by this prospectus and will receive no proceeds from
the sale of the shares by the selling stockholders. All of the proceeds from the
sale of common stock offered by this prospectus will go to the selling
stockholders at the time each offers and sells such shares.
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Effective
with the start of trading on May 1, 2009, our stock received a ticker symbol
change from “SSTX” to “OPXS” from FINRA and commenced trading under the new
symbol on the OTC Bulletin Board. Trading in our stock has
historically been sporadic, trading volumes have been low, and the market price
has been volatile.
The
following table shows the range of high and low bid prices for our common stock
as reported by the OTC Bulletin Board, as the case may be, for each quarter
since the fourth quarter of 2007. The quotations reflect inter-dealer prices,
without retail markup, markdown or commission and may not represent actual
transactions.
Period
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Commencement
of Trading through Fourth Quarter 2007
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
First
Quarter 2008
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter 2008
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2008
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter 2008
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
First
Quarter 2009
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter 2009
|
|
$
|
0.50
|
|
|
$
|
0.14
|
|
On August
31, 2009, the sale price for our common stock as reported on the OTCBB was $0.30
per share.
Securities
outstanding and holders of record
On August
31, 2009 there were approximately 99 record holders of our common stock and
141,994,940 shares of our Common Stock issued and
outstanding.
Dividend
Policy
We have
not paid and do not expect to pay dividends on our common stock. Any future
decision to pay dividends on our common stock will be at the discretion of our
board and will depend upon, among other factors, our results of operations,
financial condition, capital requirements and contractual
restrictions.
Information
respecting equity compensation plans
Summary Equity Compensation
Plan Information
The Company had no equity compensation
plans as of September 30, 2008 and adopted its 2009 Stock Option Plan on
March 26, 2009. See Equity Plan Compensation Information on p. 26.
Management’s
Discussion and Analysis or Plan of Operations
This management's discussion and
analysis reflects information known to management as at June 28, 2009. This
MD&A is intended to supplement and complement our audited financial
statements and notes thereto for the year ended September 28, 2008
(Predecessor), prepared in accordance with U.S. generally accepted accounting
principles (GAAP). You are encouraged to review our financial statements in
conjunction with your review of this MD&A. Additional information relating
to the company, including our most current annual information form, is available
at www.sec.gov. 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 non-GAAP measures are used in this MD&A, they are 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. This discussion contains
forward-looking statements. Please see “Special cautionary statement concerning
forward-looking statements” and “Risk factors” for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. The operating results for the periods presented were not
significantly affected by inflation.
Background
On
March 30, 2009, the Reorganization was consummated pursuant to which the then
existing shareholders of Optex Delaware exchanged their shares of common stock
with the shares of common stock of the Company as follows: (i) the
outstanding 85,000,000 shares of Optex Delaware common stock were exchanged by
the Company for 113,333,282 shares of Company common stock, (ii) the
outstanding 1,027 shares of Optex Delaware Series A Preferred Stock be exchanged
by the Company for 1,027 shares of Company Series A Preferred Stock,
and (iii) the 8,131,667 shares of Optex Delaware common stock purchased in
the private placement were exchanged by the Company for 8,131,667 shares of
Company common stock. Optex Delaware has remained a wholly-owned
subsidiary of the Company.
As a
result of the Reorganization, the Company changed its name from Sustut
Exploration Inc. to Optex Systems Holdings, Inc. and its year end from December
31 to a fiscal year ending on the Sunday nearest September
30.
Simultaneously
with the closing under the Reorganization Agreement (and the shares included
above), as of March 30, 2009, the Company accepted subscriptions from accredited
investors for a total 27.1 units (the "Units"), for $45,000 per Unit, with each
Unit consisting of 300,000 shares of common stock, no par value, of the Company
and warrants to purchase 300,000 shares of common stock for $0.45 per share for
a period of five (5) years from the initial closing, which were issued by the
Company after the closing referenced above. Gross proceeds to the
Company were $1,219,750, and after deducting (i) a cash finder’s fee of
$139,555, (ii) non-cash consideration of indebtedness owed to an investor of
$146,250, and (iii) stock issuance costs of $59,416, the net proceeds were
$874,529. The finder also received five year warrants to purchase
2.39 Units, at an exercise price of $49,500 per unit.
Optex
Delaware manufactures optical sighting systems and assemblies primarily for
Department of Defense applications. Its products are installed on a majority of
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 Delaware also manufactures
and delivers numerous periscope configurations, rifle and surveillance sights
and night vision optical assemblies. Optex 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.
Optex Delaware delivers high volume
products, under multi-year contracts, to large defense
contractors. It has the reputation and credibility with those
customers as a strategic supplier. The successful completion of the separation
from IRSN has enhanced its ability to serve its existing customers and will set
the stage for it to become a center of manufacturing
excellence. Irvine Sensors Corporation (“IRSN”) is predominately a
research and design company with capabilities enabling only prototype or low
quantity volumes. Optex Delaware is predominately a high volume
manufacturing company. Therefore the systems and processes needed to meet
customer’s needs are quite different. While both companies serve the
military market, the customers within these markets are different. For
example, two of the largest customers for Optex are GDLS and TACOM. IRSN
did not have any contracts or business relations with either of these two
customers. Therefore the separation has allowed Optex Delaware to
fully focus on high volume manufacturing and the use of the six sigma
manufacturing methodology. This shift in priorities has allowed Optex
Delaware to become a center of manufacturing excellence, characterized by
improved delivery performance, higher quality ratings, and reduced operational
costs.
Many 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 the Company for materials and labor required to
complete the contracts.
The
Company also anticipates the opportunity to integrate some of its night vision
and optical sights products into commercial applications. The Company
plans to carry on the business of Optex Delaware as its sole line of business,
and all of the Company’s operations are expected to be conducted by and through
Optex Delaware.
Plan
of Operation
Through
a private placement offering completed in conjunction with consummation of the
Reorganization Agreement, the Company has raised $1,219,750 ($874,529, net of
finders fees, issuance costs and non cash consideration resulting from
satisfaction of indebtedness owed to an investor) to fund
operations. The proceeds have been used as follows:
Description
|
|
Offering
|
|
Additional
Personnel
|
|
$
|
150,000
|
|
Legal
and Accounting Fees
|
|
$
|
100,000
|
|
Investor
Relations Fees
|
|
|
96,000
|
|
Working
Capital
|
|
$
|
528,529
|
|
|
|
|
|
|
Totals:
|
|
$
|
874,529
|
|
Results
of Operations
Based on the current level of
deliverable backlog, we expect the next three months’ revenues to be consistent
with the total for the periods September 29, 2008 through October 14, 2008
(Predecessor) and October 15, 2008 through June 28, 2009
(Successor). In addition, future business includes expected awards
yet to be determined. Although the current range of products being
manufactured is dependent on the receipt of continued and timely funding to
existing programs, the most recent proposed federal budget is not expected to
impact any of our existing programs in the near term.
The
Revenue, Expenses and Income for the fourteen day period of Optex Texas prior to
the acquisition by Optex Delaware are summarized below.
|
|
Millions
|
|
Revenue
|
|
$
|
0.9
|
|
Cost
of Sales
|
|
|
0.7
|
|
Gross
Margin
|
|
|
0.2
|
|
General
& Administrative
|
|
|
0.1
|
|
Operating
Income
|
|
$
|
0.1
|
|
|
|
$
|
0.1
|
|
The table below summarizes our
quarterly and year to date operating results in terms of both a GAAP net income
measure and a non GAAP EBITDA measure. We use EBITDA as an additional
measure for evaluating the performance of our business as “net income” includes
the significant impact of noncash Intangible Amortization on our income
performance. Consequently, in order to have a meaningful measure of
our operating performance on a continuing basis, we need to evaluate an income
measure which does not take into account this Intangible
Amortization. We have summarized the quarterly revenue and margin
below along with a reconciliation of the GAAP net loss to the non GAAP EBITDA
calculation for comparative purposes below. We believe that including
both measures allows the reader to have a “complete picture” of our overall
performance.
|
|
September
29, 2008 through June 28, 2009
|
|
|
Predecessor
- Fiscal Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
- Qtr 1
(Sept
29, 2008
through
Oct 14,
2008)
|
|
|
Successor-
Qtr 1
(Oct
15, 2008
through
Dec 27,
2008)
|
|
|
Qtr
2
|
|
|
Qtr
3
|
|
|
9
months ended June
28,
2009
|
|
|
Qtr
1
|
|
|
Qtr
2
|
|
|
Qtr
3
|
|
|
9 months ended
June
29,
2008
&
amp;
lt; /font>
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss After Taxes - GAAP
|
|
$
|
(0.1
|
)
|
|
$
|
0.1
|
|
|
$
|
(0.3
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
-
|
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
-
|
|
|
$
|
0.2
|
|
Federal
Income Taxes
|
|
|
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation
& Amortization
|
|
|
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
1.6
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.6
|
|
EBITDA
- Non GAAP
|
|
$
|
(0.1
|
)
|
|
$
|
1.0
|
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
|
$
|
1.6
|
|
|
$
|
(0.3
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(0.8
|
)
|
We have experienced substantial
improvement in our EBITDA as compared to our prior year
performance. We have increased our EBITDA by $2.4 million in the nine
months ending June 28, 2009 as compared to the nine months ending 2008
(Predecessor), primarily as a result of increased revenue and lower general and
administrative costs. We expect this trend to continue over the next
12 months as our product mix shifts towards more profitable programs and we
continue to pursue cost reductions in our production and general and
administrative areas.
Product
mix is dictated by customer contracted delivery dates and volume of each product
to be delivered on such delivery dates. Shifts in gross margin
from quarter to quarter are primarily attributable to the differing product
mix recognized as revenues during each respective period. During the
three and nine months, our revenues on legacy periscope programs increased
significantly over the prior year while margins significantly
decreased. The legacy periscope contracts were awarded January 2003,
and due to significant material price increases subsequent to the contract award
date, we are experiencing a loss on these contracts. We have fully
reserved for future contract losses on this program, thus deliveries against
these programs yield a product margin of zero. During 2009, we
recognized revenue of $3.7 million from these legacy periscope programs, with a
remaining backlog of $1.5 million, $0.4 million of which should be recognized in
2009 and the remaining $1.1 million in the first three quarters of
2010. We expect our product margins on periscopes to increase over
the next 12 months as the legacy programs are completed and are replaced with
new awards.
We are aggressively pursuing
additional, potentially higher margin periscope business, and in May 2009, the
Company was awarded a multi-year Indefinite Delivery/Indefinite Quantity (IDIQ)
type contract accompanied by the first delivery order from
TACOM. If all government forecasted delivery orders against this IDIQ
contract are awarded and if we were to share equally with the other supplier in
the awarded releases, the total value of the contract to us could be valued at
approximately $7.5 million over the next three years. In June
2009, we received an additional $3.4 million dollar award from GDLS to
provide product beginning with delivery starting in 2011 at the completion
of our current production contract.
As a result of the October 14, 2008
acquisition of the assets of Optex Texas (Predecessor), our amortizable
intangible assets increased significantly over the prior year. The non cash
amortization of intangible assets has had a negative impact on our Gross Margin
for 2009 as compared to 2008. In 2009, our anticipated
intangible amortization expense is $2 million and is expected to decline to $1
million in 2010.
Expected
Backlog Delivery Schedule as of June 28, 2009 (in millions):
Year
|
|
Backlog
|
|
2009
|
|
$
|
6.5
|
|
2010
|
|
|
17.8
|
|
2011
|
|
|
4.8
|
|
2012
|
|
|
2.5
|
|
2013
|
|
|
0.1
|
|
Total
|
|
$
|
31.7
|
|
Virtually all of our contracts are
prime or subcontracted directly with the Federal government and, as such, are
subject to Federal Acquisition Regulation (FAR) Subpart 49.5, “Contract
Termination Clauses” and more specifically FAR 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, these FAR 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 FAR clause 52.249-8. In addition, the
Government may require us to transfer title and deliver to the Government
any completed supplies, partially completed supplies and materials, parts,
tools, dies, jigs, fixtures, plans, drawings, information, and contract rights
(collectively referred to as “manufacturing materials”) that we
have specifically produced or acquired for the terminated portion of this
contract. The Government shall pay contract price for completed supplies
delivered and accepted, and we and the Government would negotiate an agreed
upon amount of payment for manufacturing materials delivered and accepted and
for the protection and preservation of the property. Failure to agree on an
amount for manufacturing materials is subject to the FAR Disputes clause
52.233-1.
In some cases, we may receive an
“undefinitized” (i.e., price, specifications and terms are not agreed upon
before performance commenced) contract award for contracts that exceed the
$650,000, which is the federal government simplified acquisition
threshold. These contracts are considered firm contracts at an
undefinitized, but not to exceed specified limits threshold. Cost
Accounting Standards Board covered contracts are subject to the Truth in
Negotiations Act disclosure requirements and downward only price
negotiation. As of June 28, 2009, 12.3% of our outstanding backlog,
or $3.9 million of booked orders, fell under this criteria. Our
experience has been that the historically negotiated price differentials have
been minimal (5% or less) and accordingly, we do not anticipate any significant
downward adjustments on these booked orders.
Three
Months Ended June 28, 2009 (Successor) Compared to the Three Months Ended June
29, 2008 (Predecessor)
Revenues.
In the three
months ended June 28, 2009, revenues increased by 79.5% over the respective
prior period:
|
|
3
mos ended
6/28/2009
(Successor)
|
|
|
3
mos ended
6/29/2008
(Predecessor)
|
|
|
Change
|
|
Revenue
|
|
$
|
7.0
|
|
|
$
|
3.9
|
|
|
$
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
increase
|
|
|
|
|
|
|
|
|
|
|
79.5
|
%
|
Revenues increased significantly across
all product lines during the three months ended June 2009 as compared to the
same period in 2008. Significant increases in sales of certain
product lines is attributable to increased demand by GDLS and U.S. government
accelerated schedules, whereby, in consideration for increased pricing, Optex
Delawareagreed to accelerate the contract delivery schedule and deliver at
higher volumes to support increased military service
needs. Other revenue increased due to the delivery of
higher quantities of certain assemblies in the current quarter over the
comparable period in 2008.
During the third quarter of 2009, we
worked aggressively with one customer and resolved technical field issues
related to two of our major programs, and also completed the First Article
Testing and Acceptance requirements on a third, for which government acceptance
approval was obtained on August 28, 2009. With most of the technical and
start up issues behind us on these programs, we expect to increase program
deliveries during the last quarter of fiscal year 2009 continuing through
2010.
Cost of Goods Sold
. During
the quarter ended June 28, 2009, we recorded cost of goods sold of $6.4 million
as opposed to $2.9 million during the quarter ended June 29, 2008, an increase
of $3.5 million or 82.6%. This increase in cost of goods sold was primarily
associated with increased revenue on our periscope lines in support of higher
backlog and accelerated delivery schedules, in addition to increased intangible
amortization resulting from the acquisition of Optex Texas (Predecessor) assets
from IRSN on October 14, 2008. The gross margin during the quarter ended June
28, 2009 (Successor) was 8.6% of revenues as compared to a gross margin of 25.6%
for the quarter ended June 29, 2008 (Predecessor). Product margins
decreased substantially to 15.7% for the quarter ended June 28, 2009 (Successor)
versus 25.6% for the quarter ended June 29, 2008 (Predecessor) due to a shift in
third quarter revenue mix toward less profitable contracts, combined with
increased labor costs related to the reallocation of labor costs associated with
10 employees from general and administrative costs to manufacturing overhead in
2009. Margins were further impacted by higher intangible amortization
allocable to cost of goods sold of $0.4 million, and increased reserves for
valuations and warranties of $0.1 million, resulting in an overall increase in
cost of goods sold of 7.1% of revenues in the quarter ended June 28,
2009.
G&A Expenses
. During the
three months ended June 28, 2009, we recorded operating expenses of $ 0.8
million as opposed to $ 1.2 million during the three months ended June 29, 2008,
a decrease of $0.4 million or 33.3%. The components of the
significant net decrease in general and administrative expenses as compared to
quarter ended June 29, 2008 are outlined below.
|
·
|
Elimination of corporate cost
allocations from IRSN of $0.5 million and the IRSN Employee Stock Bonus
Plan (ESBP) of $0.1 million as a result of the ownership
change.
|
|
·
|
Increased costs of $0.2
million in legal, accounting fees, board of directors fees, and investor
relations.
|
|
·
|
Lower Salaries and Wages and
employee related costs of $0.1 million primarily due to the
reclassification of 10 purchasing and planning employees from general and
administrative to manufacturing overhead in cost of sales. The
annualized impact of the personnel move is expected to be a reduction in
general and administrative expenses of approximately $0.5 million with an
offsetting increase to cost of goods
sold.
|
|
·
|
Increased Amortization of
Intangible Assets of $0.05 million as a result of the ownership change
on October 14,
2008.
|
Loss from Operations
. During
the three months ended June 28, 2009, we recorded a loss from operations of
$(0.2) million, which was the same as the $(0.2) million loss from operations
during the three months ended June 29, 2008. The loss from operations
includes a $0.4 million increase in non-cash amortization of intangible assets
as a result of the October 14, 2008 acquisition of the assets of Optex Texas
(Predecessor).
Net Loss
. During the three
months ended June 28, 2009, we recorded a net loss of $(0.3) million, as
compared to $(0.2) million for three months ended June 29, 2008, an increase of
$(0.1) million or 50.0%. Federal Income Taxes expense increased by
$0.1 million in the three months ended June 28, 2009 as a result of increased
profit before intangible amortization expense (which is not deductible
for income tax purposes), over the prior year quarter. In 2008, there
was no Federal Income Tax expense due to the loss from operations. Excluding the
impact of the increased intangible expenses of $0.5 million, we would have
recorded net income of $0.2 million for the three months ended June 28,
2009.
Predecessor
period of September 29, 2008 through October 14, 2008 and Successor period of
October 15, 2008 through June 28, 2009 Compared to the Predecessor Nine month
period ended June 29, 2008
Revenues
the For the nine
months ended June 28, 2009 (Combined) revenues increased by 51.1% over the
respective prior period (Predecessor) per the table below:
|
Predecessor
|
|
|
Successor
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
2008
through
October
14, 2008
|
|
|
October
15,
2008
through
June
28, 2009
|
|
|
9
mos.
ended
June
28,
2008
|
|
|
9
mos. ended
June
29, 2009
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
0.9
|
|
|
$
|
20.1
|
|
|
$
|
21.0
|
|
|
$
|
13.9
|
|
|
$
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51.1
|
%
|
Revenues increased significantly across
all product lines in the nine months ended June 28, 2009 as compared to the nine
months ended June 29, 2008. Significant increases in sales of certain
product lines is attributable to increased demand by General Dynamics and U.S.
government accelerated schedules, whereby, in consideration for increased
pricing, we agreed to accelerate the contract delivery schedule and deliver at
higher volumes to support increased military service needs. Other
revenue increased due to the delivery of higher quantities of certain assemblies
in the current quarter over the comparable period in 2008.
During the third quarter of 2009, we
worked aggressively with one customer and resolved technical field issues
related to two of our major programs, and completed the First Article Testing
and Acceptance requirements on a third, for which we are currently awaiting
government acceptance approval. We do not foresee any issue with obtaining
the required approval in the near term. With most of the technical and
start up issues behind us on these programs, we expect to increase program
deliveries during the last quarter of fiscal year 2009 continuing through
2010.
Cost of Goods Sold
. During
the Predecessor period from September 29, 2008 through October 14, 2008, we
recorded cost of goods sold of $0.8 million and during the Successor period from
October 15 through through June 28, 2009 we recorded cost of goods sold of $18.0
million for a total cost of good sold during the nine month period of $18.8
million as compared, to $11.7 million during the nine months ended June 29,
2008, an increase of $7.1 million or 60.7%. This increase in cost of goods sold
was primarily associated with increased revenue on certain of our product lines
in support of higher backlog and accelerated delivery schedules and increased
intangible amortization resulting from the acquisition of the assets of Optex
Texas (Predecessor) on October 14, 2008. The gross margin during the Predecessor
period beginning September 29, 2008 through October 14, 2008 was $0.1 million
and the gross margin for the Successor period beginning October 15, 2008 through
June 28, 2009 was $2.1 million for a total of $2.2 million or 10.5% of revenues
as compared to a gross margin of 15.8% for the nine months ended June 29, 2008.
Product gross margins were down 0.4% to 17.6% for the period ended June 28, 2009
versus 18.0% for the nine months ended June 29, 2008 due to a shift in revenue
mix toward less profitable contracts for certain programs, combined with
increased labor related to the reallocation of costs associated with 10
employees from the general and administrative costs to manufacturing overhead in
2009. Margins were further impacted by higher intangible amortization
allocable to cost of goods sold of $0.9 million, and increased reserves for
valuations and warranties of $0.3 million, resulting in an overall increase in
cost of goods sold of 7.1% of revenues in the period ended June 28, 2009 as
compared to the nine months ended June 29, 2008.
G&A Expenses
. During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
operating expense of $0.1 million and during the period from October 15, 2008
through June 28, 2009, we recorded operating expenses of $2.0 million for a
total of $2.1 million for the nine months ended June 28, 2009 as opposed to $3.7
million during the nine months ended June 29, 2008, a decrease of $1.6 million
or 43.2%. The components of the significant net decrease in general
and administrative expenses as compared to the nine months ended June 29, 2008
are outlined below.
|
·
|
Elimination of corporate cost
allocations from IRSN of $1.5 million and the IRSN Employee Stock Bonus
Plan (ESBP) of $0.3 million as a result of the ownership
change.
|
|
·
|
Increased costs of $0.4 million
in legal, accounting fees, board of director fees, and investor
relations
|
|
·
|
Lower Salaries and Wages and
employee related costs of $0.3 million primarily due to the
reclassification of 10 purchasing and planning employees from general and
administrative to manufacturing overhead in cost of sales. The
annualized impact of the personnel move is expected to be a reduction in
general and administrative expenses of approximately $0.5 million with an
offsetting increase to costs of goods sold. This decrease was
partially offset by the expense associated with the implementation of a
Management Incentive Bonus plan in 2009 of ($0.1) million for a net change
of $0.2 million to general and administrative salaries, wages and related
employee expenses.
|
|
·
|
Increased Amortization of
Intangible Assets of $0.1 million as a result of the ownership change as
of October 14, 2008.
|
Income (Loss) from
Operations
. During the Predecessor period from September 29, 2008 through
October 14, 2008 we recorded income from operations of $0.07 million and for the
Successor period from October 15, 2008 through June 28, 2009, we recorded a loss
from operations of $(0.09) million for a total net loss of $(0.02) million
during the nine month period as opposed to a loss from operations of $(1.5)
million during the nine months ended June 29, 2008. This improvement was
primarily due to increased sales revenue in the period ended June 28, 2009,
combined with reduced general and administrative expenses driven by the
elimination of IRSN corporate costs pushed down to us in the nine months ended
June 29, 2008. The current year loss from operations also includes $1.1
million of non cash amortization of intangible assets as a result of the October
14, 2008 acquisition transaction.
Net Income (Loss)
. During the
Predecessor period from September 29, 2008 through October 14, 2008 we recorded
net income of $0.06 million for the period beginning October 15, 2008 through
June 28, 2009, we recorded a net loss of $(0.73) million for a total net loss of
$(0.67) million during the nine months ended June 28, 2009, as compared to
$(1.6) million for nine months ended June 29, 2008, a decrease in net loss of
$0.93 million or 58.1%. This decrease in net loss was principally the result of
reduced operating expenses related to the elimination of costs pushed down from
IRSN in the nine months ended June 29, 2008 combined with increased revenue in
the period ending June 28, 2009. Federal Income Tax expense increased by $0.5
million over the prior year as a result of increased profit before intangible
amortization expense. The intangible amortization expense is amortized over five
years for book purposes and is deductible over 15 years for income tax
purposes. In 2008, there was no Federal Income Tax expense due to the loss from
operations. . Excluding the impact of the increased intangible expenses of $1.5
million, we would have recorded net income of $0.8 million for the nine month
period ending June 28, 2009.
Year
Ended September 28, 2008 (Predecessor) Compared to Year Ended September 30,
2007 (Predecessor)
The results of operations and cash
flows of the Predecessor business for the years ended September 28, 2008 and
September 30, 2007 do not include the effects of or any adjustments related to
the sale of the Optex Delaware acquisition of Optex Texas.
The information contained in this
section is that of the Predecessor, Optex Texas. For the purpose of discussion,
the results of the Predecessor for the years ended September 28, 2008 and
September 30, 2007 are presented on a stand alone basis.
For the year ended September 28, 2008
revenues increased by 29.9% over the respective prior year per the table
below:
|
|
Year ended
9/28/2008
|
|
|
Year ended
9/30/2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20.0
|
|
|
$
|
15.4
|
|
|
$
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
increase
|
|
|
|
|
|
|
|
|
|
|
29.9
|
%
|
Revenues increased 29.9% in the year
ended September 28, 2008 from the prior year due to reaching full production on
one of the Predecessor’s major product lines programs and increases in periscope
revenues resulting from accelerated customer delivery schedules for government
orders and higher production volumes on our GDLS orders.
Cost of Goods Sold
. During
the year ended September 28, 2008, we recorded cost of goods sold of $18.1
million as opposed to $17.4 million during the year ended September 30, 2007, an
increase of $0.7 million or 4.5%. This increase in cost of goods sold was
primarily due to increased revenues of $4.6 million. The margins on the
increased revenue is significantly improved over the year ended September 30,
2007 due to equitable price adjustments and accelerated schedule consideration
received in the year ended September 2008 on certain programs. Additionally, the
gross margin for the year ended September 30, 2007 included significant contract
loss reserves, excess and obsolescence and other non recurring inventory
adjustments related to unrecoverable costs increases on fixed price
contracts.
G&A Expenses
. General and
Administrative expenses were $5.0 million in the year ended 2008 versus $4.9
million in the year ended 2008, an increase $0.1 million or 2.0%. The
significant components of the net increase are outlined below.
|
·
|
Decrease in
legal and accounting fees of $0.2 million as a result of reduced
auditing expenses related to 2008 annual physical inventory and higher
legal expenses in 2007 related to securing a $2 million note from Tim
Looney.
|
|
·
|
Salaries and wages and
employee related costs changed by $0.0 in the year ended 2008 versus the
year ended 2007. Salaries increased 4%, or $0.03 million in the year ended
September 28, 2008 as compared to the year ended September 30, 2007.
This increase was primarily due to personnel changes combined with annual
salary and wage increases of approximately 3%. Employee
benefits declined by 15% or $(0.03) million in the year ended September
28, 2008 due to personnel changes at the end of 2007 whereas two key
executive employees received all accrued vacation as of their departure at
the end September, 2007.
|
|
·
|
Consulting and contract
service fees increased by $0.1 million in 2008 over 2007 due to services
used in support of attaining ISO 9000 certification in 2008, in addition
to executive services charged to Optex Texas by IRSN for organizational
oversight until replacements were secured for executives leaving Optex as
of September 30, 2007.
|
Loss from Operations
. During
the year ended September 28, 2008, we recorded a loss of $(3.1) million as
opposed to $(6.8) million during the year ended September 30, 2007, a decrease
of $3.7 million or 54.4%. This decrease in the loss from operations was
primarily due to the negotiation of several equitable price adjustments and
other consideration on accelerated delivery schedules in the year ended
September 28, 2008. Additionally, for the year ended September 30, 2007
non-recoverable cost increases on fixed price contracts resulted in significant
contract loss and excess and obsolete inventory reserves as discussed above in
cost of goods sold. These losses were partially offset in 2008 with equitable
price adjustments negotiated with the customer.
Net Loss
. During the year
ended September 28, 2008, we recorded a net loss of $(4.8) million, as compared
to $(6.8) million for year ended September 30, 2007, an improvement of $2.0
million or 29.4%. This decrease in net loss was principally the result of
increased revenues and negotiated equitable and other price adjustments
discussed above, partially offset by a $1.6 million adjustment for the
impairment of goodwill, Goodwill was reviewed as of September 28, 2008 and
adjusted based upon the most recent value of the company as determined by the
sale to third party purchasers on October 14, 2008.
Liquidity
and Capital Resources
We have historically met our
liquidity requirements from a variety of sources, including government and
customer funding through contract progress bills, short term loans, and notes
from related parties. Based upon our current working capital position and
potential for expanded business revenues, we believe that our working capital is
sufficient to fund our current operations for the next 12 months. However, based
on our strategy and the anticipated growth in our business, we believe that our
liquidity needs may increase in the future. The amount of such increase will
depend on many factors, including the costs associated with the fulfillment of
our projects, whether we upgrade our technology, and the amount of inventory
required for our expanding business. If our liquidity needs do increase, we
believe additional capital resources will be derived from a variety of sources
including, but not limited to, cash flow from operations and further private
placements of our common stock and/or debt and possible receivables funding
through a commercial lender.
Predecessor
period of September 29, 2008 through October 14, 2008
Cash and Cash Equivalents
. As
of October 14, 2008, Optex Texas (Predecessor) had cash and cash equivalents of
$0.3 million, an increase of $0.1 million from the year ended September 29,
2008. The slight increase in cash over September 29, 2008 balances were
primarily due to the timing of cash receipts on accounts receivable collections
and supplier payments made as of the October 14
th
Optex
Delaware acquisition. The cash balance as of October 14, 2009 is included as the
beginning cash balance for Optex Delaware (Successor) as of October 15,
2008.
Net Cash Provided by Operating
Activities
. Net cash provided by operating activities totaled $0.1
million for the Predecessor period of September 29, 2008 through October 14,
2008. Cash provided by operating activities was primarily due to the timing of
purchases and accounts receivable collections during the 15 day period prior the
Delaware acquisition. During this period, our net inventory increased by
$0.9 million to support substantially increased production rates across all of
our product lines and our accounts receivable decreased $(1.0) million due to
timing of collections from one of our major customers in the second week of
October, 2008. Accounts payable and accrued expenses decreased by $(0.2) million
due to the timing of cash disbursements prior to the
acquisition.
Net Cash Used in Investing
Activities
. Net cash used in investing activities totaled $0.00 million
during the Predecessor period beginning September 29, 2008 and ending October
14, 2008. The Company’s business is labor intensive and we purchase
equipment as it becomes necessary.
Net Cash Provided By Financing
Activities
. Net cash provided by financing activities totaled $0.0
million during the Predecessor period beginning September 29, 2008 and ending
October 14, 2008.
Successor
period of October 15, 2008 through June 28, 2009
Cash and Cash Equivalents
. As
of June 28, 2009, we had cash and cash equivalents of $0.5 million. During the
Successor period of October 15, 2008 through June 28, 2009 we increased cash and
cash equivalents by $0.2 million primarily due to the net proceeds received by
us in the private placement. A portion of the private placement proceeds was
used to acquire additional inventory in support of the higher revenue and
production rates during the period and which are expected to continue through
year end.
Net Cash Used in Operating
Activities
. Net cash used in operating activities during the Successor
period beginning October 15, 2008 and ending June 28, 2009 totaled $(0.4)
million. The primary uses of cash during this period relate to the timing of
purchases, accelerated collections on government contracts, and the timing of
payments to vendors. Accelerated collections of government contracts
was accomplished by offering nominal discounts for prompt
payment. Federal Acquisition Regulation Clause
52.232-8 “Discounts for Prompt Payment” permits the offer
of nominal discounts on payment terms for government contracts in order to
expedite invoice payment. Because many of our programs incur significant,
long lead times from material acquisition through production and shipment, it is
the standard policy of Optex Delaware to offer a 0.5% discount for all
government invoices paid in net 10 days or less. The normal payment terms
on these contracts are net 30. The foregone revenues as a result of
the discounted payments equate to less than 0.1% of total revenue reported
during the same period. In the period begininning October 15, 2008
and ending June, 28, 2009, our net inventory increased by $1.6 million to
support substantially increased production rates across all of our product
lines. A large portion of these inventories are progress billable
costs and as such were billed to our customer as costs were
incurred. As of June 28, 2009, our accounts receivable included
approximately $1.5 million in unpaid outstanding progress bills related to these
programs, which were paid in July 2009. We expect similar cash flows
from operations until at least mid 2010 when our low margin legacy periscope
programs are anticipated to end and are replaced with other
significant programs as they reach level production rates.
Net Cash Provided by Investing
Activities
. In the Successor period beginning October 15, 2008 and ending
June 28, 2009, net cash provided by investing activities totaled $0.24 million
and consisted of cash acquired during the Optex Delaware Predecessor acquisition
as of October 14, 2009 of $0.25 million and cash used to purchase equipment of
$(0.01) million during the period.
Net Cash Provided By Financing
Activities
. Net cash provided by financing activities totaled $0.7
million during the period beginning October 15, 2008 through June 28, 2009, The
change of $0.7 million is due to receipt of the private placement funds of $0.9
million offset by funds used to repay outstanding loans of $(0.2) million. We
raised funds through a private placement for working capital needs, primarily
inventory purchases, and additional personnel so support increased revenue and
production rates during the period.
For
the 12 months ended September 28, 2008 (Predecessor)
Cash and Cash Equivalents
. As
of September 28, 2008, the Predecessor had cash and cash equivalents of $0.2
million compared to $0.5 million in 2007. The decrease in cash and cash
equivalents was primarily due to the timing of payments to suppliers against the
open accounts payable balance versus collections of open accounts receivable
balances as of year end.
Net Cash Used in Operating
Activities.
For the year ended September 28, 2008, the Predecessor used
$0.6 million of net cash in operating activities, as compared to using $1.5
million of net cash in operating activities during 2007. The primary change was
the timing of purchases, accelerated collections on government contracts, and
the timing of payments to vendors. In the twelve months ending
September, 28, 2008, the Predecessor’s net inventory decreased by $1.7 million
due to higher shipments in 2008 of inventories on hand as of the end of 2007.
Accounts receivable declined by $0.4 million in 2008 primarily due to aggressive
non US government collections and accelerated collections on government
contracts. The accelerated collections of government contracts was accomplished
by offering nominal discounts for prompt payment. Federal Acquisition
Regulation Clause 52.232-8 “Discounts for Prompt Payment” permits the
offer of nominal discounts on payment terms for government contracts in
order to expedite invoice payment. Because many of our programs incur
significant, long lead times from material acquisition through production and
shipment, it is the standard policy to offer a 0.5% discount for all government
invoices paid in net 10 days or less. The normal pay terms on these
contracts is net 30. The foregone revenues as a result of the
discounted payments equate to less than 0.1% of total revenue reported during
the same period. Due to the increased revenues and collections, combined with
reductions in inventory, the Predecessor was able to decrease the outstanding
accounts payable and accrued expense balances by 30% or $1.1 million during 2008
.
Net Cash Used in Investing
Activities
. Net cash used in investing activities totaled $0.1 million
during the 12 months ended September 28, 2008, as compared to net cash used in
investing activities of $0.06 million during the 12 months ended September 30,
2007 and consisted of equipment purchases. The Company’s business is
labor intensive and the Predecessor purchased equipment as it became
necessary.
Net Cash Provided By Financing
Activities
. Net cash provided by financing activities totaled $0.4
million during the 12 months ended September 28, 2008, as compared to net cash
provided by financing activities of $2.0 million during the 12 months ended
September 30, 2007. The Predecessor raised funds for working capital needs
through short-term loans.
Critical
Policies and Accounting Pronouncements
Stock-Based
Compensation:
In December 2004, the Financial Accounting Standards Board issued SFAS
No. 123R,
Share-Based
Payment
. SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments. SFAS No. 123R focuses primarily
on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued.
The Company’s accounting policy for
equity instruments issued to consultants and vendors in exchange for goods and
services follows the provisions of EITF 96-18, “Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF 00-18, “Accounting
Recognition for Certain Transactions Involving Equity Instruments Granted to
Other Than Employees.” The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at
which a commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting
agreement. Stock-based compensation related to non-employees is
accounted for based on the fair value of the related stock or options or the
fair value of the services, which ever is more readily determinable in
accordance with SFAS 123R.
Revenue
Recognition
. The Company recognizes revenue based on the
modified percentage of completion method utilizing the units-of-delivery method,
in accordance with SOP 81-1:
|
·
|
The
units-of-delivery method
recognizes as revenue the
contract price of units of a basic production product delivered during a
period and as the cost of earned revenue the costs allocable to the
delivered units; costs allocable to undelivered units are reported in the
balance sheet as inventory or work in progress. The method is used in
circumstances in which an entity produces units of a basic product under
production-type contracts in a continuous or sequential production process
to buyers' specifications.
|
Our contracts are fixed price
production type contracts whereas a defined order quantity is delivered to the
customer in a continuous or sequential production process in accordance with
buyer specifications (build to print). Our deliveries against these
contracts generally occur in monthly increments across fixed delivery periods
typically spanning from 3 to 36 months.
Estimated Costs at Completion and
Accrued Loss on Contracts:
Optex Texas reviews and reports on the
performance of its contracts and production orders against the respective
resource plans for such contracts/orders. These reviews are summarized in the
form of estimates at completion (“EAC”s) which include Optex Texas’s incurred
costs to date against the contract/order plus management's current estimates of
remaining amounts for direct labor, material, other direct costs and subcontract
support and indirect overhead costs based on the completion status and future
contractual requirements for each order. If an EAC indicates a potential overrun
(loss) against a fixed price contract/order, management generally seeks to
reduce costs and /or revise the program plan in a manner consistent with
customer objectives in order to eliminate or minimize any overrun and to secure
necessary customer agreement to proposed revisions.
If an EAC indicates a potential overrun
against budgeted resources for a fixed price contract/order, management first
attempts to implement lower cost solutions to still profitably meet the
requirements of the fixed price contract. If such solutions do not appear
practicable, management makes a determination whether to seek renegotiation of
contract or order requirements from the customer. If neither cost reduction nor
renegotiation appears probable, an accrual for the contract loss/overrun is
recorded against earnings and the loss is recognized in the first period the
loss is identified based on the most recent EAC of the particular contract or
product order.
Government Contracts:
Virtually all of our contracts are prime or subcontracted directly with the
Federal government and as such, are subject to Federal Acquisition Regulation
(FAR) Subpart 49.5, “Contract Termination Clauses” and more specifically
FAR clauses 52.249-2 “Termination for Convenience of the Government
(Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for
default”. The ramifications of these termination clauses are discussed
above in “Results of Operations”.
Recent
Accounting Pronouncements.
In June 2006, The FASB
issued Interpretation No. 48 “
Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109
”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “
Accounting for Income
Taxes
”
.
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of FIN 48 did not have a material impact on the
Company's consolidated financial position, results of operations, or cash
flows.
In
September 2006, the FASB issued FASB No. 157, “
Fair Value Measurements
”
which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. While FASB No. 157 does not apply to transactions
involving share-based payment covered by FASB No. 123, it establishes a
theoretical framework for analyzing fair value measurements that is absent from
FASB No. 123. We have relied on the theoretical framework established by FASB
No. 157 in connection with certain valuation measurements that were made in the
preparation of these financial statements. FASB No. 157 is effective for years
beginning after November 15, 2007. Subsequent to the Standard’s issuance, the
FASB issued an exposure draft that provides a one year deferral for
implementation of the Standard for non-financial assets and liabilities. The
Company is currently evaluating the impact FASB No. 157 will have on its
financial statements.
In
February 2007, Statement of Financial Accounting Standards No. 159, “
The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115
,” was issued. This standard allows a company to irrevocably elect
fair value as the initial and subsequent measurement attribute for certain
financial assets and financial liabilities on a contract-by-contract basis, with
changes in fair value recognized in earnings. The provisions of this standard
are effective as of the beginning of our fiscal year 2008, with early adoption
permitted. The Company is currently evaluating what effect the adoption of FASB
159 will have on its financial statements.
In March
2007, the Financial Accounting Standards Board ratified “EITF” Issue No. 06-10,
"Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements”. EITF 06-10 provides guidance for determining a liability
for the postretirement benefit obligation as well as recognition and measurement
of the associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after
December 15, 2007. The Company is currently evaluating the impact of
EITF 06-10 on its financial statements, but does not expect it to have a
material effect.
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
and
SFAS No. 160,
Accounting
and Reporting of Noncontrolling Interest in Consolidated Financial Statements,
an amendment of ARB No. 51
. These new standards will significantly
change the accounting for and reporting of business combinations and
non-controlling (minority) interests in consolidated financial statements.
Statement Nos. 141(R) and 160 are required to be adopted simultaneously and
are effective for the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company is currently
evaluating the impact of adopting SFAS Nos. 141(R) and SFAS 160 on its
financial statements.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110. SAB 110 permits
companies to continue to use the simplified method, under certain circumstances,
in estimating the expected term of “plain vanilla” options beyond December 31,
2007. SAB 110 updates guidance provided in SAB 107 that previously stated that
the Staff would not expect a company to use the simplified method for share
option grants after December 31, 2007.
In March
2008, FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 161,
"
Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133
”. SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 with early application encouraged. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year
ended September 30, 2009. The Company is currently evaluating the impact of
SFAS 161 on its financial statements but does not expect it to have a material
effect.
In May
2008, FASB issued SFAS No. 162, "
The Hierarchy of Generally Accepted
Accounting Principles
”. SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. SFAS 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The Company is currently evaluating the impact of SFAS
162 on its consolidated financial statements but does not expect it to have a
material effect.
In May
2008, FASB issued SFAS No. 163, "
Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No.
60
". SFAS 163 interprets Statement 60 and amends existing
accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of that
Statement. SFAS 163 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and all interim periods within
those fiscal years. As such, the Company is required to adopt these
provisions at the beginning of the fiscal year ended September 30,
2011. The Company is currently evaluating the impact of SFAS 163 on
its financial statements but does not expect it to have a material
effect.
In June
2008, FASB issued FASB Staff Position EITF 03-6-1,
“Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities”
. FSP EITF 03-6-1 clarifies that share-based payment
awards that entitle their holders to receive nonforfeitable dividends or
dividend equivalents before vesting should be considered participating
securities. As participating securities, we will be required to include these
instruments in the calculation of our basic earnings per share ("EPS"), and we
will need to calculate basic EPS using the "two-class method." Restricted stock
is currently included in our dilutive EPS calculation using the treasury stock
method. The two-class method of computing EPS is an earnings allocation formula
that determines EPS for each class of common stock and participating security
according to dividends declared (or accumulated) and participation rights in
undistributed earnings. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. As such, the Company is required to
adopt these provisions at the beginning of the fiscal year ending October 3,
2010. The Company does not expect adoption of FSP EITF 03-6-1 to have a
material effect on the Company’s financial statements.
In May
2009, “FASB issued SFAS No. 165, "
Subsequent Events
".
SFAS 165 establishes principles and requirements for the reporting of events or
transactions that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. SFAS 165 is effective
for financial statements issued for fiscal years and interim periods ending
after June 15, 2009. As such, the Company adopted these provisions at the
beginning of the interim period ended June 28, 2009. Adoption of SFAS 165
did not have a material effect on the Company’s financial
statements.
In June 2009, FASB issued SFAS No. 168,
"
The FASB Accounting
Standards Codification
TM
and the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement No.
162
". SFAS 168 replaces Statement 162 and to establish the FASB
Accounting Standards Codification
TM
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. SFAS 168 is effective for
financial statements issued for fiscal years and interim periods ending after
September 15, 2009. As such, the Company is required to adopt these provisions
at the beginning of the period ending September 27, 2009. The Company does
not expect adoption of SFAS 168 to have a material effect its financial
statements.
Cautionary
Factors That May Affect Future Results
This
Registration Statement on Form S-1 and other written reports and oral statements
made from time to time by the Company may contain so-called “forward-looking
statements,” all of which are subject to risks and uncertainties. You can
identify these forward-looking statements by their use of words such as
“expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words
of similar meaning. You can identify them by the fact that they do not relate
strictly to historical or current facts. These statements are likely to address
the Company’s growth strategy, financial results and product and development
programs. You must carefully consider any such statement and should understand
that many factors could cause actual results to differ from the Company’s
forward-looking statements. These factors include inaccurate assumptions and a
broad variety of other risks and uncertainties, including some that are known
and some that are not. No forward-looking statement can be guaranteed and actual
future results may vary materially.
The
Company does not assume the obligation to update any forward-looking statement.
You should carefully evaluate such statements in light of factors described in
the Company’s filings with the SEC, especially on Forms 10-K, 10-Q and 8-K. In
various filings the Company has identified important factors that could cause
actual results to differ from expected or historic results. 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.
BUSINESS
Background
Sustut
Exploration, Inc.
Sustut was a Delaware corporation
formed on April 11, 2006 to search for available properties in north central
British Columbia. In May 2006, Sustut entered into an agreement which was
negotiated at arms length with Richard Simpson to acquire a 100% interest in the
WILLOW claim. The claim is located in the Omineca Mining Division, NTS map sheet
94D/10E. The property is 4.5 km east of the Sustut River in British Columbia.
The property could have been acquired from Simpson by paying a total of $75,000
in two option payments with the last option payment being due on May 15, 2008,
however, Sustut did not make the required payments and did not acquire title to
those property rights.
The Sustut board of directors in
consultation with its consulting geologist assessed whether to proceed with
further exploration and determined that it was in the Company’s best interest to
let the WILLOW mineral claim expire. It was determined that there was no
existence of commercially exploitable mineral deposits in the WILLOW mineral
claim. The mineral claim which was to be Sustut’s primary business expired
on May 15, 2008 leaving Sustut with no operating business of which to
dispose.
Reorganization
On
March 30, 2009, a Reorganization occurred whereby the then existing shareholders
of Optex Delaware exchanged their shares of Optex Delaware common Stock with the
shares of common stock of the Company as follows: (i) the outstanding
85,000,000 shares of Optex Delaware Common Stock were exchanged for 113,333,282
shares of Company common stock, (ii) the outstanding 1,027 shares of Optex
Delaware Series A Preferred Stock were exchanged for 1,027 shares of Company
Series A Preferred Stock and (iii) the 8,131,667 shares of Optex Delaware common
stock purchased in the private placement were exchanged for 8,131,667 shares of
Company common stock. Optex Delaware has remained a wholly-owned
subsidiary of Company, and the Optex Delaware shareholders are now shareholders
of the Company. As a result of the Reorganization, Sileas
beneficially owns approximately 72.54% of the issued and outstanding common
stock of the Company and Arland owns 5.81% of the issued and outstanding common
stock of the Company. Furthermore, at the time of the Reorganization,
Andrey Oks resigned as the sole officer and director of the the
Company. Additionally, Stanley Hirschman, Ronald Richards and Merrick
Okamoto were appointed its Directors, and Stanley Hirschman, Danny Schoening and
Karen Hawkins were appointed as its President, COO and V.P. of
Finance/Controller, respectively.
Simultaneously
with the closing under the Reorganization Agreement, the Company accepted
subscriptions from accredited investors for a total 27.1 units (the "Units"),
for $45,000 per Unit, with each Unit consisting of 300,000 shares of common
stock of the Company and warrants to purchase 300,000 shares of common Stock for
$0.45 per share for a period of five years from the initial closing, which were
issued by the Company after the closing referenced above. Gross
proceeds to the Company were $1,219,750, and after deducting (i) a cash finder’s
fee of $139,555, (ii) non-cash consideration of indebtedness owed to an investor
of $146,250, and (iii) stock issuance costs of $59,416, the net proceeds were
$874,529. The finder also received five year warrants to purchase
2.39 Units, at an exercise price of $49,500 per unit.
Contracts
Each
contract with the Company’s customers has specific quantities of material that
need to be purchased, assembled, and finally shipped. Prior to bidding a
contract, the Company contacts potential sources of material and receives
qualified quotations for this material. In some cases, the entire volume
is given to a single supplier and in other cases, the volume might be split
between several suppliers. If a contract has a single source supplier and
that supplier fails to meet their obligations (e.g., quality, delivery), then
the Company would attempt to find an alternate supplier and bring this
information back to the final customer. Contractual deliverables would
then be re-negotiated (e.g.,specifications, delivery, price.).
Currently, approximately 28% of our total material requirements are single
sourced across 21 suppliers representing approximately 20% of our active
supplier base. Single sourced component requirements span across all of
our major product lines. Of these single sourced components, we have
material contracts (purchase orders) with firm pricing and delivery schedules in
place with each of the suppliers to supply parts in satisfaction of our current
contractual needs.
The Company is responsible for full
compliance with FAR. Upon award, the contract may identify certain
regulations that the Company needs to meet. For example, one contract
may be for a fixed quantity to be delivered all on a certain
date. Other contracts may be over a multi-year period and for a range
of quantities. The FAR will identify the specific regulations that
the Company must follow based on the type of contract awarded. A
complete list of these regulations can be found at:
http://www.arnet.gov/far/
.
The material terms of our four largest
contracts are as follows:
|
|
|
Contract
Quantities
|
|
|
|
|
|
|
|
|
Customer
|
Customer
PO/Contract
|
Contract
Type
|
Min
Qty
|
Max
Qty
|
|
|
Total
Award Value*
|
|
|
Progress
Billable Y/N (1)
|
Order
Period Expiration
|
Delivery
Period
|
General
Dynamics Land Systems
|
PCL860000
thru PCL860005 (Multiple Prime Contracts)
|
1
year blanket order with Fixed Qty Contract releases which include ability
to increase or decrease Qty on each release up to 20% from PO release
quantity.
|
N/A
|
N/A
|
|
$
|
14,813,100
|
|
|
Yes
|
Expired
|
Dec
2007 - Jan 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TACOM
- ROCK ISLAND
|
W52H09-05-D-0260
|
5
Year Firm Fixed Price IDIQ
|
138
|
2,100
|
|
$
|
7,244,396
|
|
|
Yes
|
30-Jun-2010
|
Oct
2007-Jan 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TACOM
- ROCK ISLAND
|
W52H09-05-D-0248
|
5
Year Firm Fixed Price IDIQ
|
138
|
1,250
|
|
$
|
5,006,119
|
|
|
Yes
|
30-Jun-2010
|
Apr
2007- Jul 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TACOM
- ROCK ISLAND
|
W52H09-09-D-0128
|
3
Yr IDIQ - Evaluated Pricing. Restricted Procurement between
Optex Systems & Miller Holzwarth
|
250
each supplier
|
250
each supplier
|
|
$
|
118,250
|
(2)
|
|
Yes
|
40908
|
Initial
award deliverable Aug - Sept 2009. Additional awards not to
exceed aggregate 2000 units per month total
units.
|
(1) Payment
terms on shipments are all Net 30 days.
(2)
Only first delivery order awarded. Maximum order value potential of
up to $22 million with expected award value of $7.5 million.
Organizational
History
On
October 14, 2008, in a transaction that was consummated via public auction,
Optex Delaware (Successor) purchased all of the assets of Optex Texas
(Predecessor) in exchange for $15 million of IRSN debt and the assumption of
approximately $3.8 million of certain liabilities of Optex
Texas. Optex Delaware was formed by the Longview Fund, LP and Alpha
Capital Antstalt, former secured creditors of IRSN, to consummate the
transaction with the Company, and subsequently, on February 20, 2009, Longview
Fund conveyed its ownership interest in the Company to Sileas, an entity owned
by three of the Company’s officers (one of whom is also one of the Company’s
three directors). On March 30, 2009, a Reorganization occurred
whereby Optex Delaware became a wholly-owned subsidiary of the
Company.
Products
The
Company’s products are installed on a majority of types of U.S. military land
vehicles, such as the Abrams and Bradley fighting vehicles, light armored and
advanced security vehicles and have been selected for installation on the Future
Combat Systems (FCS) Stryker vehicle. The Company also manufactures and delivers
numerous periscope configurations, rifle and surveillance sights and night
vision optical assemblies. The Company delivers its products both directly to
the military services and to prime contractors.
The
Company delivers high volume products, under multi-year contracts, to large
defense contractors and government customers. The Company has a reputation for
quality and credibility with its customers as a strategic supplier. The
successful completion of the separation from IRSN has enhanced the Company’s
ability to serve its existing customers and will set the stage for it to become
a center of manufacturing excellence. The Company also anticipates the
opportunity to integrate some of its night vision and optical sights products
into commercial applications.
Specific
product lines include:
|
·
|
Electronic
sighting systems
|
|
·
|
Mechanical
sighting systems
|
|
·
|
Laser
protected glass periscopes
|
|
·
|
Laser
protected plastic periscopes
|
|
·
|
Non-laser
protected plastic periscopes
|
|
·
|
Howitzer
sighting systems
|
|
·
|
Replacement
optics (e.g. filters, mirrors)
|
Location and
Facility
The
Company is located in Richardson, TX in a 49,000 square foot facility and
currently has 107 full time employees. The Company operates with a single shift,
and capacity could be expanded by adding a second shift. The
Company’s proprietary processes and methodologies provide barriers to entry by
other competing suppliers. In many cases, the Company is the sole source
provider or one of only two providers of a product. It has
capabilities which include machining, bonding, painting, tracking, engraving and
assembly and can perform both optical and environmental testing
in-house. We lease our facility, and the lease currently expires on
February 28, 2010. We are presently in negotiations with the landlord
regarding a lease extension, and the Company is also exploring the possibility
of moving to another location. Office space, such as that leased by
the Company, is readily available in the Company’s general geographic
area.
Prior Operational/Financial
Challenges; Recovery; and Future Growth Potential
While
Optex Texas (Predecessor) was a wholly-owned subsidiary of IRSN, IRSN faced
certain business challenges and utilized the cash flow from Optex Texas to meet
its own funding needs. This left Optex Texas with limited working
capital to satisfy its own operating needs.
As of the year ended September 28,
2008 Optex Texas (Predecessor) reported $4.3 million of liabilities attributable
to expenses incurred or shared with IRSN and pushed down to Optex Texas
(Predecessor) through an intercompany payable account “Due to Parent”. These
costs were for expenses incurred by IRSN on behalf of Optex Texas, including
legal, audit, and consulting fees; insurance costs; and significant amounts of
IRSN corporate overhead allocated to Optex Texas. The outstanding “Due to
Parent” balance was not acquired by the company as part of the October 14, 2008
transaction. Therefore, this balance will have no impact on future operating
results or liquidity. We anticipate incurring similar expenses for fiscal year
2009 as follows:
|
|
$
|
250,000
|
|
Legal
Fees
|
|
|
60,000
|
|
Consulting
Fees
|
|
|
60,000
|
|
|
|
|
70,000
|
|
Total
|
|
$
|
440,000
|
|
Since the
buyout, the business outlook for the Company has changed
dramatically. Management has strengthened the Company’s balance sheet
and has increased operational efficiencies and productivity, as demonstrated by
the significant $1.45 million reduction in operating loss to $(15,193) versus
$(1,468,192) for the total for the periods September 29, 2008 through October
14, 2008 (Predecessor) and October 15, 2008 through June 28, 2009
(Successor) and the nine months ended June 28, 2008 (Predecessor),
respectively. Management expects to achieve additional improvement in
operations over time.
Virtually
all of our contracts are prime or subcontracted directly with the Federal
government and are subject to FAR Subpart 49.5, “Contract Termination
Clauses” and more specifically FAR 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 are generally “flowed down” to us as
subcontractors on other military business. It has been our experience that
the termination for convenience is rarely invoked, except where it has been
mutually beneficial for both parties. We are currently not aware of any
pending terminations for convenience or default on our existing
contracts.
In the event a termination for
convenience were to occur, these FAR 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 replacement supplies from another supplier. 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 FAR clause 52.249-8. In addition, the U.S.
government may require us to transfer title and deliver to it any completed
supplies, partially completed supplies and materials, parts, tools, dies, jigs,
fixtures, plans, drawings, information, and contract rights that we specifically
produced or acquired for the terminated portion of this contract. The
U.S. government is required to pay contract price for completed supplies
delivered and accepted, and the parties are required to negotiate an agreed upon
amount of payment for manufacturing materials delivered and accepted and for the
protection and preservation of the property. Failure to agree on an amount for
manufacturing materials is subject to the FAR Disputes clause
52.233-1.
In some cases, we may receive orders
subject to subsequent price negotiation on contracts exceeding the $650,000
federal government simplified acquisition threshold. These “undefinitized”
contracts are considered firm contracts, but as Cost Accounting Standards Board
covered contracts, they are subject to the Truth in Negotiations Act disclosure
requirements and downward-only price negotiation. As of September 28, 2008
and September 30, 2007 approximately $4.0 million and $10.0 million of booked
orders fell under this criteria, respectively. Our experience has been
that the historically negotiated price differentials have been immaterial and we
do not anticipate any significant downward adjustments on these booked
orders.
We are
currently bidding on several substantial government contracts to expand sales
and production beyond the current production and backlog. We
are also exploring possibilities to adapt some of our products for
commercial use in those markets that demonstrate potential for solid revenue
growth.
Market Opportunity – U.S.
Military
Our
products are currently marketed to the military and related government
markets. Since 1998, annual U.S. military spending has increased over
225% to over $600 billion. The trend of significant
growth in government spending on the military and defense is very positive for
the Company and others in the defense industry sector. The data
suggests that the market continues to be robust and the Company believes the
markets for new and replacement parts, such as those manufactured by the
Company, are significant.
Source: www.usgovernmentspending.com
The
following factors are important to the U.S. military:
|
·
|
Reliability
– failure can cost lives
|
|
·
|
Ability
to deliver on schedule
|
|
·
|
Armed
forces need to be able to see to
perform
|
|
·
|
Mission
critical products.
|
The
Company focuses on delivering products that satisfy these factors and believes
it is well positioned to continue to service U.S. military needs.
Market Opportunity –
Commercial
The
Company’s products are currently sold exclusively to military and related
government markets. We believe there may be opportunities to commercialize
various products we presently manufacture for other markets. Our
initial focus will be directed in three product areas.
|
·
|
Big
Eye Binoculars – While the military application we produce is based on
mature military designs, the Company owns all castings, tooling and glass
technology. These large fixed mount binoculars could be sold to
Cruise Ships, Personal Yachts and
Cities/Municipalities.
|
|
·
|
Night
Vision Goggles – the Company presently manufactures the Optical System for
the NL-61 Night Vision Goggles for the Ministry of Defense of Israel. This
technology is based on the IR Squared design and could be implemented for
commercial applications.
|
|
·
|
Infrared
Imaging Equipment – The Company manufactures and assembles Infrared
Imaging Equipment for Textron and components for Raytheon’s Thermal
Imaging M36 Mount product. This equipment and technology has potential to
be assembled for border patrol, police and security
agencies.
|
Customer
Base
The
Company serves customers in three primary categories: as prime contractor
(TACOM, U.S. Army, Navy and Marine Corps), as subcontractor (General Dynamics,
BAE, Raytheon and Northrop) and also as a supplier to foreign governments
(Israel, Australia and NAMSA). For reference, TACOM is
Tank-automotive and Armaments Command, and NAMSA is the NATO Maintenance and
Supply Agency, which is the main logistics agency of NATO.Although we do serve
all three of these categories, at present, approximately 90% of the gross
revenue from our business is derived from two customers, GDLS and TACOM, with
which we have approximately 50 discrete contracts which cover supply of
vehicles, product lines and spare parts. Given the size of GDLS and
TACOM as well as the fact that the contracts are not interdependent, we are of
the opinion that this provides us with a well diversified customer
pool. This broad base enables the Company to mitigate its risk in
this economic environment by not relying on a sole or few sources of revenue as
well as providing a broad base from which to build its future
business.
Marketing
Plan
The Company has used two models to help
develop its Marketing Plan. First, Michael Porter’s Five Force
Model.
Potential
Entrants – Low. In order to enter this market companies have a large
barrier to entry. The first hurdle is that an entrant would need to
prove the existence of a government approved accounting systems for larger
contracts. Second, the entrant would need to develop the processes
required to produce the product. Third, the entrant would then need
to produce product and then submit successful test requirements (many of which
need government consultation to complete). Finally, in many cases the
customer has an immediate need and therefore cannot wait for this qualification
cycle and therefore must issue the contracts to existing suppliers.
Buyers
– Medium. In most cases the buyers have two fairly strong
suppliers. It is in their best interest to keep at least two, and
therefore in some cases the contracts are split between suppliers. In
the case of larger contracts approximately, the customer can potentially request
an open book policy on costs and expect a reasonable margin has been
applied.
Substitutes
– Low. The Company has both new vehicle contracts and replacement
part contracts for the exact same product. The US Government has
declared that the Abrams/Bradley base vehicles will be the ground vehicle of
choice out through 2040. The Bradley vehicle has been in service for
28 years, the Abrams for 27 years. Therefore it appears that the systems
are capable of a life of approximately 30 years. In February 2008,
the Army signed a 5 year multi-year contract for the delivery of improved Abrams
and Bradleys. The contract is for up to 435 tanks and 540 Bradley
vehicles. These are the only production tanks currently being procured by
the government. This in conjunction with the 30 year life span supports
their continued use through 2040. There are no replacement systems
being proposed or funded at this time. Specifically on the Abrams, it is
the principal main battle tank of the United States Army and Marine Corps, and
the armies of Egypt, Kuwait, Saudi Arabia, and since 2007, Australia. The
new contract terms allow efficiencies within the supply chain and a very long
return on investment on new vehicle proposals.
Suppliers
– Low to Medium. The suppliers of standard processes (casting, machining,
plating, etc.) have very little power. Given the current state of the economy,
they need to be very competitive to gain and /or maintain contracts. Those
suppliers of products which use Top Secret Clearance processes are slightly
better off; however, there continues to be multiple avenues of supply and
therefore moderate power.
Industry
Competitors – Low. The current suppliers have been partitioned according to
their processes and the products. We and Miller-Holzwarth tend to compete for
the plastic periscope products whereas we and Seiler have competed on the higher
level products. In the last 12-18 months, we have begun to challenge Seiler in
areas where they have long held the dominant role. For example, while the
existing Howitzer contracts are at low margins, the new bids will be at a much
higher margin now that we have proven we can produce the
product.
The
second model is a two by two matrix for Products and Customers.
This model outlines three basic
approaches for us:
|
1)
|
Take
existing products into the applications of new
customers.
|
|
2)
|
Take
new products into our existing
customers.
|
|
3)
|
Expand
the portfolio by developing new products for new
customers.
|
Operations
Plan
Our Operations Plan can be broken down
into three distinct areas, Material Management, Manufacturing Space Planning and
Efficient Scales of Economy.
Materials
Management
–
The largest portion of our costs are
materials. We have completed the following activities in order to
demonstrate continuous improvement:
|
-
|
Successful
Completion of ISO9001:2000
Certification
|
|
-
|
Weekly
Cycle Counts on Inventory Items
|
|
-
|
Weekly
Material Review Board Meeting on non-moving piece
parts
|
|
-
|
Kanban
kitting on products with consistent ship weekly ship
quantities
|
|
-
|
Daily
review of Yields and Product
Velocity
|
|
-
|
Bill
of Material Reviews prior to Work Order
Release
|
Future
continuous improvement opportunities include installation and training of Shop
Floor Control module within the ERP system and organizational efficiencies of
common procurement techniques among buyers.
Manufacturing
Space Planning
–
We currently lease approximately 50,000
square feet of manufacturing space. Given the ample building
opportunities along with competitive lease rates, the objective is to maintain
building and building related costs consistent on a percent to sales with prior
historical ratios.
Efficient
Scales of Economy
–
Consistent with the space planning, we
will drive economies of scale to reduce support costs on a percentage of sales
perspective. These cost reductions can then be either brought
directly to the bottom line or used for business investment.
This process is driven by the use of
six sigma techniques and process standardization. Initial activities
in this area have been the success of 5S projects in several production areas
which has lead to improved output and customer approval on the aesthetics of the
work environment. In addition to the 5S projects, we have used the
DMAIC (Define, Measure, Analyze, Improve, Control) Problem Solving technique to
identify bottlenecks within the process flow and improve product
yields. These successful techniques can then be duplicated across the
production floor and drive operational improvements.
Intellectual
Property
We
utilize several highly specialized and unique processes in the manufacture of
our products. While we believe that these trade secrets have value,
it is probable that our future success will depend primarily on the innovation,
technical expertise, manufacturing and marketing abilities of our personnel. We
cannot assure you that we will be able to maintain the confidentiality of our
trade secrets or that our non-disclosure agreements will provide meaningful
protection of our trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or other
disclosure. The confidentiality agreements that are designed to
protect our trade secrets could be breached, and we might not have adequate
remedies for the breach. Additionally, our trade secrets and
proprietary know-how might otherwise become known or be independently discovered
by others. We do not possess any patents.
Our
competitors, many of which have substantially greater resources, may have
applied for or obtained, or may in the future apply for and obtain, patents that
will prevent, limit or interfere with our ability to make and sell some of our
products. Although we believe that our products do not infringe on the patents
or other proprietary rights of third parties, we cannot assure you that third
parties will not assert infringement claims against us or that such claims will
not be successful.
Competition
The
markets for our products are competitive. We compete primarily on the basis of
our ability to design and engineer products to meet performance specifications
set by our customers. Our customers include the military and government end
users as well as prime contractors that purchase component parts or
subassemblies, which they incorporate into their end
products. Product pricing, quality, customer support, experience,
reputation and financial stability are also important competitive
factors.
There are
a limited number of competitors in each of the markets for the various types of
products that we design, manufacture and sell. At this time we consider our
primary competitors to be Seiler Instruments, Miller-Holzwarth, Kent Periscopes,
and EO System Co.
Our
competitors are often well entrenched, particularly in the defense markets. Some
of these competitors have substantially greater resources than we do. While we
believe that the quality of our technologies and product offerings provides us
with a competitive advantage over certain manufacturers, some of our competitors
have significantly more financial and other resources than we do to spend on the
research and development of their technologies and for funding the construction
and operation of commercial scale plants.
We expect
our competitors to continue to improve the design and performance of their
products. We cannot assure investors that our competitors will not develop
enhancements to, or future generations of, competitive products that will offer
superior price or performance features, or that new technology or processes will
not emerge that render our products less competitive or obsolete. Increased
competitive pressure could lead to lower prices for our products, thereby
adversely affecting our business, financial condition and results of operations.
Also, competitive pressures may force us to implement new technologies at a
substantial cost, and we may not be able to successfully develop or expend the
financial resources necessary to acquire new technology. We cannot assure you
that we will be able to compete successfully in the future.
External Growth
Potential/Roll-Up Opportunities
We
operate in a business environment which is highly fragmented with numerous
private companies, many of which were established more than 20 years ago. Some
of these companies were founded by family members 2-3 generations before the
present family operators. We believe there are opportunities to pursue
mergers of strategic competitors since we are a public entity. We are not aware
of any previous attempts to consolidate companies with our defense manufacturing
expertise.
The
typical company we compete with has 50-100 employees and annual revenue of
$20-$50 million dollars. Most of these private companies have never had the
opportunity to enjoy the benefits of consolidation and the resulting economies
of scale which being a public company can provide.
We plan
to engage our competition on a selective basis, and explore all opportunities to
grow our operations through mergers and/or acquisitions. We have no
acquisition agreements pending at this time and are not currently in discussions
or negotiations with any third parties.
Employees
The Company has 107
full time equivalent
employees. The Company uses a small temporary work force to handle peak
loads. The full time employee count is 101 and the temporary employee
head count is 6. To the best of its knowledge, the Company is
compliant with local prevailing wage, contractor licensing and insurance
regulations, and has good relations with its employees.
Changes
in Registrant’s Certifying Accountant
On March
30, 2009, the Company notified Gately & Associates, LLC, the independent
accountant engaged as the principal accountant to audit the financial statements
of the Company, that it was dismissed as the Company’s independent registered
accountant, effective immediately.
On March
30, 2009, the Company engaged Rotenberg & Co, LLP, as its independent
registered accounting firm. The decision to change accountants was recommended
and approved by Company’s Board of Directors.
The audit
report of Gately & Associates, LLC on the Company’s financial statements for
the fiscal years ending December 31, 2007 and 2008; the most recent two periods
for which said auditor has issued audit reports, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. The auditor was
not required or engaged to audit the Company’s internal control over financial
reporting.
During
the past two fiscal years and during the subsequent interim period preceding the
date of dismissal, there were no disagreements with the auditor on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
the former accountants, would have caused it to make reference to the subject
matter of the disagreements in connection with its report, and there were
no reportable events as described in Item 304(a)(1)(iv) of Regulation
S-B.
The
Company has provided a copy of this disclosure to Gately & Associates, LLC
and has requested that it furnish the Company with a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the statements
made by the Company, and, if not, stating the respects in which it does not
agree. A copy of the firm’s letter to the Commission is filed as Exhibit 16 to
the Form 8-K we filed with the Commission on April 3, 2009.
During
the two most recent fiscal years prior to their engagement, or any subsequent
interim period prior to engaging Rotenberg & Co. LLP, neither the Company
nor anyone acting on the Company’s behalf consulted with Rotenberg & Co. LLP
regarding (i) the application of accounting principles to a specific completed
or contemplated transaction, or (ii) the type of audit opinion that might be
rendered on the Company’s financial statements where either written or oral
advice was provided that was an important factor considered by the Company in
reaching a decision as to the accounting, auditing, or financial reporting
issue, or (iii) any matter that was the subject of a disagreement with the
Company’s former accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountant,
would have caused it to make reference to the subject matter of the
disagreements in connection with its audit report.
Forward-Looking
Statements
This
Registration Statement on Form S-1 contains forward-looking statements. To the
extent that any statements made in this Registration Statement on Form S-1
contain information that is not historical, these statements are essentially
forward-looking. Forward-looking statements can be identified by the use of
words such as “expects,” “plans,” “will,” “may,” “anticipates,” believes,”
“should,” “intends,” “estimates,” and other words of similar meaning. These
statements are subject to risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties are outlined in “Risk Factors” and include, without limitation,
the Company’s ability to raise additional capital to finance the Company’s
activities; the effectiveness, profitability, and the marketability of its
products; legal and regulatory risks associated with the Reorganization; the
future trading of the common stock of the Company; the ability of the Company to
operate as a public company; the period of time for which the proceeds of the
Private Placement will enable the Company to fund its operations; the Company’s
ability to protect its proprietary information; general economic and business
conditions; the volatility of the Company’s operating results and financial
condition; the Company’s ability to attract or retain qualified senior
management personnel and research and development staff.
Information
regarding market and industry statistics contained in this Registration
Statement is included based on information available to the Company that it
believes is accurate. It is generally based on industry and other publications
that are not produced for purposes of securities offerings or economic analysis.
Forecasts and other forward-looking information obtained from these sources are
subject to the same qualifications and the additional uncertainties accompanying
any estimates of future market size, revenue and market acceptance of products
and services. The Company does not undertake any obligation to publicly update
any forward-looking statements. As a result, investors should not place undue
reliance on these forward-looking statements.
LEGAL
PROCEEDINGS
The Company is not a party to any
pending material legal proceeding. To the knowledge of management, no federal,
state or local governmental agency is presently contemplating any proceeding
against the Company. To the knowledge of management, no director, executive
officer or affiliate of the Company, or any owner of record or beneficially of
more than 5% of the Company's common stock is a party adverse to the Company or
has a material interest adverse to the Company in any
proceeding.
MANAGEMENT
Our
board of directors directs the management of the business and affairs of our
company as provided in our certificate of incorporation, our by-laws and the
General Corporation Law of Delaware. Members of our board of directors keep
informed about our business through discussions with senior management, by
reviewing analyses and reports sent to them, and by participating in board and
committee meetings.
Directors
and Executive Officers
The
following table sets forth information regarding the members of our board of
directors and our executive officers and other significant employees. All of our
officers and directors were appointed on March 30, 2009, the closing date
of the Reorganization.
The
following table sets forth certain information with respect to the directors and
executive officers of the Company:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Stanley
A. Hirschman
|
|
62
|
|
President,
Secretary, Treasurer & Director
|
|
|
|
|
|
Merrick
D. Okamoto
|
|
48
|
|
Director
|
|
|
|
|
|
Ronald
F. Richards
|
|
43
|
|
Chairman
of the Board
|
|
|
|
|
|
Danny
Schoening
|
|
44
|
|
Chief
Operating Officer
|
|
|
|
|
|
Karen
L. Hawkins
|
|
44
|
|
Vice
President of Finance and
Controller
|
Stanley A.
Hirschman
. Mr. Hirschman has served the Company as a Director since
2008. Stan Hirschman is President of CPointe Associates, Inc., a
Plano, Texas management consulting firm. He is a President of Sileas and a
director of South Texas Oil, Datascension and former chairman of Mustang
Software, Inc. While at Mustang Software, Mr. Hirschman took a hands-on
role in the planning and execution of the strategic initiative to increase
stockholder value resulting in the successful acquisition of the company by
Quintus Corporation. Prior to establishing CPointe Associates, he was Vice
President Operations, Software Etc., Inc., a 396 retail store software chain,
from 1989 until 1996. He has also held executive positions with T.J. Maxx,
Gap Stores and Banana Republic. Mr. Hirschman is a member of the National
Association of Corporate Directors, the KMPG Audit Committee Institute and is a
graduate of the Harvard Business School Audit Committees in the New Era of
Governance symposium. He is active in community affairs and serves on the
Advisory Board of the Salvation Army Adult Rehabilitation Centers.
Merrick D.
Okamoto
. Mr. Okamoto has served the Company as a Director since
October 2008. In 2001, Mr. Okamoto co-founded Viking Asset Management, LLC and
is the President and a Managing Member. Viking Asset manages the Longview
Fund, LP and Longview Fund International, Ltd. Limited, partners in Viking’s
family of funds are comprised of institutions, private banks, family offices and
high net worth individuals from around the world. Mr. Okamoto has completed
financings for hundreds of public and private companies across a broad array of
industries and sectors. In 1998, Mr. Okamoto co-founded and was the President of
TradePortal.com, Inc. TradePortal.com, Inc. is a software development company
and it’s wholly owned subsidiary, TradePortal Securities, Inc., a direct access
execution brokerage firm. Mr. Okamoto was instrumental in developing the
proprietary Trade Matrix™ software platform. In 2000, TradePortal.com, Inc. sold
a minority stake to Thomson Reuters (TRI:NYSE), a US $12 billion revenue
company. In 1995, he founded First Stage Capital, Inc. which specializes in
investment banking and consulting to public and private companies. From 1983 to
1994, he was employed in the securities industry with Shearson Lehman
Brothers, Prudential Securities and Paine Webber. Mr. Okamoto is widely
recognized as an advanced trader specializing in short-term trading and has more
than 25 years of extensive experience in technical market analysis techniques
and has been a frequent speaker at national trading venues. From 1987 to 1990,
he created and hosted the television program, The Income Report in Los Angeles .
He has also appeared on CNN and The MacNeil-Lehrer Report.
Ronald F.
Richards
. Mr. Richards has been a director of the Company
since October 2008. Since January 2009, Mr. Richards has served the
Company as its Chairman of the Board. Mr. Richards is the founder and
Managing Director of Gray Wolf Partners, LLC, a strategic and financial advisory
firm. From February 2007 to October 2008, he served as a Managing Director of
Viking Asset Management, LLC where his responsibilities included: (i) sourcing,
conducting due diligence, and structuring potential investment opportunities and
(ii) working with portfolio companies to enhance shareholder value. He
previously served as Chief Financial Officer and Senior Vice President, Business
Development of Biopure Corporation, a publicly traded biotechnology company
developing oxygen therapeutics and as a Managing Director, Corporate Finance of
Wells Fargo Van Kasper. Mr. Richards has over 20 years of experience working
with public and private companies in the areas of investment banking, corporate
finance, law and accounting. He has structured and executed numerous public
offerings and private placements raising a total of more than $660 million. He
also co-authored
PIPES: A
CEO's Guide to Successful Private Placements in Public Equities.
Mr.
Richards holds JD, MBA and BA degrees from UCLA. He is a member of the State Bar
of California and a retired Certified Public Accountant.
Danny
Schoening
. Mr. Schoening joined Optex Texas in January 2008 and
currently serves the Company as its Chief Operating Officer. He has been
instrumental in establishing the systems and infrastructure required to continue
Optex System’s rapid growth. This activity was rewarded with Optex
System’s recent ISO9001:2000 Certification. From February 2004 to January
2008, Danny was the Vice President of Operations for The Finisar Corporation AOC
Division for 4 years where he led a team of up to 200 employees to produce
vertical cavity lasers for the data communications industry at production rates
of hundreds of thousands of units per week. Prior to Finisar, Danny was
the Director of Operations for multiple divisions of Honeywell
International. Serving the Automotive, Medical, Aerospace, and Consumer
Commercial Markets. During this 17 year period, Danny was recognized with
Honeywell’s Lund Award, their highest award for developing employee resources.
Danny has a broad experience level in the following technologies: Mechanical
Assembly Processes, Micro-Electronic Assembly Processes, Laser Manufacturing,
Plastic Molding, Metal Machining, Plating, Thick Film Printing, Surface Mount
Technology, Hall Effect Technology and MEMS based Pressure Devices. Danny
received a Bachelors of Science in Manufacturing Engineering Technology from the
University of Nebraska, an MBA from Southern Methodist University, and holds
three United States Patents.
Karen
L.
Hawkins
. Ms.
Hawkins serves the Company as its Vice President, Finance and
Controller. She began her employment with Optex Texas in April ,
2007. Ms. Hawkins is a Certified Public Accountant since 1992 with over 22
years experience in Financial Accounting and Management, primarily focused in
the Defense and Transportation Industries. She has a strong background in both
Financial & Cost Accounting, with extensive Government Pricing, Financial
Analysis, and Internal Auditing experience. Her past history also includes
Program Management, Materials Management and Business Development. She
brings over 14 years direct experience in Government Contracting with a strong
knowledge of Cost Accounting Standards Board (CAS) and Federal Acquisition
Regulation (FAR) . Her previous employment includes General Dynamics – Ordinance
and Tactical Division, Garland (formerly known as Intercontinental
Manufacturing) for over 13 years from November, 1994 through March , 2007.
During her tenure there she served in the roles of Controller (Accounting &
IT), Program Manager over a $250M 3 year Army Indefinite Delivery/Indefinite
Quantity (IDIQ) type contract, as well as Materials Manager with oversight of
Purchasing, Production Control & Warehousing functions. Prior to her
employment at General Dynamics, Ms. Hawkins served in various finance and
accounting positions at Luminator, a Mark IV Industries Co, and Johnson
Controls, Battery Division - Garland. Karen received her Bachelors of
Business Administration in Accounting from Stephen F. Austin State University in
Texas in 1986.
Family
Relationships
There are
no family relationships among the officers and directors.
Our
Directors’ Terms and Meetings of Our Board of Directors
Each director who is elected at an
annual meeting of shareholders, and each director who is elected in the interim
to fill a vacancy or a newly created directorship, shall hold office until the
next annual meeting of shareholders and until his successor has been elected and
qualified. Sustut’s board of directors did not hold any meetings
during the fiscal year ended December 31, 2008. Optex’s board of directors
held 5
meetings
during
the
nine
months
ended
June 28, 2009.
Corporate
Governance
Our board of directors believes that
sound governance practices and policies provide an important framework to assist
them in fulfilling their duty to stockholders. As we grow, our board of
directors will work to adopt and implement many “best practices” in the area of
corporate governance, including separate committees for the areas of audit and
compensation, careful annual review of the independence of our Audit and
Compensation Committee members, maintenance of a majority of independent
directors, and written expectations of management and directors, among other
things.
Code
of Business Conduct and Ethics
Our board of directors has adopted a
Financial Code of Ethics which has been distributed to all directors, and
executive officers, and will be distributed to employees and will be given to
new employees at the time of hire. The Financial Code of Ethics contains a
number of provisions that apply principally to our CEO, Chief Financial Officer
and other key accounting and financial personnel. A copy of our Code of Business
Conduct and Ethics can be found under the “Investor Information” section of our
website at www.optexsys.com. We intend to disclose any amendments or waivers of
our Code on our website at www.optexsys.com.
Communications
with the Board of Directors
Stockholders and other parties who are
interested in communicating with members of our board of directors, either
individually or as a group may do so by writing to Ronald F. Richards, Chairman,
1420 Presidential Drive, Richardson, TX 75081-2439. Mr. Richards will
review all correspondence and forward to the appropriate members of the board of
directors copies of all correspondence that, in the opinion of Mr. Richards,
deals with the functions of the board of directors or its committees or that he
otherwise determines requires their attention. Concerns relating to accounting,
internal controls or auditing matters should be immediately brought to the
attention of our Audit Committee and will be handled in accordance with
procedures established by that committee.
Director
Independence
Our board of directors has determined
that one of our directors, Ronald Richards, would meet the independence
requirements of the American Stock Exchange if such standards applied to the
Company. Mr. Hirschman, is the majority owner of Sileas, which is our
major common shareholder, and Merrick Okamoto is the President and a Managing
Member of Viking Asset Management, which is the investment advisor to the
Longview Fund.
Board
Committees
Audit
Committee
. The Company intends to establish an audit committee of the
board of directors, which will consist of to-be-nominated independent directors,
which will be selected based upon a search to be conducted at the time it is
determined to implement the audit committee. The audit committee’s duties would
be to recommend to the Company’s board of directors the engagement of an
independent registered public accounting firm to audit the Company’s financial
statements and to review the Company’s accounting and auditing principles. The
audit committee would review the scope, timing and fees for the annual audit and
the results of audit examinations performed by the internal auditors and
independent registered public accounting firm, including their recommendations
to improve the system of accounting and internal controls. The audit committee
would at all times be composed exclusively of directors who are, in the opinion
of the Company’s board of directors, free from any relationship which would
interfere with the exercise of independent judgment as a committee member and
who possess an understanding of financial statements and generally accepted
accounting principles.
Mr.
Richards is the board of directors’ financial expert to be considered upon the
formation of the audit committee.
Compensation
Committee
. The Company intends to establish a compensation committee of
the Board of Directors. The compensation committee would review and approve the
Company’s salary and benefits policies, including compensation of executive
officers.
We have no nominating
committee and do not plan to establish one.
– Given the relatively
small size of our board of directors and the desire to involve the entire board
of directors in nominating decisions, we have elected not to have a separate
nominating committee, and the entire board of directors currently serves that
function. With respect to director nominees, our board of directors will
consider nominees recommended by stockholders that are submitted in accordance
with our By-Laws. The process for receiving and evaluating director nominations
from stockholders is described below. We do not have any specific minimum
qualifications that our board believes must be met by a board recommended
nominee for a position on our board of directors or any specific qualities or
skills that our board believes are necessary for one or more of our directors to
possess. We also do not have a specific process for identifying and evaluating
nominees for director, including nominees recommended by security holders. The
board has not paid fees to any third party to identify or evaluate potential
board nominees.
Board
nominations
Stockholders
wishing to bring a nomination for a director candidate before a stockholders
meeting must give written notice to our Corporate Secretary, either by personal
delivery or by United States mail, postage prepaid. The stockholder’s notice
must be received by the Corporate Secretary not later than (a) with respect to
an Annual Meeting of Stockholders, 90 days prior to the anniversary date of the
immediately preceding annual meeting, and (b) with respect to a special meeting
of stockholders for the election of directors, the close of business on the
tenth day following the date on which notice of the meeting is first given to
stockholders. The stockholder’s notice must set forth all information relating
to each person whom the stockholder proposes to nominate that is required to be
disclosed under applicable rules and regulations of the SEC, including the
written consent of the person proposed to be nominated to being named in the
proxy statement as a nominee and to serving as a director if elected. The
stockholder’s notice must also set forth as to the stockholder making the
nomination (i) the name and address of the stockholder, (ii) the number of
shares held by the stockholder, (iii) a representation that the stockholder is a
holder of record of stock of the Company, entitled to vote at the meeting and
intends to appear in person or by proxy at the meeting to nominate the person
named in the notice, and (iv) a description of all arrangements or
understandings between the stockholder and each nominee.
Director
Compensation
The
Company has paid its directors the following separate compensation in
respect of their services on the board since January 1, 2009 - June
28, 2009: Stanley Hirschman - $17,500 and Ronald Richards -
$70,000.
Directors’
and Officers’ Liability Insurance
We
currently have directors’ and officers’ liability insurance insuring our
directors and officers against liability for acts or omissions in their
capacities as directors or officers, subject to certain
exclusions. The insurance also insures us against losses which we may
incur in indemnifying our officers and directors. In addition, in the
near future, we will enter into indemnification agreements with key officers and
directors and such persons shall also have indemnification rights under
applicable laws, and our certificate of incorporation and
bylaws.
EXECUTIVE
COMPENSATION
Executive
Compensation
Summary
Compensation Table
The
following table sets forth, for the years indicated, all compensation paid,
distributed or accrued for services, including salary and bonus amounts,
rendered in all capacities by the Company’s chief executive officer, chief
financial officer and all other executive officers who received or are entitled
to receive remuneration in excess of $100,000 during the stated periods. These
officers are referred to herein as the “named executive officers.” Except as
provided below, none of our executive officers received annual compensation in
excess of $100,000 during the last two fiscal years.
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($)
(2)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Danny
Schoening
|
|
|
2008
|
(1)*
|
|
$
|
122,646
|
|
|
$
|
10,300
|
|
|
$
|
7,500
|
|
|
|
—
|
|
|
$
|
140,446
|
|
Chief
Operating Officer
|
|
|
2007
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Karen
Hawkins
|
|
|
2008
|
|
|
|
132,473
|
|
|
|
300
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
132,773
|
|
VP
Finance/Controller
|
|
|
2007
|
(1)*
|
|
|
56,900
|
|
|
|
300
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
57,200
|
|
Stan
Hirschman
|
|
|
2008
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
CEO
of Optex Delaware
|
|
|
2007
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrey
Oks (3)
|
|
|
2008
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
CEO,
CFO, Treasurer, Secretary and Director
|
|
|
2007
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terry
Hughes (4)
|
|
|
2008
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
CEO
|
|
|
2007
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
1.
|
The
compensation depicted is not reflective of a full year’s compensation as
Danny Schoening did not begin employment until the second quarter of
fiscal year 2008 and Karen Hawkins did not begin employment until the
third quarter of fiscal year 2007. For Mr. Schoening and Ms.
Hawkins, information is for service as an officer of Optex Texas and Optex
Delaware.
|
|
2.
|
Stock
awards include issues of 10,000 common shares of Irvine Sensors
Common Stock on January 16, 2008 at the then current market share
price of $0.75 per share.
|
|
3.
|
Mr.
Oks was appointed as an officer of Sustut as of September 15, 2008 and
resigned as of March 29, 2009. Mr. Oks was given 10,000,000
shares of restricted stock as compensation for services which was
forfeited to Sustut on the date of his
resignation.
|
|
4.
|
Mr.
Hughes served as an officer of Sustut and resigned on September 12, 2008
and forfeited the 9,902,624 shares of Common Stock in the Company he owned
at that time. He received no other compensation during 2007 or
2008.
|
Option
Grants in Last Fiscal Year
There
were no options granted to any of the named executive officers during the fiscal
years ended September 28, 2008 and September 30, 2007.
Employment
Agreement
The
Company entered into an employment agreement with Danny Schoening dated December
1, 2008. The term of the agreement commenced as of December 1, 2008
and shall continue through June 1, 2010. Thereafter, the term of the agreement
shall be automatically extended for successive and additional 18 month periods,
unless the Company shall provide a written notice of termination at least ninety
(90) days, or the Schoening shall provide a written notice of termination at
least 90 days, prior to the end of the initial term or any extended term, as
applicable. During the first eighteen months of the term of the agreement, the
Company shall pay to Schoening a base salary (“Base Salary”) at the annual rate
of One Hundred Ninety Thousand Dollars ($190,000).
Schoening was paid a
one time bonus of $10,000 at the commencement of the employment agreement in
December 2008 and was granted 1,414,649 options to purchase common stock of the
Company at an exercise price of $0.15 per share at the time of the closing of
the Reorganization.
On each
renewal date of the commencement of employment, the Schoening’s base salary
shall be reviewed by the Board and may be increased to such rate as the Board,
in its sole discretion, may hereafter from time to time determine. During the
term of the agreement, Schoening shall be entitled to receive bonuses of up to
30% of his base salary per year at the discretion of the Company’s Board of
Directors pursuant to performance objectives to be determined by the Board of
Directors. Any bonuses shall be payable in cash and shall be paid
within ninety (90) days of any year anniversary of the date of the agreement.
Upon closing of the Reorganization, the Company granted Schoening stock options
equal to 1% of the issued and outstanding shares of the Company immediately
after giving effect to the Reorganization, with 34% of the options vesting on
March 30, 2010, and 33% of the options vesting on each of March 31, 2011 and
March 31, 2012.
The
employment agreement events of termination thereof: (i) death of
Schoening; (ii) termination by the Company for cause (including conviction of a
felony, commission of fraudulent acts, willful misconduct by Schoening,
continued failure to perform duties after written notice, violation of
securities laws and breach of the employment agreement), (iii) termination
without cause by the Company and (iv) termination by Schoening for good reason
(including breach by the Company of its obligations under the agreement, the
requirement for 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 then outstanding securities of the Company or
its successor changing ownership or a sale of all or substantially all of the
Company’s assets, without the surviving entity assuming the obligations under
the agreement). For a termination by the Company for cause or upon
death of Schoening, the Schoening shall be paid salary and bonus earned through
the date of termination. For a termination by the Company without
cause or by the Schoening with good reason, the Schoening shall also be paid six
months base salary in effect and all granted stock options shall remain
exercisable for a period of two years after such termination, with all unvested
stock options immediately vesting. The agreement contains a standard
non-solicitation and non-compete agreement that extends for one year subsequent
to termination thereof, and contains standard clauses for termination and the
like.
The
Company does not have any other employment agreements with its executive
officers and directors.
Equity
Compensation Plan Information
The
Company currently has an option compensation plan covering the issuance of
options for the purchase of up to 6,000,000 shares. The purpose of the
Plan is to assist the Company in attracting and retaining highly competent
employees and to act as an incentive in motivating selected officers and other
employees of the Company and its subsidiaries, and directors and consultants of
the Company and its subsidiaries, to achieve long-term corporate
objectives. There are 6,000,000 shares of common stock reserved for
issuance under this Plan. As of June 28, 2009, the Company had issued
2,681,649 share options under this Plan of which zero shares had vested as of
June 28, 2009.
Nonqualified
deferred compensation
We had no
non-qualified deferred compensation plans during year ended September 28,
2008.
Post-Termination
Compensation
We have
not entered into change in control agreements with any of our named executive
officers or other members of the executive management team.
other than the provision
with respect to Mr. Schoening described above. No awards of equity incentives
under our 2009 Stock Option Plan provide for immediate vesting upon a change in
control. However, our Board of Directors has the full and exclusive power to
interpret the plans, including the power to accelerate the vesting of
outstanding, unvested awards. A “change in control” is generally
defined as (1) the acquisition by any person of 30% or more of the combined
voting power of our outstanding securities or (2) the occurrence of a
transaction requiring stockholder approval and involving the sale of all or
substantially all of our assets or the merger of us with or into another
corporation.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On August
31, 2009, we had 141,994,940 shares of common stock, and 1,027
shares of Series A
Preferred Stock issued and outstanding. The following table sets forth certain
information with respect to the beneficial ownership of our securities as of
August 31, 2009, for (i) each of our directors and executive officers; (ii) all
of our directors and executive officers as a group; and (iii) each person who we
know beneficially owns more than 5% of our common stock.
Beneficial
ownership data in the table has been calculated based on Commission rules that
require us to identify all securities that are exercisable for or convertible
into shares of our common stock within 60 days of August 31, 2009
and treat the underlying
stock as outstanding for the purpose of computing the percentage of ownership of
the holder.
Except as
indicated by the footnotes following the table, and subject to applicable
community property laws, each person identified in the table possesses sole
voting and investment power with respect to all capital stock held by that
person. The address of each named executive officer and director, unless
indicated otherwise by footnote, is c/o the Company’s corporate
headquarters.
Except as
otherwise set forth below, the address of each of the persons listed below is
the Company’s address.
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Name of Beneficial
|
|
Number of
|
|
|
Preferred
|
|
|
Combined
|
|
|
Outstanding
|
|
Title of Class
|
|
Owner
|
|
Shares
|
|
|
Conversion
(4)
|
|
|
Ownership
|
|
|
Shares
|
|
Common Stock :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
Holders
|
|
Arland
Holdings, Ltd (1)
|
|
|
11,148,935
|
|
|
|
|
|
|
11,148,935
|
|
|
|
5.81
|
%
|
|
|
Sileas
(2,3)
|
|
|
102,184,347
|
|
|
|
37,040,000
|
|
|
|
139,224,347
|
|
|
|
72.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Officers:
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Merrick
Okamoto
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Ronald
Richards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Stanley
Hirschman (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58.03
|
%
|
|
|
Danny
Schoening
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10.88
|
%
|
|
|
Karen
Hawkins
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and officers as a group (3 Individuals) (1)
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72.54
|
%
|
1
|
Represents
shares held by Arland Holdings, Ltd., which is located at 551 5
th
Avenue, Suite 1601, New York, NY 10176. Arie Rabinowitz has
voting control over the shares held by Arland Holdings,
Ltd.
|
2
|
Represents
shares held by Sileas of which Stanley Hirschman a Director/Officer of the
Company has a controlling interest (80%); therefore, under Rule 13d-3 of
the Exchange Act, Mr. Hirschman is deemed to be the beneficial owner of
those shares.
|
3
|
Sileas’
ownership interest in the Company has been pledged to Longview as security
for a loan in connection with the acquisition of Longview’s interests in
Optex Delaware by Sileas. Investment decisions for Longview are
made by its investment advisor, Viking Asset Management,
LLC. Mr. Peter Benz is the Chairman, Chief Executive Officer
and a Managing Member of Viking Asset Management and may be deemed to
control its business activities, including the investment activities of
Longview. Mr. Merrick Okamoto who is a director of the Company
is the President and a Managing Member of Viking Asset Management and may
be deemed to control its business activities, including the investment
activities of Longview. In the event of a default by Sileas on
its debt obligation to Longview, the shares held by Sileas may be returned
to Longview. Viking and Longview each may be deemed to have
shared voting and dispositive authority over the shares of the Company’s
common stock if they are returned to Longview. Mr. Benz and Mr.
Okamoto, as control persons of Viking and/or Longview, may be deemed to
beneficially own all such shares; however, they disclaim such beneficial
ownership.
|
4
|
Represents
shares of common stock issuable upon conversion of preferred stock held by
the stockholder.
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Relationship
between Optex Texas, IRSN and Longview and Alpha
Longview and Alpha were owed certain
debt by IRSN including debt evidenced by (i) a December 29, 2006 Term Loan and
Security Agreement executed by IRSN and Longview and Alpha, and (ii)
a series of secured promissory notes purchased by them and issued to them on
December 29, 2006, July 19, 2007 and November 28, 2007. As of August
24, 2008, the total amount due under all of the described notes was
approximately $18.4 million. Optex Texas, which was and is a wholly
owned subsidiary of IRSN, was a guarantor of all of those notes, and pursuant to
related security agreements Longview and Alpha had a validly perfected, fully
enforceable security interest in all personal property of Optex
Texas. On September 19, 2008, pursuant to an Assignment and
Stock/Note Issuance Agreement, Alpha and Longview transferred and assigned to
Optex Delaware $15 million of their respective interests and rights in the
aforesaid notes and obligations to Optex Delaware in exchange for 100% of the
issued and outstanding stock of Optex Delaware.
Acquisition
of Assets of Optex Texas by Optex Delaware on October 14, 2008
On October 14, 2008, in a purchase
transaction that was consummated via public auction, Optex Delaware purchased
all of the assets of Optex Texas in exchange for $15 million of IRSN debt owned
by it and the assumption of approximately $3.8 million of certain Optex Texas
liabilities. The $15 million of IRSN debt was contributed by Longview
and Alpha to Optex Delaware in exchange for a $6 million note payable from Optex
Delaware and a $9 million equity interest in Optex Delaware. Longview
and Alpha owned Optex Delaware until February 20, 2009, when Longview sold
100% of its interests in Optex Delaware to Sileas, as discussed
below. In referring to these transactions, Optex Delaware is
considered to be the successor entity to Optex Texas, the predecessor
entity.
Secured
Promissory Notes and Common Shares Issued in connection with Purchase by Optex
Delaware
In connection with the public sale
of the Optex Texas assets to Optex Delaware, Optex Delaware delivered to each of
Longview and Alpha a Secured Promissory Note due September 19, 2011 in the
principal amounts of $5,409,762 and $540,976, respectively. Each Note
bears simple interest at the rate of 6% per annum, and the interest rate upon an
event of default increases to 8% per annum. After 180 days from the
Issue Date, the principal amount of the Notes and accrued and unpaid interest
thereon may be converted into Optex Delaware common stock at a conversion price
of $1.80 per share (pre-split and pre-Reorganization
price). The Notes may be redeemed prior to maturity at a price of
120% of the then outstanding principal amount plus all accrued and unpaid
interest thereon. The obligations of Optex Delaware under the Notes
are secured by a lien of all of the assets of Optex Delaware in favor of
Longview and Alpha. In addition, Optex Delaware issued common stock to
each of Longview and Alpha in the quantities of 45,081,350 and 4,918,650,
respectively. On October 30, 2008, Alpha sold its Optex Delaware
common stock to Arland Holding, Ltd. On February 20, 2009, Longview sold
its Note to Sileas (see below).
Acquisition
by Sileas on February 20, 2009
On February 20, 2009, Sileas purchased
100% of the equity and debt interest held by Longview, representing 90% of Optex
Delaware, in a private transaction (the “Acquisition”). The primary reason for
the Acquisition was to eliminate shareholder control of the Company by Longview
and to limit any perception of control over the day-to-day operations of the
Company, whether or not such control actually existed. While Longview
makes investments in a variety of companies, it strives to invest passively and
leave the day-to-day operations of the companies in its investment portfolio to
the management teams of those companies. In addition, the Acquisition
allowed the Company to avoid potential conflicts of interest or other related
business issues that might have adversely affected the Company’s operations as a
result of Longview’s investments in other companies.
The purchase price for the Acquisition
was $13,524,405. Sileas issued a purchase money note to Longview for
the full amount of the purchase price in exchange for 45,081,350 shares of
common stock issued by the Company (representing 90% of the outstanding shares)
and transfer of a note dated December 2, 2008, issued by the Company to Longview
in the principal amount of $5,409,762. No contingent consideration is due the
seller in the transaction. The obligations of Sileas under the Note
are secured by a security interest in the Company’s common and preferred stock
owned by Sileas that was granted to Longview pursuant to a Stock Pledge
Agreement delivered by Sileas to Longview and also by a lien on all of the
assets of Sileas. On March 27, 2009, Sileas and Alpha exchanged the
$6,000,000 aggregate principal amount of notes, plus accrued and unpaid interest
thereon, for 1,027 shares of Optex Delaware Series A Preferred
Stock.
Sileas has no operations or business
activities other than holding the Purchased Assets and has no
revenues. The management of Sileas believes that the value of its
common stock and preferred stock holdings in the Company will increase over
time. Sileas plans to repay Longview, no later than the
maturity date, through some combination of a recapitalization of Sileas equity
and debt and partial or full liquidation of its interests in the
Company.
Secured
Promissory Note Due February 20, 2012/Longview Fund,
LP
As a result of the transaction
described above between Sileas and Longview Fund, LP on February 20, 2009,
Sileas, the new majority owner of Optex Delaware, executed and delivered to
Longview, a Secured Promissory Note due February 20, 2012 in the principal
amount of $13,524,405. The Note bears simple interest at the rate of
4% per annum, and the interest rate upon an event of default increases to 10%
per annum. In the event that a Major Transaction occurs prior to the
maturity date resulting in the Borrower receiving Net Consideration with a fair
market value in excess of the principal and interest due under the terms of this
Secured Note, (the “Optex Consideration”), then in addition to paying the
principal and interest due, Sileas shall also pay an amount equal to 90% of the
Optex Consideration. “Major Transaction” refers to a transaction
whereby Optex Delaware would consolidate or merge into or sell or convey all or
substantially all of its assets to a third party entity for more than nominal
consideration, and “Net Consideration” refers to the fair market value of the
consideration received in connection with a Major Transaction less all
outstanding liabilities of Optex Delaware.
Reorganization/Share
Exchange
On March 30, 2009, the
Reorganization occurred whereby the then existing shareholders of Optex Delaware
exchanged their shares of common stock with the shares of common stock of the
Company as follows: (i) the outstanding 85,000,000 shares of Optex
Delaware common stock were exchanged by the Company for 113,333,282 shares of
Company common stock, (ii) the outstanding 1,027 shares of Optex Delaware Series
A Preferred Stock were exchanged by the Company for 1,027 shares of Company
Series A Preferred Stock and (iii) the 8,131,667 shares of Optex Delaware common
stock purchased in the private placement, which also occurred on March 30, 2009,
were exchanged by the Company for 8,131,667 shares of Company common
stock. Optex Delaware remains a wholly-owned subsidiary of the
Company.
At the time of the Reorganization,
25,000,000 shares owned by Andrey Oks, the former CEO of the Company, were
cancelled. Immediately prior to the closing, 19,999,991 shares of
Company common stock were outstanding.
The
19,999,991 shares derives from the 17,999,995 shares outstanding as
of December 31, 2008 plus the 26,999,996 shares issued
in conjunct with the 2,5:1 forward stock split authorized by
the Sustut Board and shareholders and effected on February 27, 2009 less
retirement of Andrey Oks
’
25,000,000
shares.
The total outstanding common shares of the Company subsequent
to the closing of the Reorganization is as follows:
Existing
Sustut Shareholders
|
|
|
19,999,991
|
|
Shares
issued for Investor Relations Services
|
|
|
1,250,000
|
|
Optex
Delaware shares exchanged
|
|
|
113,333,282
|
|
Optex
Delaware Private Placement shares exchanged
|
|
|
8,131,667
|
|
Total
Shares after Reorganization
|
|
|
141,464,940
|
|
Short Term Note Payable/Longview
Fund
-
On September 23, 2008 Optex Texas borrowed $146,709 from Longview
and issued a promissory note dated September 23, 2008, to Longview in connection
therewith. The September 23, 2008 Note bears interest at the rate of
10% per annum with interest accruing until the maturity date of the September
23, 2008 Note, which was originally set as November 7, 2008. Pursuant
to an Allonge No. 1 to Promissory Note, dated January 20, 2009, the Maturity
Date was extended until March 31, 2009. On March 30, 2009 in
conjunction with the Reorganization and Private Placement, Longview purchased
3.25 Units of the Private Placement using $146,250 of the amount due under the
Note as consideration for the purchase. The current outstanding
balance related to the original note issue is $459 plus $11,101 of accrued
interest to be paid in September 2009.
Transactions
with Executive Management
See the “Executive Compensation”
section for a discussion of the material elements of compensation awarded to,
earned by or paid to our named executive officers. Other than as stated in the
“Executive Compensation” section, we have not entered into any transactions with
executive management.
THE
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
This prospectus covers 11,784,177
shares of common stock held by the selling stockholders pursuant to the
registration obligations of certain subscription agreements with the selling
stockholders in order to permit the resale of these shares of common stock by
the selling stockholders from time to time after the date of this prospectus.
After completion of the offering, if all shares registered are sold, the selling
stockholders will hold no shares of our common stock, either out right or
upon the exercise of their warrants. We will not receive any of the proceeds
from the sale by the selling stockholders of the shares of common stock covered
by this prospectus. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.
|
Name
of Selling Stockholder (18)
|
|
Amount
beneficially
owned
by
Selling
Stockholder
|
|
|
Amount
to be
offered
to Selling
Stockholder's
Account
|
|
|
Amount
to be
beneficially
owned
following
completion
of
offering
|
|
|
Percent
to be
beneficially
owned
following
completion
of the
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Albert
& Diane Gragnani
|
|
|
1,200,000
|
|
|
|
869,504
|
|
|
|
330,496
|
|
|
|
0.17
|
%
|
(2)
|
Curio
Holdings
|
|
|
600,000
|
|
|
|
434,751
|
|
|
|
165,249
|
|
|
|
0.09
|
%
|
(3)
|
Daniel
McDonald
|
|
|
300,000
|
|
|
|
217,377
|
|
|
|
82,623
|
|
|
|
0.04
|
%
|
(4)
|
Eric
Samuelson
|
|
|
1,500,000
|
|
|
|
1,086,878
|
|
|
|
413,122
|
|
|
|
0.22
|
%
|
(5)
|
George
Gummow
|
|
|
600,000
|
|
|
|
434,751
|
|
|
|
165,249
|
|
|
|
0.09
|
%
|
(6)
|
Gerald
Berkson
|
|
|
453,334
|
|
|
|
328,479
|
|
|
|
124,855
|
|
|
|
0.07
|
%
|
(7)
|
Gerald
Holland
|
|
|
600,000
|
|
|
|
434,751
|
|
|
|
165,249
|
|
|
|
0.09
|
%
|
(8)
|
Kenneth
and Irene Chaffin
|
|
|
300,000
|
|
|
|
217,376
|
|
|
|
82,624
|
|
|
|
0.04
|
%
|
(9)
|
Lee
Stambollis
|
|
|
360,000
|
|
|
|
260,851
|
|
|
|
99,149
|
|
|
|
0.05
|
%
|
(10)
|
Longview
Fund, LP
|
|
|
1,950,000
|
|
|
|
1,412,942
|
|
|
|
537,058
|
|
|
|
0.28
|
%
|
(11)
|
Michael
Peter Lee
|
|
|
600,000
|
|
|
|
434,751
|
|
|
|
165,249
|
|
|
|
0.09
|
%
|
(12)
|
Robert
E. Kraemer
|
|
|
600,000
|
|
|
|
434,751
|
|
|
|
165,249
|
|
|
|
0.09
|
%
|
(13)
|
Somasundaram
Ilangovan
|
|
|
600,000
|
|
|
|
434,751
|
|
|
|
165,249
|
|
|
|
0.09
|
%
|
(14)
|
Victor
M. Dandridge III
|
|
|
1,800,000
|
|
|
|
1,304,254
|
|
|
|
495,746
|
|
|
|
0.26
|
%
|
(15)
|
George
Warburton
|
|
|
3,600,000
|
|
|
|
2,608,508
|
|
|
|
991,492
|
|
|
|
0.52
|
%
|
(16)
|
Dr.
Marc Medway
|
|
|
600,000
|
|
|
|
434,751
|
|
|
|
165,249
|
|
|
|
0.09
|
%
|
(17)
|
Micheal
R. Ruffer
|
|
|
600,000
|
|
|
|
434,751
|
|
|
|
165,249
|
|
|
|
0.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,263,334
|
|
|
|
11,784,177
|
|
|
|
4,479,157
|
|
|
|
2.33
|
%
|
(1)
|
|
Consists
of 600,000 common shares outstanding and 600,000 warrants exercisable
within 60 days of May 19, 2009. The address for Albert & Diane
Gragnani
is
478
Country Club Dr. San Francisco, CA 94132.
|
(2)
|
|
300,000
common shares outstanding and 300,000 warrants exercisable within 60 days
of May 19, 2009 The address for Curio Holding, Inc. is 1630 York Avenue,
New York, NY 10028, of which the sole stockholder is Inge L. Kerster, with
the same address, who exercises voting and investment control with respect
to shares of common stock held by that selling
stockholder.
|
(3)
|
|
Consists
of 150,000 common shares outstanding and 150,000 warrants exercisable
within 60 days of May 19, 2009. The address for Daniel McDonald is 2615
Silverton Rd. Salem, OR 97303.
|
(4)
|
|
Consists
of 750,000 common shares outstanding and 750,000 warrants exercisable
within 60 days of May 19, 2009. The address for Eric Samuelson is Rear 320
South Clairmont Springfield, OH 45505.
|
(5)
|
|
Consists
of 300,000 common shares outstanding and 300,000 warrants exercisable
within 60 days of May 19, 2009. The address for George Gummow is 14821
Bartlett Ct. San Martin, CA 95046.
|
(6)
|
|
Consists
of 226,667 common shares outstanding and 226,667 warrants exercisable
within 60 days of May 19, 2009. The address for Gerald Berkson is 2222
Springfield Way San Mateo, CA 94403.
|
(7)
|
|
Consists
of 300,000 common shares outstanding and 300,000 warrants exercisable
within 60 days of May 19, 2009. The address for Gerald Holland is 3231 NE
59th St. Fort Lauderdale, FL 33308,
|
(8)
|
|
Consists
of 150,000 common shares outstanding and 150,000 warrants exercisable
within 60 days of May 19, 2009. The address for Kenneth and Irene Chaffin
is 915 N. Road I West Chino Valley, AZ 86323.
|
(9)
|
|
Consists
of 180,000 common shares outstanding and 180,000 warrants exercisable
within 60 days of May 19, 2009. The address for Lee Stambollis is 300 26th
Ave. San Mateo, CA 94403.
|
(10)
|
|
Consists
of 975,000 common shares outstanding and 975,000 warrants exercisable
within 60 days of May 19, 2009. The address of Longview Fund, L.P. is c/o
Viking Asset Management, 505 Sansome Street, Suite 1275, San Francisco, CA
94111. Peter T. Benz exercises voting and investment control with respect
to the shares of common stock held by this selling stockholder. Please see
Secured Promissory Note
Due February 20, 2012/Longview Fund, LP
on p. __ for a description
of the previously existing relationship between the Company and
Longview.
|
(11)
|
|
Consists
of 300,000 common shares outstanding and 300,000 warrants exercisable
within 60 days of May 19, 2009. The address for Michael Peter Lee is
Redwood House, Lodge Gardens, Great Carlton, Louth Lincolnshire LN11.8JY
U. K.
|
(12)
|
|
Consists
of 300,000 common shares outstanding and 300,000 warrants exercisable
within 60 days of May 19, 2009. The address for Robert E. Kraemer is N6816
St RD 79 Menomonie, WI 54751.
|
(13)
|
|
Consists
of 300,000 common shares outstanding and 300,000 warrants exercisable
within 60 days of May 19, 2009. The address for Somasundaram Ilangovan is
229 Sydney Road Holland, PA 18966.
|
(14)
|
|
Consists
of 900,000 common shares outstanding and 900,000 warrants exercisable
within 60 days of May 19, 2009. The address for Victor M. Dandridge III is
695 Berkmar Court Charlottesville, VA 22901.
|
(15)
|
|
Consists
of 1,800,000 common shares outstanding and 1,800,000 warrants exercisable
within 60 days of May 19, 2009. The address for George Warburton is 19 The
Citadel Fort George St. Peter Port Guernsey GY125X.
|
(16)
|
|
Consists
of 300,000 common shares outstanding and 300,000 warrants exercisable
within 60 days of May 19, 2009. The address for Dr. Marc Medway is 506
Hobby Horse Hills Ambler, PA
19002.
|
(17)
|
|
Consists
of 300,000 common shares outstanding and 300,000 warrants exercisable
within 60 days of May 19, 2009. The address for Michael R.
Ruffer is 11809 Lyrac Ct Oakton,
VA 22124.
|
(18)
|
|
All
of the securities listed in this table were purchased as of March 30, 2009
when the Company accepted subscriptions from accredited investors for a
total 27.1 units for $45,000.00 per Unit, with each unit consisting of
Three Hundred Thousand (300,000) shares of common stock, no par value of
the Company and warrants to purchase Three Hundred Thousand (300,000)
shares of common stock at an exercise price of $0.45 per share for a
period of five (5) years from the date of
closing.
|
The selling stockholders may sell all
or a portion of the shares of common stock beneficially owned by them and
offered hereby from time to time directly or through one or more underwriters,
broker-dealers or agents. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions:
|
·
|
to
purchasers directly;
|
|
·
|
in
ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
|
|
·
|
through
underwriters or dealers who may receive compensation in the form of
underwriting discounts, concessions or commissions from such stockholders
or from the purchasers of the securities for whom they may act as
agent;
|
|
·
|
by
the pledge of the shares as security for any loan or obligation, including
pledges to brokers or dealers who may effect distribution of the shares or
interests in such securities;
|
|
·
|
to
purchasers by a broker or dealer as principal and resale by such broker or
dealer for its own account pursuant to this
prospectus;
|
|
·
|
in
a block trade in which the broker or dealer so engaged will attempt to
sell the securities as agent but may position and resell a portion of the
block as principal to facilitate a
transaction;
|
|
·
|
through
an exchange distribution in accordance with the rules of the exchange or
in transactions in the over-the-counter
market;
|
|
·
|
pursuant
to Rule 144; or
|
|
·
|
in
any other manner not proscribed by
law.
|
If the selling stockholders effect
such transactions by selling shares of common stock to or through underwriters,
broker-dealers or agents, such underwriters, broker-dealers or agents may
receive commissions in the form of discounts, concessions or commissions from
the selling stockholders or commissions from purchasers of the shares of common
stock for whom they may act as agent or to whom they may sell as principal
(which discounts, concessions or commissions as to particular underwriters,
broker-dealers or agents may be in excess of those customary in the types of
transactions involved). In connection with sales of the shares of common stock
or otherwise, the selling stockholders may enter into hedging transactions with
broker-dealers, which may in turn engage in short sales of the shares of common
stock in the course of hedging in positions they assume. If the selling
stockholders enter into an agreement to sell their shares to a
broker-dealer and such broker-dealer is acting as an underwriter, we will file a
post-effective amendment to the registration statement of which this prospectus
forms a part for the purpose of updating this disclosure with respect to such
broker-dealer and its related plan of distribution. The selling stockholders may
also sell shares of common stock short and deliver shares of common stock
covered by this prospectus to close out short positions. The selling
stockholders may also loan or pledge shares of common stock to broker-dealers
that in turn may sell such shares.
The selling stockholders and any
broker-dealer participating in the distribution of the shares of common stock
may be deemed to be “underwriters” within the meaning of the Securities Act, and
any commission paid, or any discounts or concessions allowed to, any such
broker-dealer may be deemed to be underwriting commissions or discounts under
the Securities Act.
We have advised the selling
stockholders that under current interpretations they may not use shares
registered on this registration statement to cover short sales of our common
stock made prior to the date on which this registration statement shall have
been declared effective by the Commission. If the selling stockholders use this
prospectus for any sale of our common stock, it will be subject to the
prospectus delivery requirements of the Securities Act.
The selling stockholders and any other
person participating in such distribution will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including, without limitation, Regulation M of the Exchange Act, which may limit
the timing of purchases and sales of any of the shares of common stock by the
selling stockholders and any other participating person. Regulation M may also
restrict the ability of any person engaged in the distribution of the shares of
common stock to engage in market-making activities with respect to the shares of
common stock. All of the foregoing may affect the marketability of the shares of
common stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.
The Company has agreed to indemnify the
selling stockholders against (i) any untrue statement of a material fact
contained in any registration statement filed by the Company on behalf of the
selling stockholders, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation by the
Company of the Securities Act, the Exchange Act, or any rule or regulation
promulgated under the Securities Act, or the Exchange Act made by the Company in
connection therewith,
Once sold under the registration
statement, of which this prospectus forms a part, the shares of common stock
will be freely tradable in the hands of persons other than our
affiliates.
There can be no assurance that the
selling stockholders will sell any or all of the shares of common stock
registered pursuant to the registration statement, of which this prospectus
forms a part.
Our common stock is quoted on the OTCBB
under the symbol “OPXS”.
DESCRIPTION
OF SECURITIES
The
Company is authorized to issue 200,000,000 shares of common stock and 5,000
shares of Preferred Stock of which 1,027 shares are designated as Series A
Preferred Stock. As of August 31, 2009, there were 141,994,940 shares of common
stock issued and outstanding and 1,027 Series A Preferred Stock issued and
outstanding.
Common
Stock
The
holders of common stock are entitled to one vote per share. The holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of legally available funds. However, the
current policy of the board of directors is to retain earnings, if any, for
operations and growth. Upon liquidation, dissolution or winding-up, the holders
of common stock are entitled to share ratably in all assets that are legally
available for distribution. The holders of common stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of any series of preferred stock, which
may be designated solely by action of the board of directors and issued in the
future.
Preferred
Stock
Series
A Preferred Stock
On March
24, 2009, the Company filed a Certificate of Designation with the Secretary of
State of the State of Delaware authorizing a series of preferred stock, under
its articles of incorporation, known as “Series A Preferred Stock”. This
Certificate of Designation was approved by the Company’s Board of Directors and
Shareholders at a Board Meeting and Shareholders Meeting held on February 25,
2009. The Certificate of Designation sets forth the following terms for the
Series A Preferred Stock as described in the table below.
Authorized
Shares:
|
|
1,027
|
|
|
|
Per
Share Stated Value:
|
|
$6,000
|
|
|
|
Liquidation
Preference:
|
|
Per
share Stated Value
|
|
|
|
Conversion
Price into Common Stock:
|
|
$0.15
per share, as adjusted on a pro rata basis for stock splits, dividends,
combinations or reclassifications and on a full ratchet basis for equity
issuances at a price less than the then in effect exercise
price.
|
|
|
|
Voting
Rights:
|
|
The
Series A Preferred Shares shall vote along with the common stock on an as
converted basis and shall have one vote per share.
|
|
|
|
Dividends:
|
|
6%
per annum payable quarterly payable quarterly in
arrears.
|
Stock
Options
As of the date of this Prospectus, we
have
2,681,649
outstanding stock options that represent potential future cash proceeds to our
company of $402,247. The company granted an officer at the consummation of the
Reorganization, 1,414,649 options, on March 29, 2009 with an exercise price of
$0.15 per share, vesting as follows: 34% of the options vesting one year
following the date of grant, and 33% vesting on each of the second and third
anniversaries following the date of grant. On May 14, 2009 the company
issued 1,267,000 share options to Optex employees with an exercise price of
$0.15 per share and vesting equally at 25% per year at the end of each service
year for four years. The holders of options are not required to
exercise their rights at any time and we are unable to predict the amount and
timing of any future option exercises. We reserve the right to temporarily
reduce the exercise prices of our options from time to time in order to
encourage the early exercise of the options. As of the date of this
prospectus, none of the stock options had vested.
Delaware
Anti-takeover Statute
We are subject to the provisions of
section 203 of the Delaware General Corporation Law regulating corporate
takeovers. In general, those provisions prohibit a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
|
·
|
the
transaction is approved by the board of directors before the date the
interested stockholder attained that status;
|
|
|
|
|
·
|
upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced;
or
|
|
·
|
on
or after the date the business combination is approved by the board of
directors and authorized at a meeting of stockholders by at least
two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
|
Section
203 defines “business combination” to include the following:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
|
|
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested
stockholder;
|
|
|
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
|
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
|
|
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
|
|
|
In general, Section 203 defines an
interested stockholder as any entity or person beneficially owning 15% or more
of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by any of these entities or
persons.
A Delaware corporation may opt out of
this provision either with an express provision in its certificate of
incorporation or bylaws approved by its stockholders. However, we have not opted
out, and do not currently intend to opt out, of this provision. The statute
could prohibit or delay mergers or other takeover or change in control attempts
and, accordingly, may discourage attempts to acquire us.
Certificate
of Incorporation and By-laws
Our Certificate of Incorporation and
by-laws include provisions that may have the effect of delaying or preventing a
change of control or changes in our management. These provisions
include:
|
·
|
the
right of the board of directors to elect a director to fill a vacancy
created by the resignation of a director or the expansion of the board of
directors;
|
|
|
|
|
·
|
the
requirement for advance notice for nominations of candidates for election
to the board of directors or for proposing matters that can be acted upon
at a stockholders’ meeting;
|
|
|
|
|
·
|
the
right of our board of directors to alter our bylaws without stockholder
approval.
|
Also
pursuant to the Reorganization, we amended our bylaws which provided for a
fiscal year end on December 31 to a fiscal year ending on the Sunday nearest
September 30.
Transfer
Agent
Our transfer agent is American
Registrar & Transfer Co., 342 East 900 South, Salt Lake City, UT
84111.
LEGAL
MATTERS
The legality of the shares of common
stock offered by this prospectus will be passed upon for us by Jolie Kahn, Esq.
of New York, NY.
EXPERTS
The financial statements as of
September 28, 2008 and September 30, 2007 included in this prospectus have been
so included in reliance on the report of Rotenberg & Co. LLP, an independent
registered public accounting firm, given on the authority of said firm as
experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed a registration statement
on Form S-1 with the Commission with respect to this offering. This prospectus,
which is part of the registration statement, does not include all of the
information contained in the registration statement. You should refer to the
registration statement and its exhibits and schedules for additional
information. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, the references are not necessarily
complete and you should refer to the exhibits and schedules attached to the
registration statement for copies of the actual contract, agreement or other
document.
We also file annual, quarterly and
current reports, proxy statements and other documents with the Commission under
the Exchange Act. You may read and copy any materials that we may file without
charge at the Commission’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You may call the Commission at 1-800-Commission-0330 for
further information on the operation of the Public Reference Room. You may
obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the Commission at 100 F Street, N.E., Washington, D.C.
20549. The Commission also maintains an Internet site, http://www.sec.gov, which
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The other
information we file with the Commission is not part of the registration
statement of which this prospectus forms a part.
OPTEX
SYSTEMS HOLDINGS, INC.
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF
JUNE 28, 2009 (Restated)
OPTEX
SYSTEMS HOLDINGS, INC.
BALANCE
SHEETS AS OF JUNE 28, 2009 (SUCCESSOR) (UNAUDITED) (RESTATED)
AND
SEPTEMBER 28, 2008 (PREDECESSOR) (RESTATED)
|
F-3
|
|
|
STATEMENTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 28, 2009
(SUCCESSOR) AND
JUNE 29, 2008 (PREDECESSOR) (UNAUDITED)
FOR
THE PERIOD OCTOBER 15, 2008 THROUGH JUNE 28, 2009 (SUCCESSOR) AND
FOR
THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008
(PREDECESSOR)
(UNAUDITED) (RESTATED)
|
F-5
|
|
|
STATEMENTS
OF CASH FLOWS FOR THE PERIOD OCTOBER 15, 2008 THROUGH
JUNE 28,
2009 (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008
THROUGH OCTOBER
14, 2008 (PREDECESSOR) (UNAUDITED) (RESTATED)
|
F-6
|
|
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY FOR THE PERIOD OCTOBER 15, 2008
THROUGH JUNE
28, 2009 (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29,
2008 THROUGH
OCTOBER 14, 2008 (PREDECESSOR) (UNAUDITED) (RESTATED)
|
F-8
|
|
|
FINANCIAL
STATEMENT FOOTNOTES (UNAUDITED) (RESTATED)
|
F-9
|
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Balance Sheets
|
|
Restated
|
|
|
Restated
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 28, 2009 (Unaudited)
|
|
|
September 28, 2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
492,325
|
|
|
$
|
170,183
|
|
Accounts
Receivable
|
|
|
3,228,098
|
|
|
|
2,454,235
|
|
Net
Inventory
|
|
|
6,843,017
|
|
|
|
4,547,726
|
|
Prepaid
Expenses
|
|
|
158,797
|
|
|
|
307,507
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
10,722,237
|
|
|
|
7,479,651
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment
|
|
|
1,341,271
|
|
|
|
1,314,109
|
|
Accumulated
Depreciation
|
|
|
(1,073,745
|
)
|
|
|
(994,542
|
)
|
|
|
|
|
|
|
|
|
|
Total
Property and Equipment
|
|
|
267,526
|
|
|
|
319,567
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Security
Deposits
|
|
|
20,684
|
|
|
|
20,684
|
|
Intangibles
|
|
|
2,483,395
|
|
|
|
1,100,140
|
|
Goodwill
|
|
|
7,110,415
|
|
|
|
10,047,065
|
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
9,614,494
|
|
|
|
11,167,889
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
20,604,257
|
|
|
$
|
18,967,107
|
|
The
accompanying notes are an integral part of these financial
statements
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Balance
Sheets – Continued
|
|
Restated
|
|
|
Restated
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 28, 2009
(Unaudited)
|
|
|
September 28, 2008
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
3,223,278
|
|
|
$
|
1,821,534
|
|
Accrued
Expenses
|
|
|
628,033
|
|
|
|
798,974
|
|
Accrued
Warranties
|
|
|
314,446
|
|
|
|
227,000
|
|
Accrued
Contract Losses
|
|
|
687,111
|
|
|
|
821,885
|
|
Loans
Payable
|
|
|
459
|
|
|
|
373,974
|
|
Interest
on Loans Payable
|
|
|
11,101
|
|
|
|
|
|
Income
Tax Payable
|
|
|
85,179
|
|
|
|
4,425
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
4,949,607
|
|
|
|
4,047,792
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
|
|
|
|
|
|
Note
Payable
|
|
|
-
|
|
|
$
|
2,000,000
|
|
Accrued
Interest on Note
|
|
|
-
|
|
|
|
336,148
|
|
Due
to Parent
|
|
|
-
|
|
|
|
4,300,151
|
|
|
|
|
|
|
|
|
|
|
Total
Other Liabilities
|
|
|
-
|
|
|
|
6,636,299
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
4,949,607
|
|
|
$
|
10,684,091
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Optex
Systems Holdings, Inc. – (par value $0.001 per share, 200,000,000 shares
authorized, 141,464,940 shares issued and outstanding as of June 28,
2009)
|
|
|
141,465
|
|
|
|
|
|
Optex
Systems Holdings, Inc. Preferred Stock (par value $0.001 per
share, 5,000 shares authorized, 1,027 Series A Preferred shares
issued and outstanding as of June 28, 2009)
|
|
|
1
|
|
|
|
|
|
Optex
Systems, Inc. – Texas (predecessor) Common Stock (no par 100,000 shares
authorized, 18,870 shares issued and 10,000 shares outstanding as
of September 28, 2008)
|
|
|
|
|
|
|
164,834
|
|
Optex
Systems, Inc. – Texas (predecessor) Treasury Stock (8,870 shares at cost
as of September 28, 2008)
|
|
|
-
|
|
|
|
(1,217,400
|
)
|
Additional
Paid-in-capital
|
|
|
16,241,768
|
|
|
|
15,246,282
|
|
Retained
Deficit
|
|
|
(728,584
|
)
|
|
|
(5,910,700
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
$
|
15,654,650
|
|
|
$
|
8,283,016
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
20,604,257
|
|
|
$
|
18,967,107
|
|
The
accompanying notes are an integral part of these financial
statements
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Condensed
Consolidated Statements of Operations – Restated and Unaudited
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
Three Months ended
June 28, 2009
|
|
|
Three Months
ended June 29,
2008
|
|
|
For the period
October 15, 2008
through June 28,
2009
|
|
|
For the period
September 29,
2008 through
October 14, 2008
|
|
|
Nine Months
ended June 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,983,930
|
|
|
$
|
3,881,053
|
|
|
$
|
20,084,362
|
|
|
$
|
871,938
|
|
|
$
|
13,925,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Sales
|
|
|
6,417,926
|
|
|
|
2,851,287
|
|
|
|
18,135,020
|
|
|
|
739,868
|
|
|
|
11,716,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
566,004
|
|
|
|
1,029,766
|
|
|
|
1,949,342
|
|
|
|
132,070
|
|
|
|
2,208,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and Wages
|
|
|
176,869
|
|
|
|
253,594
|
|
|
|
502,883
|
|
|
|
22,028
|
|
|
|
744,119
|
|
Employee
Benefits & Taxes
|
|
|
29,716
|
|
|
|
76,438
|
|
|
|
228,847
|
|
|
|
495
|
|
|
|
246,071
|
|
Employee
Stock Bonus Plan
|
|
|
-
|
|
|
|
100,174
|
|
|
|
4,812
|
|
|
|
(4,812
|
)
|
|
|
279,034
|
|
Amortization
of Intangible
|
|
|
101,159
|
|
|
|
54,123
|
|
|
|
303,475
|
|
|
|
-
|
|
|
|
169,368
|
|
Rent,
Utilities and Building Maintenance
|
|
|
50,838
|
|
|
|
69,959
|
|
|
|
150,780
|
|
|
|
12,493
|
|
|
|
160,999
|
|
Investor
Relations
|
|
|
88,326
|
|
|
|
-
|
|
|
|
88,326
|
|
|
|
-
|
|
|
|
-
|
|
Legal
and Accounting Fees
|
|
|
128,274
|
|
|
|
20,166
|
|
|
|
296,627
|
|
|
|
360
|
|
|
|
117,695
|
|
Consulting
and Contract Service Fees
|
|
|
43,210
|
|
|
|
66,678
|
|
|
|
167,261
|
|
|
|
10,527
|
|
|
|
267,222
|
|
Travel
Expenses
|
|
|
16,294
|
|
|
|
28,376
|
|
|
|
41,317
|
|
|
|
-
|
|
|
|
116,338
|
|
Corporate
Allocations
|
|
|
-
|
|
|
|
508,275
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,450,905
|
|
Board
of Director Fees
|
|
|
37,500
|
|
|
|
-
|
|
|
|
87,500
|
|
|
|
-
|
|
|
|
-
|
|
Other
Expenses
|
|
|
87,749
|
|
|
|
47,127
|
|
|
|
167,531
|
|
|
|
16,155
|
|
|
|
124,729
|
|
Total
General and Administrative
|
|
|
759,935
|
|
|
|
1,224,910
|
|
|
|
2,039,359
|
|
|
|
57,246
|
|
|
|
3,676,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
(193,931
|
)
|
|
|
(195,144
|
)
|
|
|
(90,017
|
)
|
|
|
74,824
|
|
|
|
(1,468,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(Income) and Expense
|
|
|
(351
|
)
|
|
|
3
|
|
|
|
(1,434
|
)
|
|
|
-
|
|
|
|
(499
|
)
|
Interest
(Income) Expense - Net
|
|
|
-
|
|
|
|
46,000
|
|
|
|
174,710
|
|
|
|
9,492
|
|
|
|
145,503
|
|
Total
Other
|
|
|
(351
|
)
|
|
|
46,003
|
|
|
|
173,276
|
|
|
|
9,492
|
|
|
|
145,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Taxes
|
|
|
(193,580
|
)
|
|
|
(241,147
|
)
|
|
|
(263,293
|
)
|
|
|
65,332
|
|
|
|
(1,613,196
|
)
|
Income
Taxes (Benefit)
|
|
|
114,973
|
|
|
|
-
|
|
|
|
465,291
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) After Taxes
|
|
$
|
(308,553
|
)
|
|
$
|
(241,147
|
)
|
|
$
|
(728,584
|
)
|
|
$
|
65,332
|
|
|
$
|
(1,613,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share (1)
|
|
$
|
(0.00
|
)
|
|
$
|
(24.11
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
6.53
|
|
|
$
|
(161.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
141,464,940
|
|
|
|
10,000
|
|
|
|
122,744,977
|
|
|
|
10,000
|
|
|
|
10,000
|
|
The
accompanying notes are an integral part of these financial
statements
(1) Basic
earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) for the period. Diluted earnings per share is
computed by assuming that any dilutive convertible securities outstanding were
converted, with related preferred stock dividend requirements and outstanding
common shares adjusted accordingly. In a loss year, the calculation
for basic and diluted earnings per share is considered to be the same, as the
impact of potential common shares is
anti-dilutive.
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Statements
of Cash Flows Restated and Unaudited
|
|
Successor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
For the period October 15,
2008 through June 28, 2009
|
|
|
For the period September 29,
2008 through October 14, 2008
|
|
|
Nine months ended
June 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(728,584
|
)
|
|
$
|
65,332
|
|
|
$
|
(1,613,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,622,907
|
|
|
|
9,691
|
|
|
|
570,566
|
|
Provision
for (use of) allowance for inventory valuation
|
|
|
158,273
|
|
|
|
27,363
|
|
|
|
|
|
Noncash
interest expense
|
|
|
170,882
|
|
|
|
9,500
|
|
|
|
145,503
|
|
Stock
option compensation expense
|
|
|
15,174
|
|
|
|
-
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
(1,823,665
|
)
|
|
|
1,049,802
|
|
|
|
460,783
|
|
(Increase)
decrease in inventory (net of progress billed)
|
|
|
(1,617,361
|
)
|
|
|
(863,566
|
)
|
|
|
321,273
|
|
(Increase)
decrease in other current assets
|
|
|
317,669
|
|
|
|
18,541
|
|
|
|
(190,829
|
)
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
1,416,854
|
|
|
|
(186,051
|
)
|
|
|
(510,043
|
)
|
Increase
(decrease) in accrued warranty costs
|
|
|
87,446
|
|
|
|
-
|
|
|
|
|
|
Increase
(decrease) in due to parent
|
|
|
-
|
|
|
|
1,428
|
|
|
|
1,595,954
|
|
Increase
(decrease) in accrued estimated loss on contracts
|
|
|
(119,470
|
)
|
|
|
(15,304
|
)
|
|
|
(1,021,761
|
)
|
Increase
(decrease) in income taxes payable
|
|
|
85,179
|
|
|
|
-
|
|
|
|
|
|
Total
adjustments
|
|
|
313,888
|
|
|
|
51,404
|
|
|
|
1,371,446
|
|
Net
cash (used)/provided by operating activities
|
|
|
(414,696
|
)
|
|
|
116,736
|
|
|
|
(241,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Received through Optex Texas acquisition
|
|
|
253,581
|
|
|
|
-
|
|
|
|
-
|
|
Purchased
of property and equipment
|
|
|
(13,824
|
)
|
|
|
(13,338
|
)
|
|
|
(103,974
|
)
|
Net
cash used in investing activities:
|
|
|
239,757
|
|
|
|
(13,338
|
)
|
|
|
(103,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement net of stock issuance cost
|
|
|
874,529
|
|
|
|
-
|
|
|
|
|
|
Proceeds
(to) from Loans Payable – Qioptic
|
|
|
(207,265
|
)
|
|
|
(20,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities:
|
|
|
667,264
|
|
|
|
(20,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
492,325
|
|
|
|
83,398
|
|
|
|
(345,724
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
-
|
|
|
|
170,183
|
|
|
|
504,753
|
|
Cash
and cash equivalents at end of period
|
|
$
|
492,325
|
|
|
$
|
253,581
|
|
|
$
|
159,029
|
|
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Statements
of Cash Flows – Restated and Unaudited – continued
|
|
Successor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
For the period October 15,
2008 through June 28,
2009
|
|
|
For the period September
29, 2008 through October
14, 2008
|
|
|
Nine months
ended June 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Optex
Delaware (Successor) purchase of Optex Texas
(Predecessor)
|
|
|
|
|
|
|
|
|
|
Cash
received
|
|
$
|
253,581
|
|
|
|
-
|
|
|
|
-
|
|
Accounts
Receivable
|
|
|
1,404,434
|
|
|
|
-
|
|
|
|
-
|
|
Inventory
|
|
|
5,383,929
|
|
|
|
-
|
|
|
|
-
|
|
Intangibles
|
|
|
4,036,790
|
|
|
|
-
|
|
|
|
-
|
|
Other
Assets
|
|
|
632,864
|
|
|
|
-
|
|
|
|
-
|
|
Accounts
Payable
|
|
|
(1,953,833
|
)
|
|
|
-
|
|
|
|
-
|
|
Other
Liabilities
|
|
|
(1,868,180
|
)
|
|
|
-
|
|
|
|
-
|
|
Debt
|
|
|
(6,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Goodwill
|
|
|
7,110,415
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of Stock
|
|
$
|
9,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Debt to Series A Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Additonal
Paid in Capital ($6,000,000 debt retirement plus accrued interest of
$159,780)
|
|
$
|
6,159,780
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common shares in exchange for Investor Relations
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Additonal
Paid in Capital (1,250,000 shares issued at $0.001
par)
|
|
$
|
187,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
3,817
|
|
|
|
-
|
|
|
|
-
|
|
Cash
paid for taxes
|
|
$
|
380,112
|
|
|
|
-
|
|
|
|
-
|
|
The
accompanying notes are an integral part of these financial
statements
Optex
Systems Holdings, Inc.
(formerly
known as Sustut Exploration, Inc.)
Statement
of Stockholders' Equity and Comprehensive Income/(Loss) (Restated)
|
|
Common
|
|
|
Series A
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
Preferred
|
|
|
Common
|
|
|
Series A
|
|
|
Treasury Stock
|
|
|
Paid in
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Outstanding
|
|
|
Shares
|
|
|
Stock
|
|
|
Stock
|
|
|
Optex Texas
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
Entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 28, 2008
|
|
|
10,000
|
|
|
|
|
|
$
|
164,834
|
|
|
|
|
|
$
|
(1,217,400
|
)
|
|
$
|
15,246,282
|
|
|
$
|
(5,910,700
|
)
|
|
$
|
8,283,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,332
|
|
|
|
65,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 14, 2008
|
|
|
10,000
|
|
|
|
-
|
|
|
$
|
164,834
|
|
|
$
|
-
|
|
|
$
|
(1,217,400
|
)
|
|
$
|
15,246,282
|
|
|
$
|
(5,845,368
|
)
|
|
$
|
8,348,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 15, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock (1)
|
|
|
113,333,282
|
|
|
|
-
|
|
|
$
|
113,333
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,886,667
|
|
|
$
|
-
|
|
|
$
|
9,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of 6,000,000 Debt and Interest to Series A Preferred
shares
|
|
|
-
|
|
|
|
1,027
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
6,159,780
|
|
|
|
-
|
|
|
|
6,159,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sustut
Exploration Reorganization (2)
|
|
|
19,999,991
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
167,500
|
|
|
|
-
|
|
|
|
187,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option Compensation Expense
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,174
|
|
|
|
-
|
|
|
|
15,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Sale of Stock (2)
|
|
|
8,131,667
|
|
|
|
-
|
|
|
|
8,132
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,012,647
|
|
|
|
-
|
|
|
|
1,020,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings (Loss) from continuing operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(728,584
|
)
|
|
|
(728,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 28, 2009
|
|
|
141,464,940
|
|
|
|
1,027
|
|
|
$
|
141,465
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
16,241,768
|
|
|
$
|
(728,584
|
)
|
|
$
|
15,654,650
|
|
The
accompanying notes are an integral part of these financial
statements
(1)After
giving affect to the equivalent number of shares issued to existing Optex
shareholders due to the reorganization.
(2)Reorganization
and private placement transactions which occurred on March 30,
2009.
OPTEX
SYSTEMS HOLDINGS, INC.
(formerly
known as Sustut Exploration, Inc.)
Notes
to Condensed Consolidated Financial Statements
Note 1 - Organization and
Operations
On March
30, 2009, Optex Systems Holdings, Inc., (formerly known as Sustut Exploration,
Inc.), a Delaware corporation (the “Company”), along with Optex Systems, Inc. ,
a privately held Delaware corporation which is the Company’s wholly-owned
subsidiary (“Optex Delaware” or “Successor”), entered into a Reorganization
Agreement and Plan of Reorganization, pursuant to which Optex Delaware was
acquired by the Company in a share exchange transaction. The Company
became the surviving corporation. At the closing, the Company changed its name
from Sustut Exploration Inc. to Optex Systems Holdings, Inc. and its year end
from December 31 to a fiscal year ending on the Sunday nearest September
30.
On
October 14, 2008, certain senior secured creditors of Irvine Sensors Corp.
(“IRSN”), Longview Fund, L.P. (“Longview”) and Alpha Capital Anstalt (“Alpha”)
formed Optex Delaware, which acquired all of the assets and assumed certain
liabilities of Optex Systems, Inc., a Texas corporation and wholly owned
subsidiary of IRSN, (“Optex Texas” or “Predecessor”) in a transaction that was
consummated via purchase at a public auction. Following this asset
purchase, Optex Texas remained a wholly-owned subsidiary of
IRSN.
In accordance with SFAS 141 “Business
Combination” and EITF 98-3 “Determining Whether a Non-monetary Transaction
Involves Receipt of Productive Assets or of a Business” Optex Delaware’s
purchase of substantially all of the assets and assumption of certain
liabilities represented the acquisition of a business. EITF 98-3
outlines the guidance in determining whether a “business” has been acquired in a
transaction. For a transferred set of activities and assets to be a business, it
must contain all of the inputs and processes necessary for it to continue to
conduct normal operations after the transferred set of assets is separated from
the transferor, which include the ability to sustain a revenue stream by
providing its outputs to customers. Optex Delaware obtained the inputs and
processes necessary for normal operations
.
Optex
Texas was a privately held Subchapter “S” Corporation from inception in 1987
until December 30, 2005 when 70% of the issued and outstanding stock was
acquired by IRSN, and Optex Texas was automatically converted to a Subchapter
“C” Corporation. On December 29, 2006, the remaining 30% equity
interest in Optex Texas was purchased by IRSN.
On
February 20, 2009, Sileas Corp. (“Sileas”), a newly-formed Delaware corporation,
owned by present members of the company’s management, purchased 100% of
Longview's equity and debt interest in Optex Delaware, representing 90% of
the issued and outstanding common equity interests in Optex Delaware, in a
private transaction (the “Acquisition”). See Note 4.
Optex
Delaware operated as a privately-held Delaware corporation until March 30, 2009,
when as a result of the Reorganization Agreement (described above and also in
Note 5), it became a wholly-owned subsidiary of the Company. Sileas
is the majority owner (parent) of the Company owning approximately 73% of the
Company. The Company plans to carry on the business of Optex Delaware as its
sole line of business and all of the Company’s operations are conducted by and
through Optex Delaware. Accordingly, in subsequent periods the
financial statements presented will be those of the accounting
acquirer. The financial statements of the Company represent
subsidiary statements and do not include the accounts of its majority
owner.
The
Company’s operations are based in Richardson, Texas in a leased facility
comprising 49,100 square feet. As of June 28, 2009, the Company
operated with 107 full-time equivalent employees.
The
Company manufactures optical sighting systems and assemblies, primarily for
Department of Defense applications. Its products are installed on a
variety of U.S. military land vehicles such as the Abrams and Bradley fighting
vehicles, light armored and advanced security vehicles and have been selected
for installation on the Stryker family of vehicles. The Company also
manufactures and delivers numerous periscope configurations, rifle and
surveillance sights and night vision optical assemblies. The Company’s products
consist primarily of build to customer print products that are delivered both
directly to the military and to other defense prime
contractors.
In
February 2009, the Company’s ISO certification status was upgraded
from 9001:2000 to 9001:2008 bringing the Company into compliance with
the new ISO standards rewritten to align with ISO 14001.
Note
2 - Accounting Policies
Basis
of Presentation
Principles of
Consolidation:
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Optex
Delaware. All significant inter-company balances and transactions
have been eliminated in consolidation.
The
accompanying financial statements include the results of operations and cash
flows of Optex Delaware, the accounting acquirer in the Sustut
reorganization and the Successor in the October 14, 2008 Optex Texas asset
purchase transaction, for the period from October 15, 2008 through June 28,
2009. The accompanying financial statements include the
balance sheet at September 28, 2008 and the results of operations, changes in
stockholders’ equity and cash flows for the period from September 29, 2008
through October 14, 2008 of Optex Texas, Predecessor.
Although,
Optex Texas (predecessor) has been majority owned by various parent companies
described in the preceding paragraphs, no accounts of the parent companies or
the effects of consolidation with any parent companies have been included in the
accompanying financial statements. The Optex Texas accounts have been
presented on the basis of push down accounting in accordance with Staff
Accounting Bulletin No. 54
Application of “Push Down” Basis of
Accounting in Financial Statements of Subsidiaries Acquired by Purchase
.
SAB 54 states that the push down basis of accounting should be used in a
purchase transaction in which the entity becomes wholly-owned. Under the push
down basis of accounting certain transactions incurred by the parent company,
which would otherwise be accounted for in the accounts of the parent, are
“pushed down” and recorded on the financial statements of the subsidiary.
Accordingly, items resulting from the Optex Texas purchase transaction such as
goodwill, debt incurred by the parent to acquire the subsidiary and other costs
related to the purchase have been
recorded on the
financial statements of the Company.
Upon
completing the business combination with Sustut on March 30, 2009, the Company
elected to change its fiscal year to match that of Optex Delaware. Accordingly,
all activity of the combined companies was presented as of the quarter’s end of
the accounting acquirer, which was March 29, 2009.
Although
the effective date of the merger was March 30, 2009, all transactions related to
the business combination (and only those transactions), with Sustut have been
reflected as if they had taken place one day prior (on March 29, 2009) so as to
coincide with the accounting acquirer’s quarter end of March 29, 2009. See Note
5 for details of the Reorganization.
The
condensed consolidated financial statements of the Company included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the SEC. Certain information and footnote disclosures normally
included in financial statements prepared in conjunction with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the annual audited financial
statements and the notes thereto included in the Company’s Forms 8-K and other
reports filed with the SEC.
The
accompanying unaudited interim financial statements reflect all adjustments of a
normal and recurring nature which are, in the opinion of management, necessary
to present fairly the financial position, results of operations and cash flows
of the Company for the interim periods presented. The results of operations for
these periods are not necessarily comparable to, or indicative of, results of
any other interim period or for the fiscal year taken as a whole. Certain
information that is not required for interim financial reporting purposes has
been omitted.
Use of
Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the estimates.
Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted as
appropriate for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. Cost is determined using the first-in
first-out (FIFO) method. Under arrangements by which progress payments are
received against certain contracts, the customer retains a security interest in
the undelivered inventory identified with these contracts. Payments received for
such undelivered inventory are classified as unliquidated progress payments and
deducted from the gross inventory balance. At June 28, 2009, and September 28,
2008 inventory included:
|
|
Successor
As of June
28, 2009
|
|
|
Predecessor
As of
September
28, 2008
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
$
|
6,939,094
|
|
|
$
|
4,199,657
|
|
Work
in Process
|
|
|
3,529,351
|
|
|
|
5,575,520
|
|
Finished
Goods
|
|
|
780,828
|
|
|
|
28,014
|
|
Gross
Inventory
|
|
$
|
11,249,273
|
|
|
$
|
9,803,191
|
|
Less:
|
|
|
|
|
|
|
|
|
Unliquidated
Progress Payments
|
|
|
(3,546,890
|
)
|
|
|
(4,581,736
|
)
|
Inventory
Reserves
|
|
|
(859,366
|
)
|
|
|
(673,729
|
)
|
Net
Inventory
|
|
$
|
6,843,017
|
|
|
$
|
4,547,726
|
|
Stock-Based
Compensation:
In December 2004, FASB issued SFAS No. 123R,
Share-Based
Payment
. SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments. SFAS No. 123R focuses primarily
on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued.
The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF 96-18,
“Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18,
“Accounting Recognition for Certain Transactions Involving Equity Instruments
Granted to Other Than Employees.” The measurement date for the fair
value of the equity instruments issued is determined at the earlier of
(i) the date at which a commitment for performance by the consultant or
vendor is reached or (ii) the date at which the consultant or vendor’s
performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term
of the consulting agreement. Stock-based compensation related to
non-employees is accounted for based on the fair value of the related stock or
options or the fair value of the services, which ever is more readily
determinable in accordance with SFAS 123R.
Earnings per
Share:
Basic earnings per common share is computed by dividing net
earnings by the weighted average number of common shares outstanding during each
year presented. Diluted earnings per common share give the effect to the assumed
exercise of stock options when dilutive. In a loss year, the calculation for
basic and diluted earnings per share is considered to be to be the same, as the
impact of potential common shares is anti-dilutive. For the period October 15,
2008 through June 28, 2009 there were 2,681,649 stock options issued and
outstanding that could dilute future earnings. For the period September 29, 2008
through October 14, 2008 and for the nine months ended June 29, 2008, there were
no stock options that could dilute future earnings
Note
3 - Recent Accounting Pronouncements
In June
2008, FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities”. FSP EITF 03-6-1 clarifies that share-based payment awards that
entitle their holders to receive nonforfeitable dividends or dividend
equivalents before vesting should be considered participating securities. As
participating securities, we will be required to include these instruments in
the calculation of our basic earnings per share ("EPS"), and we will need to
calculate basic EPS using the "two-class method." Restricted stock is currently
included in our dilutive EPS calculation using the treasury stock method. The
two-class method of computing EPS is an earnings allocation formula that
determines EPS for each class of common stock and participating security
according to dividends declared (or accumulated) and participation rights in
undistributed earnings. FSP EITF 03-6-1 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and all interim
periods within those fiscal years. As such, the Company is required to adopt
these provisions at the beginning of the fiscal year ending October 3, 2010. The
Company does not expect adoption of FSP EITF 03-6-1 to have a material effect on
the Company’s financial statements.
In May
2009, FASB issued SFAS No. 165, "Subsequent Events". SFAS 165 establishes
principles and requirements for the reporting of events or transactions that
occur after the balance sheet date, but before financial statements are issued
or are available to be issued. SFAS 165 is effective for financial statements
issued for fiscal years and interim periods ending after June 15, 2009. As such,
the Company adopted these provisions at the beginning of the interim period
ended June 28, 2009. Adoption of SFAS 165 did not have a material effect on the
Company’s financial statements.
In June
2009, FASB issued Statement of Financial Accounting Standard No. 168, " The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No. 162". SFAS 168
replaces Statement 162 and establishes the FASB Accounting Standards
CodificationTM (Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with GAAP. SFAS 168 is
effective for financial statements issued for fiscal years and interim periods
ending after September 15, 2009. As such, the Company is required to adopt these
provisions at the beginning of the interim period ending September 27, 2009. The
Company does not expect adoption of SFAS 168 to have a material effect its
financial statements.
In June
2006, FASB issued Interpretation No. 48 “
Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109
”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “
Accounting for Income Taxes
”
.
FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN 48 did not have a material impact on the Company's
financial position, results of operations, or cash flows.
In
September 2006, the FASB issued FASB Statement 157, “Fair Value Measurements”.
FASB No. 157 defines fair value, establishes a framework for measuring fair
value under GAAP and expands disclosures about fair value measurements. FASB No.
157 applies under other accounting pronouncements that require or permit fair
value measurements. Accordingly, FASB No. 157 does not require any new fair
value measurements. However, for some entities, the application of FASB No. 157
will change current practice. The changes to current practice resulting from the
application of FASB No. 157 relate to the definition of fair value, the methods
used to measure fair value and the expanded disclosures about fair value
measurements. The provisions of FASB No. 157 are effective as of January 1,
2008, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. However, delayed application of
this statement is permitted for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years. The adoption of FASB No. 157 did not have a material impact on the
Company's financial position, results of operations, or cash flows.
In
February 2007, Statement of Financial Accounting Standards No. 159, “
The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115
,” was issued. This standard allows a company to irrevocably elect
fair value as the initial and subsequent measurement attribute for certain
financial assets and financial liabilities on a contract-by-contract basis, with
changes in fair value recognized in earnings. The provisions of this standard
are effective as of the beginning of our fiscal year 2008, with early adoption
permitted. The adoption of FASB No. 159 did not have a material impact on the
Company's financial position, results of operations, or cash flows.
In March
2007, EITF Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar
Life Insurance Agreements”. EITF 06-10 provides guidance for determining a
liability for the postretirement benefit obligation as well as recognition and
measurement of the associated asset on the basis of the terms of the collateral
assignment agreement. EITF 06-10 is effective for fiscal years beginning after
December 15, 2007. The adoption of EITF 06-10 did not have a material impact on
the Company's financial position, results of operations, or cash
flows.
In
December 2007,FASB issued SFAS No. 141(R),
Business Combinations
and
SFAS No. 160,
Accounting and
Reporting of Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51
. These new standards will significantly change
the accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. Statement Nos. 141(R)
and 160 are required to be adopted simultaneously and are effective for the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited. The Company is currently evaluating the impact of
adopting SFAS Nos. 141(R) and SFAS 160 on its financial statements.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110. SAB 110 permits
companies to continue to use the simplified method, under certain circumstances,
in estimating the expected term of “plain vanilla” options beyond December 31,
2007. SAB 110 updates guidance provided in SAB 107 that previously stated that
the Staff would not expect a company to use the simplified method for share
option grants after December 31, 2007. The Company does not have any outstanding
stock options issued before December 31, 2007.
In March
2008, FASB issued SFAS No. 161, "
Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133
”. SFAS 161 requires enhanced disclosures about an entity’s derivative
and hedging activities. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008 with
early application encouraged. As such, the Company is required to adopt these
provisions at the beginning of the fiscal year ended September 30, 2009. The
Company is currently evaluating the impact of SFAS 161 on its financial
statements but does not expect it to have a material effect
In May
2008, FASB issued SFAS No. 162, "
The Hierarchy of Generally Accepted
Accounting Principles
”. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States. SFAS 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. The adoption of FASB No. 162 did
not have a material impact on the Company's financial position, results of
operations, or cash flows.
In May
2008, FASB issued SFAS No. 163, "
Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60
". SFAS
163 interprets Statement 60 and amends existing accounting pronouncements to
clarify their application to the financial guarantee insurance contracts
included within the scope of that Statement. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. As such, the Company is required to
adopt these provisions at the beginning of the fiscal year ended September 30,
2011. The Company is currently evaluating the impact of SFAS 163 on its
financial statements but does not expect it to have a material
effect.
Note
4 — Acquisition of Substantially All of the Assets of Optex Texas
Acquisition
of Assets of Optex Texas by Optex Delaware on October 14, 2008
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Delaware (Successor) purchased all of the assets of Optex Texas
(Predecessor) in exchange for $15 million of IRSN debt owned by it and the
assumption of approximately $3.8 million of certain Optex Texas liabilities. The
$15 million of IRSN debt was contributed by Longview and Alpha to Optex
Delaware, Arland Holdings, Ltd. as discussed below, in exchange for a $6
million note payable from Optex Delaware and a $9 million equity interest in
Optex Delaware (which consisted of the issuance by Optex Delaware of 45,081,350
and 4,918,650 shares of its common stock to each of Longview Fund and Alpha,
respectively). On October 30, 2008, Alpha sold its Optex Delaware common stock
to Arland Holdings, Ltd. There was no contingent consideration associated with
the purchase. Longview and Arland Holdings, Ltd., owned Optex Delaware until
February 20, 2009, when Longview sold 100% of its equity interests in Optex
Delaware to Sileas, as discussed below.
Optex
Delaware purchased all of the assets of Optex Texas, including: intellectual
property, production processes and know-how, and outstanding contracts and
customer relationships. Optex Delaware also assumed certain liabilities of Optex
Texas consisting of accounts payable and accrued liabilities. The Company’s
management intends to improve the business’s ability to serve its existing
customers and to attract new customers by providing quality products and
superior service which will be achieved by improving the Company’s working
capital availability as opposed to the limited working capital that was
available during the time period in which the assets were owned by
IRSN.
Optex
Delaware has allocated the consideration for its acquisition of the Purchased
Assets among tangible and intangible assets acquired and liabilities assumed
based upon their fair values. Assets that met the criteria for recognition as
intangible assets apart from goodwill were also valued at their fair
values.
The
purchase price was assigned to the acquired interest in the assets and
liabilities of the Company as of October 14, 2008 as follows:
Assets:
|
|
|
|
Current
assets, consisting primarily of inventory of $5,383,929 and accounts
receivable of $1,404,434
|
|
$
|
7,330,910
|
|
Identifiable
intangible assets
|
|
|
4,036,789
|
|
Purchased
Goodwill
|
|
|
7,110,416
|
|
Other
non-current assets, principally property and equipment
|
|
|
343,898
|
|
|
|
|
|
|
Total
assets
|
|
$
|
18,822,013
|
|
Liabilities:
|
|
|
|
|
Current
liabilities, consisting of accounts payable of $1,953,833 and accrued
liabilities of $1,868,180
|
|
|
3,822,013
|
|
|
|
|
|
|
Acquired
net assets
|
|
$
|
15,000,000
|
|
The
following table summarizes the estimate of the fair values of the intangible
assets as of the asset transfer date:
|
|
Total
|
|
Contracted
Backlog - Existing Orders
|
|
$
|
2,763,567
|
|
Program
Backlog - Forecasted IDIQ awards
|
|
|
1,273,222
|
|
Total
Intangible Asset to be amortized
|
|
$
|
4,036,789
|
|
Identifiable
intangible assets primarily consist of customer and program backlog and will be
amortized between general and administrative expenses and costs of sales
according to their respective estimated useful lives as follows:
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Contracted
backlog amortized by delivery schedule
|
|
COS
|
|
$
|
1,666,559
|
|
|
$
|
718,289
|
|
|
$
|
126,158
|
|
|
$
|
19,614
|
|
|
$
|
4,762
|
|
Contracted
backlog amortized by delivery schedule
|
|
G&A
|
|
|
149,990
|
|
|
|
64,646
|
|
|
|
11,354
|
|
|
|
1,765
|
|
|
|
429
|
|
Program
backlog amortized straight line across 5 years
|
|
G&A
|
|
|
254,645
|
|
|
|
254,645
|
|
|
|
254,645
|
|
|
|
254,645
|
|
|
|
254,645
|
|
Total
Amortization by Year
|
|
|
|
$
|
2,071,194
|
|
|
$
|
1,037,580
|
|
|
$
|
392,157
|
|
|
$
|
276,024
|
|
|
$
|
259,834
|
|
The
accompanying unaudited pro forma financial information for the consolidated
predecessor and successor three and nine months ended June 28, 2009 and
successor three and nine months ended June 29, 2008 present the historical
financial information of the accounting acquirer. The pro forma financial
information is presented for informational purposes only. Such information is
based upon the standalone historical results of each entity and does not reflect
the actual results that would have been reported had the acquisition been
completed when assumed, nor is it indicative of the future results of operations
for the combined enterprise.
Pro forma
revenue and earnings per share information is presented cumulatively in Note
5.
Secured
Promissory Note Issued in Connection with Purchase by Optex Delaware
(Successor)
In
connection with the public sale of the Optex Texas (Predecessor) assets to Optex
Delaware (Successor), Optex Delaware delivered to Longview and Alpha Secured
Promissory Notes, due September 19, 2011, in the principal amounts of $5,409,762
and $540,976, respectively. On February 20, 2009, Longview sold its Optex
Delaware promissory note to Sileas, as described below. On March 27, 2009,
Sileas and Alpha exchanged their Notes plus accrued and unpaid interest thereon
for 1,027 shares of Optex Delaware Series A Preferred Stock.
Acquisition
by Sileas on February 20, 2009
On
February 20, 2009, Sileas purchased 100% of the equity and debt interest held by
Longview, representing 90% of Optex Delaware, in the “Acquisition”. As of the
date of this transaction, Sileas is the majority owner of the
Company.
Secured
Promissory Note Due February 20, 2012/Longview Fund, LP
As a
result of the transaction described above between Sileas and Longview Fund, LP
on February 20, 2009, Sileas, currently majority owner of the Company, executed
and delivered to Longview, a Secured Promissory Note due February 20, 2012 in
the principal amount of $13,524,405. The Note bears simple interest at the rate
of 4% per annum, and the interest rate upon an event of default increases to 10%
per annum. In the event the Company sells or conveys all or substantially all
its assets to a third party entity for more than nominal consideration, other
than a Reorganization into Sileas or reincorporation in another jurisdiction,
then this Note shall be immediately due and owing without demand. In the event
that a Major Transaction occurs prior to the maturity date resulting in the
Borrower receiving Net Consideration with a fair market value in excess of the
principal and interest due under the terms of this Secured Note, (the “Optex
Consideration”), then in addition to paying the principal and interest due,
Sileas shall also pay an amount equal to 90% of the Optex Consideration. The
obligations of Sileas under the Note are secured by a security interest in the
Company’s common and preferred stock owned by Sileas that was granted to
Longview pursuant to a Stock Pledge Agreement delivered by Sileas to Longview
and also by a lien on all of the assets of Sileas.
The
Company has not guaranteed the note and Longview is not entitled to pursue the
Company in the event of a default by Sileas. Therefore, there are no actual or
potential cash flow commitments from the Company. In the event of default by
Sileas on its obligations under the note, Longview would only be entitled to
receive the Company common and preferred stock held by Sileas.
Note
5 –Reorganization Plan and Private Placement
Reorganization/Share
Exchange
On
March 30, 2009, the Reorganization occurred whereby the then existing
shareholders of Optex Delaware exchanged their shares of common stock with the
shares of common stock of the Company as follows: (i) the outstanding 85,000,000
shares of Optex Delaware common stock were exchanged by the Company for
113,333,282 shares of Company common stock, (ii) the outstanding 1,027 shares of
Optex Delaware Series A Preferred Stock be exchanged by the Company for 1,027
shares of Company Series A Preferred Stock and (iii) the 8,131,667 shares of
Optex Delaware common stock purchased in the private placement were exchanged by
the Company for 8,131,667 shares of Company common stock. Following the
Reorganization, Optex Delaware remained a wholly-owned subsidiary of the
Company.
Shares
outstanding of the Company just prior to the close consisted of 19,999,991
shares of which 1,250,000 shares were issued on March 27, 2009 as payment for
Investor Relations Services, of which 700,000 were surrendered to the Company
upon termination of one of the Investor Relations contracts in June 2009. See
Note 11 – “Subsequent Events” for a further discussion of the termination of the
relationship with one of the Company’s investor relations firms and appointment
of a replacement service provider.
Private
Placement
Simultaneously
with the closing of the Reorganization Agreement, as of March 30, 2009 , the
Company accepted subscriptions from accredited investors for a total of 27.1
units (the "Units"), for $45,000 per Unit, with each Unit consisting of 300,000
shares of common stock, of the Company and warrants to purchase 300,000 shares
of common stock for $0.45 per share for a period of five years from the initial
closing, which were issued by the Company after the closing referenced above.
Gross proceeds to the Company were $1,219,750, and after deducting (i) a cash
finder’s fee of $139,555, (ii) non-cash consideration of indebtedness owed to an
investor of $146,250, and (iii) stock issuance costs of $59,416, net proceeds
were $874,529. The finder also received five year warrants to purchase 2.39
Units, at an exercise price of $49,500 per unit.
The
following table represents the Reorganization and Private Placement transactions
which occurred on March 30, 2009 reflected in March 29, 2009 statements due to
the election to report as of the accounting acquirers’ period
end:
Optex
Systems Holdings, Inc.
Balance
Sheet Adjusted for Reorganization and Private Placement
|
|
Unaudited
Quarter
Ended March 29,
2009
|
|
|
Reorganization
Adjustments
(1)
|
|
|
Private
Placement
Adjustments
|
|
|
Unaudited Quarter
Ended March 29,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
8,880,436
|
|
|
$
|
187,500
|
|
|
$
|
929,738
|
|
|
$
|
9,997,674
|
|
Non
current Assets
|
|
|
10,422,425
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,422,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
19,302,861
|
|
|
$
|
187,500
|
|
|
$
|
929,738
|
|
|
$
|
20,420,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
Payable
|
|
|
146,709
|
|
|
|
|
|
|
|
(146,250
|
)
|
|
|
459
|
|
Other
Current Liabilities
|
|
|
4,416,403
|
|
|
|
-
|
|
|
|
55,209
|
|
|
|
4,471,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
4,563,112
|
|
|
$
|
-
|
|
|
$
|
(91,041
|
)
|
|
$
|
4,472,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optex
Systems Holdings, Inc. – (par $0.001per share, 200,000,000 shares
authorized, 141,464,940 shares issued and outstanding as of March 29,
2009)
|
|
|
113,333
|
|
|
|
20,000
|
|
|
|
8,132
|
|
|
|
141,465
|
|
Optex
Systems Holdings, Inc. Preferred Stock (par value $0.001per
share, 5,000 shares authorized, 1027 shares of Series A
Preferred issued and outstanding)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Additional
Paid in Capital
|
|
|
15,046,446
|
|
|
|
167,500
|
|
|
|
1,012,647
|
|
|
|
16,226,593
|
|
Retained
Earnings
|
|
|
(420,031
|
)
|
|
|
|
|
|
|
|
|
|
|
(420,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders Equity
|
|
$
|
14,739,749
|
|
|
$
|
187,500
|
|
|
$
|
1,020,779
|
|
|
$
|
15,948,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders Equity
|
|
$
|
19,302,861
|
|
|
$
|
187,500
|
|
|
$
|
929,738
|
|
|
$
|
20,420,099
|
|
(1)
Sustut Exploration, Inc. Balance
Sheet as of the March 30, 2009 Reorganization. Other assets include $187,500 in
prepaid expenses for investor relation services to be realized over the next 12
months. The services were prepaid by the issue of 1,250,000 Sustut shares issued
by Sustut prior to March 30, 2009. The prepaid expense covers April 2009 through
April 2010 and will be reflected on the consolidated Statement of Operations for
the Company as expensed. See Note 11 - Subsequent Events. 700,000 of these
shares were returned to the Company subsequent to the quarter
end.
The
expenses reflected by the Company on its Statement of Operations for the period
from April 1, 2009 through March 31, 2010 will be increased by $46,875 per
calendar quarter (as a non-cash expense) as a result of the issuance of the
1,250,000 shares for Investor Relations Services by Sustut and are carried on
the Sustut Balance Sheet as a prepaid expense. The same Investor Relations
agreements also call for an aggregate cash payment of $8,000 per month which
will increase the expense by an additional $24,000 per quarter. Therefore, the
total impact of the agreements for Investor Relations Services is $70,875 per
quarter (pretax) including both the current cash expense and the amortization of
the prepaid expense which is carried on the Condensed Consolidated Balance Sheet
of the Company. See Note 11 - Subsequent Events. 700,000 of these shares were
returned to the Company subsequent to the quarter end.
The
accompanying unaudited pro forma financial information for the consolidated
successor and predecessor nine months ended June 28, 2009 and successor nine
months ended June 29, 2008 present the historical financial information of the
accounting acquirer. The pro forma financial information is presented for
information purposes only. Such information is based upon the standalone
historical results of each company and does not reflect the actual results that
would have been reported had the acquisition been completed when assumed, nor is
it indicative of the future results of operations for the combined
enterprise.
The
following represents condensed pro forma revenue and earnings information for
the three and six months ended June 28, 2009 and June 29, 2008 as if the
acquisition of Optex Texas and Reorganization Plan had occurred on the first day
of each of the years.
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 28,
2009
|
|
|
June 29,
2008
|
|
|
June 28,
2009
|
|
|
June 29,
2008
|
|
Revenues
|
|
|
6,983,930
|
|
|
|
3,881,053
|
|
|
|
20,956,300
|
|
|
|
13,925,073
|
|
Net
Income (Loss)
|
|
|
(308,553
|
)
|
|
|
145,877
|
|
|
|
(653,750
|
)
|
|
|
(450,016
|
)
|
Diluted
earnings per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
141,464,940
|
|
|
|
141,464,940
|
|
|
|
141,464,940
|
|
|
|
141,464,940
|
|
The pro
forma information depicted above reflect the impacts of reduced interest
expense, increased intangible amortization expenses, the elimination of
corporate allocation costs from IRSN and the elimination of employee stock bonus
compensation previously pushed down from IRSN. There is no expected
tax effect of the proforma adjustments for the periods affected in 2008 due
to net loss and accumulated retained deficit of IRSN
Note
6 Commitments and Contingencies
Leases
The
Company leases its office and manufacturing facilities under two non-cancellable
operating leases expiring November 2009 and February 2010 in addition to
maintaining several non-cancellable operating leases for office and
manufacturing equipment. The Company is in negotiation to enter into
new leases for the facilities; however, in the event the negotiations are not
successful, the Company believes it can secure replacement facilities upon
similar terms in the surrounding vicinity. Total expenses under these
facility lease agreements for the three and nine months ended June 28, 2009 was
$77,350 and 232,343 respectively. Total expenses for manufacturing
and office equipment for the three and nine months ended June 28, 2009 was $796
and $2,464, respectively. At June 28, 2009, the remaining minimum
lease payments under non-cancelable operating leases for equipment, office and
facility space are as follows:
|
|
Operating
Leases
|
|
Fiscal
Years ending September
|
|
|
|
2009
|
|
$
|
119,461
|
|
2010
|
|
|
79,867
|
|
2011
|
|
|
16,753
|
|
2012
|
|
|
-
|
|
2013
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
minimum lease payments
|
|
$
|
216,081
|
|
Note
7 - Debt Financing
Non-Related
parties
Short
Term Note Payable/Longview Fund
-
On September 23, 2008, Optex Delaware borrowed $146,709 from
Longview and issued a promissory note dated September 23, 2008, to Longview in
connection therewith. Pursuant to an Allonge No. 1 to Promissory
Note, dated January 20, 2009, the Maturity Date was extended until March 31,
2009. On March 30, 2009 in conjunction with the Reorganization and
Private Placement, Longview Fund purchased 3.25 Units of the Private Placement
using $146,250 of the outstanding Note Payable as consideration for the
purchase. (See Note 5).
Short
term note payable (Qioptic)
-
On
November 20, 2008, Optex Delaware issued a promissory note to Qioptiq Limited in
the amount of $117,780. The Note originated as a trade payable as of September
28, 2008 in the amount of $227,265, and was paid in full as of March 29,
2009.
Note
8 – Stockholders Equity
Common
Stock:
Stock
Split
On March
26, 2009, Optex Delaware’s Board of Directors reconfirmed a 1.7:1 forward split
of its common stock to holders of record as of February 23,
2009. Accordingly, as a result of the forward split, the 45,081,350
shares of common stock held by Sileas was split into
76,638,295 shares, and the 4,918,650 shares of common stock held by
Arland Holdings, Ltd. was split into 8,361,705 shares.
As of
March 30, 2009, Optex Delaware was authorized to issue 200,000,000 shares of
$0.001 par value common stock, of which 85,000,000 shares were issued and
outstanding as follows:
Sileas
Corporation
|
|
|
76,638,295
|
|
Arland
Holdings, Ltd.
|
|
|
8,361,705
|
|
Total
Outstanding
|
|
|
85,000,000
|
|
Reorganization
& Private Placement:
On March
29, 2009, as a result of the Reorganization Agreement and Private Placement, the
85,000,000 outstanding shares of Optex Delaware as of March 30, 2009 were
exchanged for 113,333,282 shares of the Company (formerly Sustut Exploration,
Inc.). An additional 8,131,667 shares were issued as a result of the private
placement closed concurrently with the Reorganization.
Each
share of stock entitles the holder to one vote on matters brought to a vote of
the shareholders.
The
company granted an officer at the consummation of the reorganization, options:
to purchase 1,414,649 shares with exercise price of $0.15 per share. The options
vest 34% one year following the date of grant, and 33% on each of the second and
third anniversaries following the date of grant. See Note 10 - Stock Based
Compensation.
Series
A Preferred Stock
On March
24, 2009, the Company filed a Certificate of Designation with the Secretary of
State of the State of Delaware authorizing a series of preferred stock, under
its articles of incorporation, known as “Series A Preferred Stock”. This
Certificate of Designation was approved by the Company’s Board of Directors and
Shareholders at a Board Meeting and Shareholders Meeting held on February 25,
2009. The Certificate of Designation sets forth the following terms for the
Series A Preferred Stock: (i) number of authorized shares: 1,027; (ii) per share
stated value: $6,000; (iii) liquidation preference per share: stated value; (iv)
conversion price: $0.15 per share as adjusted from time to time; and (v) voting
rights: votes along with the common stock on an as converted basis with one vote
per share.
The
Series A Preferred Stock entitles the holders to receive cumulative dividends at
the rate of 6% per annum payable in cash at the discretion of Board of
Directors. Each share of preferred stock is immediately convertible into common
shares at the option of the holder which entitles the holder to receive the
equivalent number of common shares equal to the stated value of the preferred
shares divided by the conversion price, which was initially set at $0.15 per
share.
Holders
of preferred shares receive preferential rights in the event of liquidation.
Additionally the preferred stock shareholders are entitled to vote together with
the common stock on an ”as-converted” basis.
On March
27, 2009, Sileas and Alpha exchanged their promissory notes in the total amount
of $6,000,000 plus accrued and unpaid interest thereon into 1,027 shares of
Series A Preferred Stock. On March 30, 2009 shares of Optex Systems, Inc. Series
A Preferred Stock was exchanged on a 1:1 basis for Series A Preferred Stock of
the Company.
Note 9—Earnings/Loss Per Share
Basic
earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) for the period. Diluted earnings per share is
computed by assuming that any dilutive convertible securities outstanding were
converted, with related preferred stock dividend requirements and outstanding
common shares adjusted accordingly. In a loss year, the calculation
for basic and diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive. At June 28, 2009
there were 2,681,649 stock options that could dilute future earnings, as
compared to zero stock options at June 29, 2008.
The
following table sets forth the computation of basic and diluted net loss
attributable to common stockholders per share for the three and nine months
ended June 28, 2009, and June 29, 2008.
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Predecessor
|
|
|
|
Three Months
ended June 28,
2009
|
|
|
Three Months
ended June 29,
2008
|
|
|
For the period
October 15, 2008
through June 28,
2009
|
|
|
For the period
September 29,
2008 through
October 14,
2008
|
|
|
Nine Months
ended June 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(308,553
|
)
|
|
$
|
(241,147
|
)
|
|
$
|
(728,584
|
)
|
|
$
|
65,332
|
|
|
$
|
(1,613,196
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares
|
|
|
141,464,940
|
|
|
|
10,000
|
|
|
|
122,744,977
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.00
|
)
|
|
$
|
(24.11
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
6.53
|
|
|
$
|
(161.32
|
)
|
Note
10-Stock Based Compensation
On
March 26, 2009, the Board of Directors and Shareholders of Sustut adopted the
2009 Stock Option Plan providing for the issuance of up to 6,000,000 shares
to Company officers, directors, employees and to independent contractors
who provide services to the Company.
Options
granted under the 2009 Stock Option Plan vest as determined by the Board of
Directors of the Company or committee set up to act as a compensation committee
of the Board of Directors and terminate after the earliest of the following
events: expiration of the option as provided in the option agreement, 90 days
subsequent to the date of termination of the employee, or ten years from the
date of grant (five years from the date of grant for incentive options granted
to an employee who owns more than 10% of the total combined voting power of all
classes of the Company stock at the date of grant). In some
instances, granted stock options are immediately exercisable into restricted
shares of common stock, which vest in accordance with the original terms of the
related options. The Company recognizes compensation expense ratably over the
requisite service period.
The
option price of each share of common stock shall be determined by the Board of
Directors or compensation committee (when one is established), provided that
with respect to incentive stock options, the option price per share shall in all
cases be equal to or greater than 100% of the fair value of a share of common
stock on the date of the grant, except an incentive option granted under the
2009 Stock Option Plan to a shareholder that owns more than 10% of the total
combined voting power of all classes of the Company stock, shall have an
exercise price of not less than 110% of the fair value of a share of common
stock on the date of grant. No participant may be granted incentive stock
options, which would result in shares with an aggregate fair value of more than
$100,000 first becoming exercisable in one calendar year.
On March
30, 2009, 1,414,649 stock options with an exercise price of $0.15 were granted
to an officer of the Company which vest as follows: 34% after the
first year, and 33% each after the second and third years. These
options carry a grant expiration date of seven years after
issuance. On May 14, 2009, 1,267,000 stock options were issued to
other Company employees, including 250,000 shares to one Company
officer. These stock options vest 25% per year after
each year of employment and carry a grant expiration date of seven years after
issuance. For shares granted as of May 14, 2009, the Company
anticipates an annualized employee turnover rate of 3% per year, and as such
anticipate that only 1,174,786 of the 1,267,000 shares will vest as of the end
of the contract term. As of June 28, 2009 none of the stock options
had vested.
For the
three months and nine months ended June 28, 2009, the Company recorded
compensation costs for options and shares granted under the plan amounting to
$15,174. There were no stock options or shares granted or outstanding
prior to September 28, 2008, therefore no compensation expense was recorded in
2008. The impact of this expense was immaterial to the basic and
diluted net loss per share for the three months and nine months ended June 28,
2009. A deduction is not allowed for income tax purposes until
nonqualified options are exercised. The amount of this deduction will be the
difference between the fair value of the Company’s common stock and the exercise
price at the date of exercise. For the three months ended June 28, 2009
estimated deferred tax assets were deemed immaterial and have not been recorded
for the tax effect of the financial statement expense. The tax effect of the
income tax deduction in excess of the financial statement expense, if any, will
be recorded as an increase to additional paid-in capital. No tax
deduction is allowed for incentive stock options. Accordingly no deferred tax
asset is recorded for GAAP expense related to these options.
Management
has valued the options at their date of grant utilizing the Black Scholes option
pricing model. The fair value of the underlying shares was determined
based on the closing price of the Company’s publicly-traded shares as of June
26, 2009. Further, the expected volatility was calculated using the
historical volatility of a diversified index of companies in
the defense, homeland security, and space industry in accordance with
Question 6 of SAB Topic 14.D.1. In making this determination and
trying to find another similar company, the Company considered the industry,
stage of life cycle, size and financial leverage of such other
entities. Based on the development stage of the Company, similar
companies with enough historical data were not available. The
Company utilized the three year volatility of the SPADE Defense Index, which is
a diversified index of 58 companies in the same industry as the
Company. The risk-free interest rate is based on the implied yield
available on U.S. Treasury issues with an equivalent term approximating the
expected life of the options depending on the date of the grant and expected
life of the options. The expected life of options used was based on
the contractual life of the option granted. The Company determined
the expected dividend rate based on the assumption and expectation that earnings
generated from operations are not expected to be adequate to allow for the
payment of dividends in the near future. The following weighted-average
assumptions were utilized in the fair value calculations for options
granted:
|
|
Nine months Ended
|
|
|
June 28, 2009
|
|
|
|
Expected
dividend yield
|
|
0
%
|
Expected
stock price volatility
|
|
27.8
%
|
Risk-free
interest rate (1)
|
|
2.8%-4.07
%
|
Expected
life of options
|
|
4.5
to 7 Years
|
(1)
2.8% for grant expected life less than
7 years
(2)
4.07% for grant expected life of 7
years.
The
Company has granted stock options to officers and employees as
follows:
Date of
|
|
Shares
|
|
|
Exercise
|
|
|
Shares Outstanding
|
|
Expiration
|
|
Vesting
|
Grant
|
|
Granted
|
|
|
Price
|
|
|
As of 06/28/09
|
|
Date
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/30/09
|
|
|
480,981
|
|
|
$
|
0.15
|
|
|
|
480,981
|
|
03/29/2016
|
|
03/30/2010
|
03/30/09
|
|
|
466,834
|
|
|
|
0.15
|
|
|
|
466,834
|
|
03/29/2016
|
|
03/30/2011
|
03/30/09
|
|
|
466,834
|
|
|
|
0.15
|
|
|
|
466,834
|
|
03/29/2016
|
|
03/30/2012
|
05/14/09
|
|
|
316,750
|
|
|
|
0.15
|
|
|
|
316,750
|
|
05/13/2016
|
|
05/14/2010
|
05/14/09
|
|
|
316,750
|
|
|
|
0.15
|
|
|
|
316,750
|
|
05/13/2016
|
|
05/14/2011
|
05/14/09
|
|
|
316,750
|
|
|
|
0.15
|
|
|
|
316,750
|
|
05/13/2016
|
|
05/14/2012
|
05/14/09
|
|
|
316,750
|
|
|
|
0.15
|
|
|
|
316750
|
|
05/13/2016
|
|
05/14/2013
|
Total
|
|
|
|
|
|
|
|
|
|
|
2,681,649
|
|
|
|
|
The
following table summarizes the status of the Company’s aggregate stock options
granted under the incentive stock option plan:
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
Average
|
|
|
Aggregate
|
|
Subject to Exercise
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of June 29, 2008
|
|
|
-
|
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
Granted
– 2009
|
|
|
2,681,649
|
|
|
$
|
0.09
|
|
|
|
5.38
|
.
|
|
$
|
233,049
|
|
Forfeited
– 2009
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
– 2009
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
as of June 28, 2009
|
|
|
2,681,649
|
|
|
$
|
0.09
|
|
|
|
5.38
|
|
|
$
|
233,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of June 28, 2009
|
|
|
0
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The
weighted-average grant date fair value of options granted during the nine months
ended June 28, 2009 was $0.14. The total intrinsic value of options
exercised during the nine months June 28, 2009 was $ 0.0
The
following table summarizes the status of the Company’s aggregate non-vested
shares granted under the 2009 Stock Option Plan (See Note 9):
|
|
Number of
Non-
vested
Shares
Subject to
Options
|
|
|
Weighted-
Average
Grant-
Date
Fair Value
|
|
Non-vested
as of June 28, 2009
|
|
|
-
|
|
|
$
|
|
|
Non-vested
granted — nine months ended June 28, 2009
|
|
|
2,681,649
|
|
|
$
|
0.14
|
|
Vested — nine
months ended June 28, 2009
|
|
|
-
|
|
|
$
|
0.00
|
|
Forfeited — nine
months ended June 28, 2009
|
|
|
-
|
|
|
$
|
|
|
Non-vested
as of June 28, 2009
|
|
|
2,681,649
|
|
|
$
|
0.14
|
|
As of
June 28, 2009, the unrecognized compensation cost related to non-vested
share based compensation arrangements granted under the plan that was
approximately $357,196. These costs are expected to be recognized on
a straight line basis from March 30, 2009 through May 13, 2013. The total
fair value of options and shares vested during the year period ended
June 28, 2009 was $0.0.
Note
11-Subsequent Events
On June
26, 2009, the Company terminated its Investor Relations Agreement with American
Capital Ventures, Inc., and pursuant to this termination, American Capital
Ventures returned 700,000 of the 1,000,000 restricted shares of Company common
stock it received pursuant to the agreement.
Effective
as of June 29, 2009, the Company entered into a Consulting Agreement with ZA
Consulting, Inc. for the provision of consulting services to the Company’s
management including investor support; broker relations; conducting due
diligence meetings with brokers, analysts, institutional money managers and
financial media companies; attendance at investor conferences and trade shows;
and assistance in the preparation and dissemination of press releases and
stockholder communications. ZA Consulting will also assist the
Company with corporate communications involving brand, product, and corporate
awareness. The term of the Agreement is for one year terminating June
30, 2010. For services rendered, ZA Consulting was paid $150,000 upon
execution of the Agreement and will receive $5,000 and 40,000 shares of
restricted common stock per month for the duration of the
agreement.
The
expenses reflected by the Company on its Statement of Operations for the period
from June 29, 2009 through June 27, 2010 will be increased by $36,000 over the
next twelve months due to amortization of the prepaid expense of $150,000 and
non cash related stock issues as a result of the change in firms.
Subsequent
events were evaluated through August 12, 2009, the date the financial statements
were issued.
Note
12-Restatement of September 28, 2008 financial statements
As a
result of Securities and Exchange Commission comments, we have reissued the
financial statements to restate the following:
The
Company reclassified the asset impairment of goodwill from other expenses to an
operating expense. This reclassification increased the loss from
operations by $1,586,416 to $4,653,743 with no change to the net
loss.
Note 2
has been restated to accurately reflect the Company’s revenue recognition
policy.
The above
restatements have no affect on the balance sheet, statements of
stockholders’ equity, net loss or cash flows for the year ended
September 28, 2008.
Note
13-Restatement of June 28, 2009 financial statements
The
presentation of the October 14, 2008 Optex Delaware acquisition of all the
assets and certain liabilities of Optex Texas has been restated to properly
reflect Optex Delaware as the Successor entity and Optex Texas as the
Predecessor entity.
OPTEX
SYSTEMS, INC.
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
|
|
F-24
|
|
|
|
|
|
|
Notes
to Financial Statements
|
|
|
F-30
|
|
|
|
|
|
|
Balance
Sheets as of September 28, 2008 and September 30, 2007
|
|
|
F-25
|
|
|
|
|
|
|
Statements
of Operations for years ended September 28, 2008 and September 30,
2007
|
|
|
F-27
|
|
|
|
|
|
|
Statements
of Stockholders’ Equity (Deficit) for the years ended September 28, 2008
and September 30, 2007
|
|
|
F-29
|
|
|
|
|
|
|
Statements
of Cash Flows for the years ended September 28, 2008 and September 30,
2007
|
|
|
F-28
|
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Optex Systems, Inc.
Richardson,
Texas
We have
audited the accompanying balance sheets of Optex Systems, Inc. (the Company) as
of September 28, 2008 and September 30, 2007, and the related statements of
operations, stockholders’ equity, and cash flows for the years then ended. The
Company’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As
discussed in Note 15 to the financial statements, the Company restated the
previously issued financial statements for September 28, 2008 and September 30,
2007 as the result of Securities and Exchange Commission (SEC) comments. The
restatements have no effect on the balance sheet, statements of stockholders’
equity, net loss or cash flows for the years ended September 28, 2008 or
September 30, 2007.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Optex Systems, Inc. as of December
September 28, 2008 and September 30, 2007, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/Rotenberg
& Co., LLP
Rotenberg
& Co., LLP
Rochester,
New York
April 3,
2009
except for Note
15, as to which the date is August 30, 2009
Optex
Systems, Inc.
Balance
Sheets
|
|
September 28, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
170,183
|
|
|
$
|
504,753
|
|
Accounts
Receivable
|
|
|
2,454,235
|
|
|
|
2,043,634
|
|
Net
Inventory
|
|
|
4,547,726
|
|
|
|
6,112,565
|
|
Prepaid
Expenses
|
|
|
307,507
|
|
|
|
17,072
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
7,479,651
|
|
|
|
8,678,024
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment
|
|
|
1,314,109
|
|
|
|
1,196,543
|
|
Accumulated
Depreciation
|
|
|
(994,542
|
)
|
|
|
(830,108
|
)
|
|
|
|
|
|
|
|
|
|
Total
Property and Equipment
|
|
|
319,567
|
|
|
|
366,435
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Security
Deposits
|
|
|
20,684
|
|
|
|
20,684
|
|
Intangibles
|
|
|
1,100,140
|
|
|
|
1,696,507
|
|
Goodwill
|
|
|
10,047,065
|
|
|
|
11,633,481
|
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
11,167,889
|
|
|
|
13,350,672
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
18,967,107
|
|
|
$
|
22,395,131
|
|
The
accompanying notes are an integral part of these financial
statements
Optex
Systems, Inc.
Balance
Sheets - continued
|
|
September
28,2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
1,821,534
|
|
|
$
|
3,381,508
|
|
Accrued
Expenses
|
|
|
798,974
|
|
|
|
371,320
|
|
Accrued
Warranties
|
|
|
227,000
|
|
|
|
-
|
|
Accrued
Contract Losses
|
|
|
821,885
|
|
|
|
1,377,348
|
|
Loans
Payable
|
|
|
373,974
|
|
|
|
-
|
|
Income
Tax Payable
|
|
|
4,425
|
|
|
|
25,969
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
4,047,792
|
|
|
|
5,156,145
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
|
|
|
|
|
|
Note
Payable
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Accrued
Interest on Note
|
|
|
336,148
|
|
|
|
136,148
|
|
Due
to IRSN (Parent)
|
|
|
4,300,151
|
|
|
|
1,987,870
|
|
|
|
|
|
|
|
|
|
|
Total
Other Liabilities
|
|
|
6,636,299
|
|
|
|
4,124,018
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
10,684,091
|
|
|
|
9,280,163
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
Stock (no par 100,000 authorized, 18,870 shares issued and 10,000 shares
outstanding)
|
|
|
164,834
|
|
|
|
164,834
|
|
Treasury
Stock (8,870 shares at cost)
|
|
|
(1,217,400
|
)
|
|
|
(1,217,400
|
)
|
Additional
Paid-in-capital
|
|
|
15,246,282
|
|
|
|
15,246,282
|
|
Retained
Earnings (Deficit)
|
|
|
(5,910,700
|
)
|
|
|
(1,078,748
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
8,283,016
|
|
|
|
13,114,968
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
18,967,107
|
|
|
$
|
22,395,131
|
|
The
accompanying notes are an integral part of these financial
statements
Optex
Systems, Inc.
Statements
of Operations
|
|
Restated
Year Ended
September 28,
2008
|
|
|
Year Ended
September 30,
2007
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
20,017,209
|
|
|
$
|
15,406,186
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
18,145,211
|
|
|
|
17,361,378
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
1,871,998
|
|
|
|
(1,955,192
|
)
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
|
|
|
|
|
|
Salaries
and Wages
|
|
|
910,854
|
|
|
|
876,366
|
|
Employee
Benefits
|
|
|
190,489
|
|
|
|
222,433
|
|
Employee
Stock Bonus Plan
|
|
|
378,716
|
|
|
|
388,756
|
|
Amortization
of Intangibles
|
|
|
223,491
|
|
|
|
223,835
|
|
Rent,
Utilities and Building Maintenance
|
|
|
228,694
|
|
|
|
210,936
|
|
Legal
and Accounting Fees
|
|
|
223,715
|
|
|
|
374,845
|
|
Consulting
and Contract Service Fees
|
|
|
325,723
|
|
|
|
212,925
|
|
Corporate
Allocations
|
|
|
2,076,184
|
|
|
|
2,010,027
|
|
Asset
Impairment of Goodwill
|
|
|
1,586,416
|
|
|
|
-
|
|
Other
Expenses
|
|
|
381,459
|
|
|
|
361,932
|
|
Total
General and Administrative
|
|
$
|
6,525,741
|
|
|
$
|
4,882,055
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
$
|
(4,653,743
|
)
|
|
$
|
(6,837,247
|
)
|
|
|
|
|
|
|
|
|
|
Other
Expenses
|
|
|
|
|
|
|
|
|
Interest
Expense – Net
|
|
|
199,753
|
|
|
|
136,148
|
|
|
|
|
|
|
|
|
|
|
Total
Other
|
|
|
199,753
|
|
|
|
136,148
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Taxes
|
|
|
(4,853,496
|
)
|
|
|
(6,973,395
|
)
|
Income
Taxes (Benefit)
|
|
|
(21,544
|
)
|
|
|
(162,541
|
)
|
Net
Loss After Taxes
|
|
$
|
(4,831,952
|
)
|
|
$
|
(6,810,854
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(483.20
|
)
|
|
$
|
(681.09
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
10,000
|
|
|
|
10,000
|
|
The
accompanying notes are an integral part of these financial
statements
Optex
Systems, Inc.
Statements
of Cash Flows
|
|
Year Ended
September
28, 2008
|
|
|
Year Ended
September
30, 2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(4,831,952
|
)
|
|
$
|
(6,810,854
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
760,801
|
|
|
|
1,068,938
|
|
Provision
for (use of) allowance for inventory valuation
|
|
|
(102,579
|
)
|
|
|
701,308
|
|
Noncash
interest expense
|
|
|
200,000
|
|
|
|
136,148
|
|
(Gain)
loss on disposal and impairment of assets
|
|
|
1,586,416
|
|
|
|
-
|
|
(Increase)
decrease in accounts receivable
|
|
|
(410,602
|
)
|
|
|
688,023
|
|
(Increase)
decrease in inventory (net of unliquidated progress
payments)
|
|
|
1,667,418
|
|
|
|
(1,124,352
|
)
|
(Increase)
decrease in other current assets
|
|
|
(290,435
|
)
|
|
|
(757
|
)
|
(Increase)
decrease in other assets
|
|
|
-
|
|
|
|
(530
|
)
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
(1,132,319
|
)
|
|
|
61,917
|
|
Increase
(decrease) in accrued warranty costs
|
|
|
227,000
|
|
|
|
-
|
|
Increase
(decrease) in due to parent
|
|
|
2,312,280
|
|
|
|
2,385,105
|
|
Increase
(decrease) in accrued estimated loss on contracts
|
|
|
(555,462
|
)
|
|
|
1,377,348
|
|
Increase
(decrease) in income taxes payable
|
|
|
(21,544
|
)
|
|
|
30,558
|
|
Total
adjustments
|
|
|
4,240,974
|
|
|
|
5,323,706
|
|
Net
cash (used)/provided by operating activities
|
|
|
(590,978
|
)
|
|
|
(1,487,149
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(117,566
|
)
|
|
|
(61,465
|
)
|
Net
cash used in investing activities
|
|
|
(117,566
|
)
|
|
|
(61,465
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from Notes Payable
|
|
|
373,974
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
373,974
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(334,570
|
)
|
|
|
451,385
|
|
Cash
and cash equivalents at beginning of period
|
|
|
504,753
|
|
|
|
53,367
|
|
Cash
and cash equivalents at end of period
|
|
$
|
170,183
|
|
|
$
|
504,753
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Irvine
Sensors purchase of remaining 30% interest in Optex Texas pushed down to
subsidiary’s equity
|
|
|
|
|
|
Intangible
Assets
|
|
|
-
|
|
|
|
954,000
|
|
Goodwill
|
|
|
-
|
|
|
|
3,223,633
|
|
Other
|
|
|
-
|
|
|
|
(10,093
|
)
|
Additional
Paid in Capital
|
|
$
|
-
|
|
|
$
|
4,167,540
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
|
-
|
|
|
|
-
|
|
Cash
paid for taxes
|
|
|
-
|
|
|
$
|
6,681
|
|
The
accompanying notes are an integral part of these financial
statements
Optex
Systems, Inc.
Statements
of Stockholders' Equity
|
|
Number of
Outstanding
Shares
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Additional
Paid in
Capital
|
|
|
Retained
Earnings
|
|
|
Total
Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
|
10,000
|
|
|
$
|
164,834
|
|
|
$
|
(1,217,400
|
)
|
|
$
|
11,078,742
|
|
|
$
|
5,732,106
|
|
|
$
|
15,758,282
|
|
Net
Earnings (Loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,810,854
|
)
|
|
|
(6,810,854
|
)
|
30%
acquisition of Optex by Irvine Sensors pushed down to subsidiary’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,167,540
|
|
|
|
|
|
|
|
4,167,540
|
|
Balance
at September 30, 2007
|
|
|
10,000
|
|
|
$
|
164,834
|
|
|
$
|
(1,217,400
|
)
|
|
$
|
15,246,282
|
|
|
$
|
(1,078,748
|
)
|
|
$
|
13,114,968
|
|
Net
Earnings (Loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,831,952
|
)
|
|
|
(4,831,952
|
)
|
Balance
at September 28, 2008
|
|
|
10,000
|
|
|
$
|
164,834
|
|
|
$
|
(1,217,400
|
)
|
|
$
|
15,246,282
|
|
|
$
|
(5,910,700
|
)
|
|
$
|
8,283,016
|
|
The
accompanying notes are an integral part of these financial
statements
Note 1 - Organization and
Operations
Optex
Systems, Inc. (“Optex Texas”) was a privately held Texas Subchapter “S”
Corporation from inception in 1987 until December 30, 2005 when 70% of the
issued and outstanding stock was acquired by Irvine Sensors Corp. (“IRSN”) and
Optex Texas was automatically converted to a Subchapter “C”
Corporation. On December 29, 2006, the remaining 30% equity interest
in Optex Texas was purchased by IRSN.
On
October 14, 2008, certain senior secured creditors of IRSN, Longview Fund, L.P.
(“Longview Fund”) and Alpha Capital Anstalt (“Alpha”) formed Optex Systems,
Inc., a Delaware Corporation, (“Optex Delaware” or “Successor”), which acquired
all of the assets and assumed certain liabilities of Optex Texas in a
transaction that was consummated via purchase at a public auction. After this
asset purchase, Optex Texas remained a wholly-owned subsidiary of
IRSN.
Optex
Texas’ operations are based in Richardson, Texas in a leased facility comprising
49,100 square feet. As of fiscal year ended September 28, 2008 Optex
Texas operated with 109 full-time equivalent employees.
Optex
Texas manufactures optical sighting systems and assemblies primarily for
Department of Defense (DOD) applications. Its products are installed on a
variety of U.S. military land vehicles such as the Abrams and Bradley fighting
vehicles, Light Armored and Advanced Security Vehicles and have been selected
for installation on the Future Combat Systems Stryker vehicle. Optex Texas also
manufactures and delivers numerous periscope configurations, rifle and
surveillance sights and night vision optical assemblies. Optex Texas’s products
consist primarily of build to customer print products that are delivered both
directly to the military services and to other defense prime
contractors.
In May
2008, Optex Texas was awarded ISO9001:2000 certification.
Note
2 - Accounting Policies
Basis
of Presentation
The
accompanying financial statements include the historical accounts of Optex
Texas. The financial statements have been presented as subsidiary-only financial
statements, reflecting the balance sheets, results of operations and cash flows
of the subsidiary as a stand-alone entity.
Although,
Optex Texas was majority-owned by IRSN during the fiscal periods presented, no
accounts of IRSN or the effects of consolidation with IRSN have been included in
the accompanying financial statements.
The
financial statements have been presented on the basis of push down
accounting in accordance with Staff Accounting Bulletin No. 54
Application of “Push Down”
Basis of Accounting in Financial Statements of Subsidiaries Acquired by
Purchase
. SAB 54 states that the push down basis of accounting should be
used in a purchase transaction in which the entity becomes wholly-owned. Under
the push down basis of accounting certain transactions incurred by the parent
company, which would otherwise be accounted for in the accounts of the parent,
are “pushed down” and recorded on the financial statements of the subsidiary.
Accordingly, items resulting from the purchase transaction such as goodwill,
debt incurred by the parent to acquire the subsidiary and other cost related to
the purchase have been recorded on the financial statements of Optex
Texas.
Use of
Estimates:
The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the estimates.
Segment
Reporting:
Management has determined that Optex Texas is organized,
managed and internally reported as one business segment. Segments are determined
based on differences in products, internal reporting and how operational
decisions are made.
Fiscal
Year:
Optex Texas’ fiscal year ends on the Sunday nearest
September 30. Fiscal year 2008 ended on September 28, 2008 and
included 52 weeks. Fiscal year 2007 ended on September 30 and
included 52 weeks.
Fair Value of
Financial Instruments:
FASB No. 107, "
Disclosures about Fair Value of
Financial Instruments
," requires disclosure of fair value information
about certain financial instruments, including, but not limited to, cash and
cash equivalents, accounts receivable, refundable tax credits, prepaid expenses,
accounts payable, accrued expenses, notes payable to related parties and
convertible debt-related securities. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information available to
management as of fiscal years ended September 28, 2008 and September 30, 2007.
The carrying value of the balance sheet financial instruments included in Optex
Texas’s consolidated financial statements approximated their fair
values.
Cash and Cash
Equivalents:
For financial statement
presentation purposes, Optex Texas considers those short-term, highly liquid
investments with original maturities of three months or less to be cash or cash
equivalents.
Concentration of
Credit Risk:
Optex Texas’s cash and cash equivalents are on deposit with
banks. Only a portion of the cash and cash equivalents would be covered by
deposit insurance and the uninsured balances are substantially greater than the
insured amounts. Although cash and cash equivalent balances exceed insured
deposit amounts, management does not anticipate non-performance by the
banks.
Most of
Optex Texas’s accounts receivable are derived from sales to U.S. government
agencies or prime government contractors. Optex Texas does not
believe that this concentration increases credit risks because of the financial
strength of the payees.
Accounts
Receivable:
Optex Texas records its accounts receivable at the original
sales invoice amount less shipment liquidations for previously collected
advance/progress bills and an allowance for doubtful accounts. An account
receivable is considered to be past due if any portion of the receivable balance
is outstanding beyond its scheduled due date. On a quarterly basis, Optex Texas
evaluates its accounts receivable and establishes an allowance for doubtful
accounts, based on its history of past write-offs and collections, and current
credit conditions. No interest is accrued on past due accounts receivable. As
the customer base is primarily U.S. government and government prime contractors,
Optex Texas has concluded that there is no need for an allowance for doubtful
accounts for the years ended September 28, 2008 and September 30,
2007.
Inventory:
Inventory is recorded at the lower of cost or market value, and adjusted as
appropriate for decreases in valuation and obsolescence. Adjustments to the
valuation and obsolescence reserves are made after analyzing market conditions,
current and projected sales activity, inventory costs and inventory balances to
determine appropriate reserve levels. Cost is determined using the first-in
first-out (FIFO) method. Under arrangements by which progress payments are
received against certain contracts, the customer retains a security interest in
the undelivered inventory identified with these contracts. Payments
received for such undelivered inventory are classified as unliquidated progress
payments and deducted from the gross inventory balance. As of years
ended September 28, 2008, and September 30, 2007 inventory
included:
|
|
As of
September 28, 2008
|
|
|
As of
September 30, 2007
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
$
|
4,199,657
|
|
|
$
|
6,812,810
|
|
Work
in Process
|
|
|
5,575,520
|
|
|
|
6,423,902
|
|
Finished
Goods
|
|
|
28,014
|
|
|
|
157,389
|
|
Gross
Inventory
|
|
$
|
9,803,191
|
|
|
$
|
13,394,101
|
|
Less:
|
|
|
|
|
|
|
|
|
Unliquidated
Progress Payments
|
|
|
(4,581,736
|
)
|
|
|
(6,505,228
|
)
|
Inventory
Reserves
|
|
|
(673,729
|
)
|
|
|
(776,308
|
)
|
Net
Inventory
|
|
$
|
4,547,726
|
|
|
$
|
6,112,565
|
|
Warranty
Costs:
Optex Texas warrants the quality of its products to
meet customer requirements and be free of defects for twelve months subsequent
to delivery. In the year ended September 28, 2008, Optex Texas
incurred $227,000 of warranty expenses representing the estimated cost of repair
or replacement for specific customer returned products still covered under
warranty as of the return date and awaiting replacement, in addition to
estimated future warranty costs for shipments occurring during the fifteen
months proceeding September 28, 2008. 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 sales. Prior to
fiscal year 2008, all warranty expenses were incurred as product was replaced
with no reserve for warranties against deliveries in the covered
period.
Property and
Equipment:
Property and equipment
are recorded at cost. Depreciation is computed using the straight line method
over the estimated useful lives of the assets, ranging from three to seven
years. Expenditures for renewals and betterments are
capitalized. Expenditures for minor items, repairs and maintenance
are charged to operations as incurred. Gain or loss upon sale or retirement due
to obsolescence is reflected in the operating results in the period the event
takes place.
Goodwill and
Other Intangible Assets:
Goodwill represents the cost of
acquired businesses in excess of fair value of the related net assets at
acquisition. (See also notes 9 and 14). Optex Texas does not amortize goodwill,
but tests it annually for impairment using a fair value approach during the
fiscal fourth quarter and between annual testing periods, if circumstances
warrant. Goodwill of Optex Texas was reviewed as of September 30,
2007 and based on the assessment, it was determined that no impairment was
required. Goodwill was reviewed as of September 28, 2008, and it was
determined that an impairment charge of $1,586,416 was required. The fair values
assigned to the assets of Optex Texas and the goodwill was based upon the most
recent value of Optex Texas as determined by the sale to third party purchasers
on October 14, 2008.
Optex
Texas amortizes the cost of other intangibles over their estimated useful lives,
unless such lives are deemed indefinite. Amortizable intangible assets are
tested for impairment based on undiscounted cash flows and, if impaired, written
down to fair value based on either discounted cash flows or appraised values.
The identified amortizable intangible assets at September 28, 2008 and September
30, 2007 derived from the acquisition of Optex Texas by Irvine Sensors and
consisted of non-competition agreements and customer backlog, with initial
useful lives ranging from two to eight years. (See Note 9). Intangible assets
with indefinite lives are tested annually for impairment, as of the first day of
Optex Texas's fourth fiscal quarter and between annual periods, if impairment
indicators exist, and are written down to fair value as required.
Impairment or
Disposal of Long-Lived Assets:
Optex Texas adopted the provisions of FASB
No. 144, “
Accounting for the
Impairment or Disposal of Long-lived Assets
.” This standard requires,
among other things, that long-lived assets be reviewed for potential impairment
whenever events or circumstances indicate that the carrying amounts may not be
recoverable. The assessment of possible impairment is based on the ability to
recover the carrying value of the asset from the expected future pre-tax cash
flows (undiscounted and without interest charges) of the related operations. If
these expected cash flows are less than the carrying value of such asset, an
impairment loss is recognized for the difference between estimated fair value
and carrying value. The primary measure of fair value is based on discounted
cash flows. The measurement of impairment requires management to make estimates
of these cash flows related to long-lived assets, as well as other fair value
determinations.
Revenue
Recognition:
Optex
Systems recognizes revenue based on the modified percentage of completion method
utilizing the units-of-delivery method, in accordance with SOP
81-1:
|
·
|
The
units-of-delivery method recognizes as revenue the contract price of units
of a basic production product delivered during a period and as the cost of
earned revenue the costs allocable to the delivered units; costs allocable
to undelivered units are reported in the balance sheet as inventory or
work in progress. The method is used in circumstances in which an entity
produces units of a basic product under production-type contracts in a
continuous or sequential production process to buyers'
specifications.
|
Optex
Texas’s contracts are fixed price production type contracts whereas a defined
order quantity is delivered to the customer during in a continuous or sequential
production process to buyers specifications (build to print). Our
deliveries against these contracts generally occur in monthly increments across
fixed delivery periods spanning from 3 to 36 months.
Estimated
Costs at Completion and Accrued Loss on Contracts: Optex Texas reviews and
reports on the performance of its contracts and production orders against the
respective resource plans for such contracts/orders. These reviews are
summarized in the form of estimates at completion (“EAC”s). EACs include Optex
Texas’s incurred costs to date against the contract/order plus management's
current estimates of remaining amounts for direct labor, material, other direct
costs and subcontract support and indirect overhead costs based on the
completion status and future contractual requirements for each order. If an EAC
indicates a potential overrun (loss) against a fixed price contract/order,
management generally seeks to reduce costs and /or revise the program plan in a
manner consistent with customer objectives in order to eliminate or minimize any
overrun and to secure necessary customer agreement to proposed
revisions.
If an EAC
indicates a potential overrun against budgeted resources for a fixed price
contract/order, management first attempts to implement lower cost solutions to
still profitably meet the requirements of the fixed price contract. If such
solutions do not appear practicable, management makes a determination whether to
seek renegotiation of contract or order requirements from the customer. If
neither cost reduction nor renegotiation appears probable, an accrual for the
contract loss/overrun is recorded against earnings and the loss is recognized in
the first period the loss is identified based on the most recent EAC of the
particular contract or product order.
For years
ended September 28, 2008 and September 30, 2007, estimated loss reserves were
estimated as $821,885 and $1,377,348, respectively. Decreases in estimated loss
reserves from 2007 to 2008 of $555,463 were primarily attributable to the
successful negotiation of an equitable price adjustment for technical issues
related to our US Government M187 program and several negotiated price increases
in exchange for accelerated schedule deliveries on US Government periscope
contracts.
Government
Contracts:
Virtually all of our contracts are prime or
subcontracted directly with the Federal government and as such, are subject to
Federal Acquisition Regulation (FAR) Subpart 49.5, “Contract Termination
Clauses” and more specifically FAR 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 are generally, “flowed down” to us as
subcontractors on other military business. It has been our experience that
the termination for convenience is rarely invoked, except where it has been
mutually beneficial for both parties. We are currently not aware of any
pending terminations for convenience or default on our existing
contracts.
In the
event a termination for convenience were to occur, these FAR 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, Optex
could be liable for any excess cost incurred by the government to acquire
supplies from another supplier similar to those terminated from
Optex. Optex 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 FAR clause
52.249-8. In addition, the Government may require Optex to transfer
title and deliver to the Government any completed supplies, partially completed
supplies and materials, parts, tools, dies, jigs, fixtures, plans, drawings,
information, and contract rights (collectively referred to as “manufacturing
materials”) that Optex has specifically produced or acquired for the terminated
portion of this contract. The Government shall pay contract price for
completed supplies delivered and accepted, and Optex and the Government would
negotiate an agreed upon amount of payment for manufacturing materials delivered
and accepted and for the protection and preservation of the property. Failure to
agree on an amount for manufacturing materials is subject to the FAR Disputes
clause 52.233-1.
In some
cases, Optex Texas may receive orders subject to subsequent price negotiation on
contracts exceeding the $650,000 federal government simplified acquisition
threshold. These “undefinitized” contracts are considered firm contracts
but as Cost Accounting Standards Board (CAS) covered contracts, they are subject
to the Truth in Negotiations Act (TINA) disclosure requirements and downward
only price negotiation. As of September 28, 2008 and September 30, 2007
approximately $4.0 million and $10.0 million of booked orders fell under this
criteria. Our experience has been that the historically negotiated price
differentials have been immaterial and accordingly, we do not anticipate any
significant downward adjustments on these booked orders.
Shipping and
Handling Costs:
All shipping and handling costs are included as a
component of Cost of Goods sold.
Income
Taxes:
Optex Texas accounts for income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provided for certain deferred tax assets if it is more
likely than not that Optex Texas will not realize tax assets through future
operations.
Earnings per
Share:
Basic earnings per common share is computed by dividing net
earnings by the weighted average number of common shares outstanding during each
year presented. Diluted earnings per common share gives effect to the
assumed exercise of stock options when dilutive. There were no
dilutive stock options during 2008 or 2007.
Note
3 - Recent Accounting Pronouncements
In June
2006, The FASB issued Interpretation No. 48 “
Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109
”. This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB No. 109, “
Accounting for Income Taxes
”
.
FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN 48 did not have a material impact on Optex Texas's
consolidated financial position, results of operations, or cash
flows.
In
September 2006, the FASB issued FASB No. 157, “
Fair Value Measurements
”
which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. While FASB No. 157 does not apply to transactions
involving share-based payment covered by FASB No. 123, it establishes a
theoretical framework for analyzing fair value measurements that is absent from
FASB No. 123. We have relied on the theoretical framework established by FASB
No. 157 in connection with certain valuation measurements that were made in the
preparation of these financial statements. FASB No. 157 is effective for years
beginning after November 15, 2007. Subsequent to the Standard’s issuance, the
FASB issued an exposure draft that provides a one year deferral for
implementation of the Standard for non-financial assets and liabilities. Optex
Texas is currently evaluating the impact FASB No. 157 will have on its financial
statements.
In
February 2007, Statement of Financial Accounting Standards No. 159, “
The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115
,” (FASB 159), was issued. This standard allows a company to
irrevocably elect fair value as the initial and subsequent measurement attribute
for certain financial assets and financial liabilities on a contract-by-contract
basis, with changes in fair value recognized in earnings. The provisions of this
standard are effective as of the beginning of our fiscal year 2008, with early
adoption permitted. Optex Texas is currently evaluating what effect the adoption
of FASB 159 will have on its financial statements.
In March
2007, the Financial Accounting Standards Board ratified Emerging Issues Task
Force (“EITF”) Issue No. 06-10, "Accounting for Collateral Assignment
Split-Dollar Life Insurance Agreements”. EITF 06-10 provides guidance
for determining a liability for the postretirement benefit obligation as well as
recognition and measurement of the associated asset on the basis of the terms of
the collateral assignment agreement. EITF 06-10 is effective for
fiscal years beginning after December 15, 2007. Optex Texas is
currently evaluating the impact of EITF 06-10 on its financial statements, but
does not expect it to have a material effect.
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
and
SFAS No. 160,
Accounting
and Reporting of Noncontrolling Interest in Consolidated Financial Statements,
an amendment of ARB No. 51
. These new standards will significantly
change the accounting for and reporting of business combinations and
non-controlling (minority) interests in consolidated financial statements.
Statement Nos. 141(R) and 160 are required to be adopted simultaneously and
are effective for the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. Optex Texas is currently
evaluating the impact of adopting SFAS Nos. 141(R) and SFAS 160 on its
financial statements.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB
110 permits companies to continue to use the simplified method, under certain
circumstances, in estimating the expected term of “plain vanilla” options beyond
December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously
stated that the Staff would not expect a company to use the simplified method
for share option grants after December 31, 2007. Optex Texas does not have any
outstanding stock options.
In March
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 161, "
Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
”. SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 with early application encouraged. As such, Optex Texas is
required to adopt these provisions at the beginning of the fiscal year ended
September 30, 2009 . Optex Texas is currently evaluating the impact of
SFAS 161 on its financial statements but does not expect it to have a material
effect
In May
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 162, "
The Hierarchy of Generally Accepted
Accounting Principles
”. SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. SFAS 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. Optex Texas is currently evaluating the impact of SFAS
162 on its consolidated financial statements but does not expect it to have a
material effect.
In May
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (“SFAS”) No. 163, "
Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60
". SFAS 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. SFAS 163 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal
years. As such, Optex Texas is required to adopt these provisions at
the beginning of the fiscal year ended September 30,
2011. Optex Texas is currently evaluating the impact of SFAS 163 on
its financial statements but does not expect it to have a material
effect.
Note
4 - Property and Equipment
A summary
of property and equipment at September 28, 2008 and September 30, 2007 is as
follows:
|
|
Estimated Useful Life
|
|
Year Ended
September 28, 2008
|
|
|
Year Ended
September 30, 2007
|
|
Property
and Equipment
|
|
|
|
|
|
|
|
|
Office
Furniture/Equipment
|
|
3-5yrs
|
|
$
|
145,071
|
|
|
$
|
127,502
|
|
Machinery
and Equipment
|
|
5
yrs
|
|
|
1,026,250
|
|
|
|
926,253
|
|
Leasehold
Improvements
|
|
7
yrs
|
|
|
142,788
|
|
|
|
142,788
|
|
Less:
Accumulated Depreciation
|
|
|
|
|
(994,542
|
)
|
|
|
(830,108
|
)
|
Net
Property & Equipment
|
|
|
|
$
|
(319,567
|
)
|
|
$
|
(366,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
Expense
|
|
|
|
$
|
164,434
|
|
|
$
|
129,069
|
|
Depreciation
expense included in cost of goods sold and general and administrative expense
for 2008 is $104,837 and 59,597, respectively. Depreciation expense
included in cost of goods sold and general and administrative expense for 2007
is $68,663 and $60,406, respectively.
Note
5 – Accrued Liabilities
The
components of accrued liabilities for years ended September 28, 2008 and
September 30, 2007 are summarized below:
|
|
Year Ended
September 28, 2008
|
|
|
Year Ended
September 30, 2007
|
|
|
|
|
|
|
|
|
Customer
Advance Payments
|
|
$
|
-
|
|
|
$
|
62,784
|
|
Deferred
Rent Expense
|
|
|
84,435
|
|
|
|
119,073
|
|
Accrued
Vacation
|
|
|
94,311
|
|
|
|
69,803
|
|
Property
Taxes
|
|
|
17,557
|
|
|
|
13,031
|
|
Contract
Settlement
|
|
|
351,217
|
|
|
|
-
|
|
Operating
Expenses
|
|
|
128,717
|
|
|
|
-
|
|
Payroll
& Payroll Related
|
|
|
122,737
|
|
|
|
106,629
|
|
Total
Accrued Expenses
|
|
$
|
798,974
|
|
|
$
|
371,320
|
|
Contract
Settlement Costs represent amounts due to the US government in relation to a
progress billed contract that was cancelled prior to completion. The
remaining government-owned (progress billed) materials on the contract were
subsequently used to satisfy other existing and new contracts at full value,
although the unliquidated progress payments for the original contract have yet
to be refunded. Optex Texas expects to settle the contract
overpayment with the customer by third quarter of fiscal year
2009. Accrued operating expenses include additional operating costs
for estimated costs not yet invoiced or invoices not vouched into accounts
payable as of year-end period close.
Note
6 - Commitments and Contingencies
Leases
Optex
Texas leases its office and manufacturing facilities under two non-cancellable
operating leases expiring November 2009 and February 2010 in addition to
maintaining several non-cancellable operating leases for office and
manufacturing equipment. Total expenses under these facility lease
agreements for the year ended September 28, 2008 was $313,032 and total expenses
for manufacturing and office equipment was $21,830. At September 28,
2008, the minimum lease payments under non-cancellable operating leases for
equipment, office and facility space are as follows:
|
|
Operating
|
|
|
|
Leases
|
|
Years
ended December 31,
|
|
|
|
2009
|
|
$
|
364,260
|
|
2010
|
|
|
79,867
|
|
2011
|
|
|
16,753
|
|
2012
|
|
|
-
|
|
2013
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
minimum lease payments
|
|
$
|
460,880
|
|
Note
7 - Transactions with a Related Party
Corporate Cost
Allocations:
In accordance with government contracting
regulations, IRSN was required to allocate some portion of its corporate
general and administrative expense to operating subsidiaries, such as
Optex. IRSN elected to use Cost Accounting Standards (CAS) 403.40, a
recognized government contract allocation methodology, to satisfy this
requirement in which the proportional contribution of Optex to IRSN’s total
revenues, payroll expense and net book value of tangible assets determined a
percentage of corporate general and administrative expense for allocation to
Optex. The CAS allocation methodology was chosen as the most
reasonable method because adequate historical information was not available at
the time to allow for alternative allocation methodologies to be
used.
The
estimated total impact of General and Administrative expenses for items
previously paid by IRSN and allocated to Optex Texas on annual basis as
follows:
Accounting
& Auditing Fees
|
|
$
|
250,000
|
|
Legal
Fees
|
|
|
60,000
|
|
Consulting
Fees
|
|
|
60,000
|
|
Workers
Comp & General Insurance
|
|
|
70,000
|
|
Total
|
|
$
|
440,000
|
|
Due to IRSN
(Parent):
Due to Parent relates to expenses of Optex Systems,
incurred by or shared with IRSN and pushed down to Optex Systems through an
intercompany payable account “Due to Parent”. The ending amounts
reflected as of September 28, 2008 and September 30, represent the cumulative
amount of expenses incurred, net of any cash transfers made to/from IRSN since
inception at January 2006. Significant amounts charged through this
account include IRSN corporate cost allocations, legal expenses, accounting and
audit fees, travel expenses, consulting fees, and insurance
costs.
Note
8 - Debt Financing
Related
Parties
Note
Payable/Timothy Looney -
In
January 2007, IRSN amended its earn-out agreement with Timothy Looney
in consideration for Mr. Looney providing Optex Texas with a secured
subordinated term note providing for advances of up to $2 million, bearing
interest at 10% per annum and maturing on the earlier of February 2009 or sixty
days after retirement of IRSN’s senior debt. Aggregate advances of $2 million
were provided to Optex Texas in January 2007 pursuant to the secured
subordinated term note, and the advances and accrued interest were outstanding
at September 28, 2008 and September 30, 2007. This Note is secured by
the assets of Optex Texas, but subordinated to the liens of Alpha and
Longview. Following the public sale of the assets of Optex Texas to
Optex Delaware on October 14, 2008, the entire $2,000,000 Note Payable with
accrued interest of $345,648 remained a liability of Optex Texas.
Note
9 – Intangible Assets and Goodwill
On
December 30, 2005, IRSN entered into an agreement with Optex Texas pursuant
to which IRSN purchased 70% of the issued and outstanding common stock of Optex
Texas, thereby becoming its majority shareholder. On
December 29, 2006, IRSN exercised a buyer option to acquire the remaining
30% ownership interest in Optex Texas.
Optex
Texas has allocated the purchase consideration for the purchase to tangible and
intangible assets acquired and liabilities assumed based on the valuation
determinations made in connection with the Initial Acquisition of Optex Texas in
December 2005 and the purchase of the remaining minority in December 2006 as
shown in the following table, which sets forth the estimated amounts related to
the acquisition of all of the issued and outstanding stock of Optex Texas by
IRSN. The excess of the purchase price over such values is presented as goodwill
in the accompanying balance sheet.
Assets:
|
|
Current
assets, consisting primarily of inventory of $5,734,500 and accounts
receivable of $2,191,800
|
|
|
|
|
$
|
8,070,300
|
|
Identifiable
intangible assets
|
|
|
|
|
|
3,180,000
|
|
Other
non-current assets, principally property and equipment
|
|
|
|
|
|
455,100
|
|
Total
assets
|
|
|
|
|
|
11,705,400
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
Current
liabilities, consisting of accounts payable of $1,638,600, tax liabilities
of $112,800 and accrued liabilities of $682,100
|
|
|
|
|
|
2,433,481
|
|
Acquired
net assets
|
|
|
|
|
|
9,271,919
|
|
Purchase
price
|
|
|
|
|
|
|
|
Total
consideration to seller
|
|
$
|
19,865,400
|
|
|
|
|
|
Direct
acquisition costs
|
|
|
1,040,000
|
|
|
|
|
|
|
|
|
|
|
|
|
20,905,400
|
|
Excess
purchase price reported as goodwill
|
|
|
|
|
|
$
|
11,633,481
|
|
Goodwill
related to the IRSN acquisition of Optex Texas was reviewed as of September 30,
2008 and it was determined that an impairment charge of $1,586,416 was required.
The fair values assigned to the assets of Optex Texas and the goodwill was based
upon the most recent value of Optex Texas as determined by the asset sale via
public auction to third party purchasers on October 14, 2008.
Identifiable
intangible assets included non-competition agreements and customer backlog, and
is amortized over the respective estimated useful lives as follows:
|
|
Useful Life in
Years
|
|
|
Acquired
Fair Value
|
|
|
|
|
|
|
|
|
Non-competition
agreement
|
|
|
2
|
|
|
$
|
80,000
|
|
Contractual
backlog
|
|
|
2
|
|
|
$
|
1,570,000
|
|
Program
backlog
|
|
|
8
|
|
|
$
|
1,530,000
|
|
The
amortization of identifiable intangible assets associated with the Optex Texas
acquisition in fiscal 2008 and fiscal 2007 was $596,367 and, $949,962,
respectively. The identifiable intangible assets and recorded goodwill are not
deductible for income tax purposes. As of the year ended September 28, 2008, the
total unamortized balance of intangible assets was $1,100,140. As of
the year ended September 30, 2007, the total unamortized balance of intangible
assets was $1,696,507.
The
September 28, 2008 unamortized balance of intangible assets is estimated to be
amortized as follows:
Year
|
|
Annual
Amortization
|
|
2009
|
|
|
266,365
|
|
2010
|
|
|
204,490
|
|
2011
|
|
|
204,490
|
|
2012
|
|
|
204,490
|
|
2013
|
|
|
186,837
|
|
2014
|
|
|
33,468
|
|
Total
|
|
$
|
1,100,140
|
|
Note
10 – Stockholders Equity
Common
Stock:
Optex Texas is authorized to issue 100,000 shares of no par
common stock. At September 28, 2008 and 2007, there were 18,870 and
10,000 shares issued and outstanding, respectively.
The
common stock, treasury stock and additional paid in capital accounts have been
presented to reflect the ownership structure of Optex Texas as it existed prior
to the acquisition by IRSN, since Optex Texas is presenting its financial
statements as a separate entity.
Note
11 - Equity Compensation
Total
stock-based compensation expense of Optex Texas associated with IRSN stock
grants during fiscal years 2008 and 2007 was $378,716 and $388,756,
respectively. These amounts were pushed down by IRSN and
charged to general and administrative expense for each of the
periods. There were no stock options issued to Optex Texas
employees or equity instruments issued to consultants and vendors in either 2007
or 2008.
Note
12 - Income Taxes
As of
September 28, 2008, and September 30, 2007, Optex Texas had generated net losses
for financial accounting purposes in the amounts of approximately $4,831,952 and
$6,810,854, respectively. During these periods Optex Texas was a member of a
consolidated entity for tax reporting purposes. As such, any losses that would
have qualified as Net Operating Losses for Federal Income Taxes purposes as
potential deductions were available to the consolidated entity. Such losses may
have been utilized by the consolidated entity and are not available to Optex
Delaware to offset its future taxable income. Additionally, since
Optex Texas was acquired in a transaction effected as an asset purchase, Optex
Delaware would only be entitled to tax deductions generated after the date of
the acquisition. Accordingly, no deferred tax assets have been recorded in the
acPredecessoring financial statements for net operating losses generated by
Optex Texas.
No
current provision for income taxes for the fiscal years ended September 28, 2008
is required, except for minimal state taxes, since Optex Texas incurred losses
during each year. There was no provision for income taxes in fiscal 2008 or
2007.
Prior to
January 2006, Optex Texas had elected to be a “S” corporation. “S”
corporations pass through all items of profits, losses and tax credits to the
stockholders of Optex Texas who are responsible for taxes other than annual
state franchise taxes. Effective December 30, 2005, concurrent with
the sale of Optex Texas to IRSN, Optex Texas terminated its “S” corporation
election and, as a result, is now treated as a “C” corporation for both Federal
and State corporation income tax purposes. Profits, losses, and tax credits are
reported by the corporation on its tax return and the Corporation pays taxes
accordingly. “S” corporation retained earnings were $6,711,750. The “C”
corporation retained deficit is $7,790,534.
Note 13—Earnings/Loss Per
Share
Basic
earnings per share is computed by dividing income available to common
shareholders (the numerator) by the weighted-average number of common shares
outstanding (the denominator) for the period. Diluted earnings per
share is computed by assuming that any dilutive convertible securities
outstanding were converted, with related preferred stock dividend requirements
and outstanding common shares adjusted accordingly. For all periods presented
herein, there are no dilutive convertible securities.
The
following table sets forth the computation of basic and diluted net loss
attributable to common stockholders per share for the years ended September 28,
2008, and September 30, 2007.
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,831,952
|
)
|
|
$
|
(6,810,854
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
10,000
|
|
|
|
10,000
|
|
Basic
and diluted net loss per share
|
|
$
|
(483.20
|
)
|
|
$
|
(681.09
|
)
|
Note
14 — Subsequent Events
On
October 14, 2008, in a purchase transaction that was consummated via public
auction, Optex Delaware (Successor) purchased all of the assets of Optex Texas
(Predecessor) in exchange for $15 million of IRSN debt owned by it and the
assumption of approximately $3.8 million of certain Optex Texas
liabilities.
Optex
Delaware purchased all of assets from Optex Texas
including intellectual property, production processes and know how,
and outstanding contracts and customer relationships. Optex Delaware
also assumed certain liabilities of Optex Texas consisting of accounts payable
and accrued liabilities.
Note
15-Restatement
As a
result of Securities and Exchange Commission (SEC) comments, we have reissued
the financial statements to restate the following:
|
·
|
Optex
Texas reclassified the asset impairment of goodwill from other expenses to
an operating expense. This reclassification increased the loss
from operations by $1,586,416 to $4,653,743 with no change to the net
loss.
|
|
·
|
Note
2 has been restated to accurately reflect Optex Texas’s revenue
recognition policy.
|
|
·
|
Note
14 has been revised to reflect only those transactions related to the
predecessor entity.
|
The above
restatements had no effect on the balance sheet, statements of stockholders’
equity, net loss or cash flows for the year ended September 28,
2008.
PART
II – INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
We
estimate that our expenses in connection with this offering, other than
underwriting discounts and commissions, will be as follows:
Securities
and Exchange Commission registration fee
|
|
$
|
1,447
|
|
Printing
and engraving expenses
|
|
|
1,000
|
|
Legal
fees and expenses
|
|
|
-
|
|
Accountant
fees and expenses
|
|
|
2,500
|
|
Total
|
|
$
|
4,947
|
|
Item
14. Indemnification of Directors and Officers
Indemnification
of Directors and Officers
Section
145 of the Delaware General Corporation Law provides, in general, that a
corporation incorporated under the laws of the State of Delaware, such as the
Company, may indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(other than a derivative action by or in the right of the corporation) by reason
of the fact that such person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person’s conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys’ fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification will be made in respect of any claim, issue or matter as to
which such person will have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery of the State of Delaware or
any other court in which such action was brought determines such person is
fairly and reasonably entitled to indemnity for such expenses.
Item
15. Recent Sales of Unregistered Securities
On
March 30, 2009, a Reorganization occurred whereby the then existing shareholders
of Optex Delaware exchanged their shares of common stock with the shares of
common stock of Optex Systems Holdings, Inc. (formerly Sustut Exploration, Inc.)
(the “Company”) as follows: (i) the outstanding 85,000,000 shares of
Optex Delaware common stock were exchanged by the Company for 113,333,282
shares of Company common stock, (ii) the outstanding 1,027 shares of Optex
Delaware Series A Preferred Stock be exchanged by the Company for 1,027 shares
of Company Series A Preferred Stock and (iii) the 8,131,667 shares of Optex
Delaware common stock purchased in the private placement were exchanged by the
Company for 8,131,667 shares of Company common stock. Optex Delaware
will remain a wholly-owned subsidiary of the Company.
Simultaneously
with closing of the Reorganization Agreement (and the shares are included
above), as of March 30, 2009, Optex accepted subscriptions from accredited
investors for a total 27.1 units (the "Units"), for $45,000 per Unit, with each
Unit consisting of 300,000 shares of common stock, no par value (the "common
stock") of Optex and warrants to purchase 300,000 shares of common stock for
$0.45 per share for a period of five years from the initial closing, which were
issued by Registrant after the closing referenced above. Gross
proceeds to the Company were $1,219,750, and after deducting (i) a cash finder’s
fee of $139,555, (ii) non-cash consideration of indebtedness owed to an investor
of $146,250, and (iii) stock issuance costs of $59,416, the net proceeds were
$874,529. The finder also received five year warrants to purchase
2.39 Units, at an exercise price of $49,500 per unit.
Neither
the Company nor Optex Delaware had any options or warrants to purchase shares of
capital stock outstanding immediately prior to or following the Reorganization,
except for 8,941,667 warrants issued in the Private Placement. Immediately prior
to the closing, the Company adopted the 2009 Stock Option Plan providing for the
issuance of up to 6,000,000 shares for the purpose of having shares available
for the granting of options to officers, directors, employees and to independent
contractors who provide services. Each share of stock entitles the
holder to one vote on matters brought to a vote of the
shareholders.
The Company granted an officer at the
consummation of the reorganization, options to purchase 1,414,649
shares at an exercise price of $0.15 per share that vest as follows: 34% of the
options vesting one year following the date of grant, and 33% vesting on each of
the second and third anniversaries following the date of grant
Series
A Preferred Stock
On March 24, 2009, the Company filed a
Certificate of Designation with the Secretary of State of the State of Delaware
authorizing a series of preferred stock, under its articles of incorporation,
known as “Series A Preferred Stock”. The terms and provisions of the Series A
Preferred Stock are set forth in “Description of Securities” – “Preferred Stock”
above.
On March 27, 2009, Sileas and Alpha
exchanged their promissory notes in the total amount of $6,000,000 plus accrued
and unpaid interest thereon into 1,027 shares of Series A Preferred
Stock. On March 30, 2009, the shares of Optex Delaware Preferred
Stock were exchanged on a 1:1 basis for Series A Preferred Stock of the
Company.
All of the above equity transactions
were made in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act.
Item
16. Exhibits and Financial Statement Schedules
Exhibit
No.
|
|
Description
|
2.1
|
|
Agreement
and Plan of Reorganization (the “Agreement”), dated as of the March 30,
2009, by and between Registrant, a Delaware corporation and Optex Systems,
Inc., a Delaware corporation (1).
|
|
|
|
3.1
|
|
Certificate
of Incorporation, as amended, of Optex Systems Holdings,
Inc.
|
|
|
|
3.2
|
|
Bylaws
of Optex Systems Holdings Corp. (1).
|
|
|
|
5.1
|
|
Opinion
as to Legality of the Shares
|
|
|
|
10.1
|
|
Lease
for 1420 Presidential Blvd., Richardson, TX
(1).
|
10.2
|
|
Employment
Agreement with Danny Schoening (1).
|
|
|
|
10.3
|
|
2009
Stock Option Plan (1).
|
|
|
|
10.4
|
|
Form
of Warrant (1)
|
|
|
|
10.5
|
|
Specimen
Stock Certificate (1)
|
|
|
|
10.6
|
|
Material
Customer Contracts*
|
|
|
|
14.1
|
|
Code
of Ethics (1)
|
|
|
|
16
|
|
Letter
re: Change in Certifying Accountant (1)
|
|
|
|
21.1
|
|
List
of Subsidiaries – Optex Systems, Inc. (1).
|
|
|
|
23.1
|
|
Consent
of Rotenberg, LLP
|
|
|
|
*
|
Portions of this exhibit have been omitted pursuant to a confidential treatment request, and information regarding this confidential treatment request is being separately submitted to the Commission.
|
(1)
|
Incorporated
by reference from our Current Report on Form 8-K dated April 3,
2009.
|
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
1.
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
|
|
i.
|
To
include any prospectus required by section 10(a)(3) of the Securities
Act;
|
|
ii.
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
|
|
iii.
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration
statement.
|
2.
|
That,
for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
|
3.
|
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
|
4.
|
That,
for the purpose of determining liability under the Securities Act to any
purchaser:
|
|
i.
|
If
the registrant is relying on Rule 430B (Section 430B of this
chapter):
|
|
A.
|
Each
prospectus filed by the registrant pursuant to Rule 424(b)(3)shall be
deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
|
|
B.
|
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x)
for the purpose of providing the information required by section 10(a) of
the Securities Act shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating
to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or modify
any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date;
or
|
|
ii.
|
If
the registrant is subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to an offering,
other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of
and included in the registration statement as of the date it is first used
after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time of contract
of sale prior to such first use, supersede or modify any statement that
was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to
such date of first use.
|
5.
|
That,
for the purpose of determining liability of the registrant under the
Securities Act to any purchaser in the initial distribution of the
securities: The undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to such
purchaser:
|
|
i.
|
Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
|
|
ii.
|
Any
free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
|
|
iii.
|
The
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant;
and
|
|
iv.
|
Any
other communication that is an offer in the offering made by the
undersigned registrant to the
purchaser.
|
6
.
Item 512(h)
Undertaking:
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1933, the registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Richardson, TX, on the 25th day
of September, 2009.
OPTEX
SYSTEMS HOLDINGS, INC.
|
|
By:
|
/s/
Stanley A. Hirschman
|
|
Stanley
A. Hirschman, Principal Executive Officer and Director
|
|
|
Date:
September 25, 2009
|
|
By:
|
/s/
Karen Hawkins
|
|
Karen
Hawkins, Principal Financial Officer
|
|
|
Date:
September
25, 2009
|
Pursuant
to the requirements of the Securities Act, this Registration Statement has been
signed by the following persons in the capacities and on the dates indicated,
constituting the Principal Executive Officer and Principal Financial Officer of
Registrant and a majority of the Board of Directors of Registrant:
Signature
|
|
Title
|
|
Date
|
/s/
Stanley A. Hirschman
|
|
|
|
|
Stanley
A. Hirschman
|
|
Principal
Executive Officer and Director
|
|
September
25, 2009
|
|
|
|
|
|
/s/
Karen Hawkins
|
|
|
|
|
Karen
Hawkins
|
|
Principal
Financial Officer
|
|
September
25, 2009
|
|
|
|
|
|
/s/
Ronald F. Richards
|
|
|
|
|
Ronald
F. Richards
|
|
Director
|
|
September
25, 2009
|
|
|
|
|
|
/s/
Merrick Okamoto
|
|
|
|
|
Merrick
Okamoto
|
|
Director
|
|
September
25,
2009
|