UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2010

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ______to______.
 
OPTEX SYSTEMS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
 
Delaware
  
333-143215
  
333-143215
(State or other jurisdiction of
incorporation)
  
(Commission File Number)
  
(IRS Employer Identification
No.)
 
1420 Presidential Drive, Richardson, TX
  
75081-2439
(Address of principal executive offices)
  
(Zip Code)

Registrant’s telephone number, including area code: (972) 644-0722
 
 (Former Name or Former Address if Changed Since Last Report)
 
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  o  No  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
 
Large Accelerated Filer o     Accelerated Filer o     Non-Accelerated Filer o     Smaller Reporting Company x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o
 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b`-2 of the Exchange Act. Yes o  No x
 
State the number of shares outstanding of each of the issuer’s classes of common equity, as of August 9, 2010: 139,444,940 shares of common stock.
 
 
OPTEX SYSTEMS HOLDINGS, INC.
FORM 10-Q
June 27, 2010

 
INDEX
 
PART I— FINANCIAL INFORMATION
  
 
   
 
 
Item 1.
Financial Statements
 
3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
4
Item 4.
Control and Procedures
 
13
   
 
PART II— OTHER INFORMATION
  
 
   
 
 
Item 1
Legal Proceedings
 
13
Item 1A
Risk Factors
 
13
Item 6.
Exhibits
 
13
     
 
 
SIGNATURE
  
14
 
 
2
 
 
Item 1. Financial Information

OPTEX SYSTEMS HOLDINGS, INC.
 
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
AS OF JUNE 27, 2010

BALANCE SHEETS AS OF JUNE 27, 2010 (SUCCESSOR) (UNAUDITED) AND SEPTEMBER 27, 2009 (SUCCESSOR)
  
F-1
  
       
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 27, 2010 (SUCCESSOR) AND THE THREE MONTHS ENDED JUNE 28, 2009 (SUCCESSOR) AND FOR THE PERIOD OCTOBER 15, 2008 THROUGH JUNE 28, 2009 (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008 (PREDECESSOR) (UNAUDITED)
  
F-3
  
       
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 27, 2010 (SUCCESSOR) AND FOR THE PERIOD OCTOBER 15, 2008 THROUGH JUNE 28, 2009 (SUCCESSOR) AND FOR THE PERIOD SEPTEMBER 29, 2008 THROUGH OCTOBER 14, 2008 (PREDECESSOR) (UNAUDITED)
  
F-4
  
       
FINANCIAL STATEMENT FOOTNOTES (UNAUDITED)
  
F-6
  

3
 
Optex Systems Holdings, Inc.
(formerly known as Sustut Exploration, Inc.)
Condensed Consolidated Balance Sheets
 
   
Successor
        
   
June 27, 2010
(Unaudited)
    
Successor 
September 27, 2009
  
             
ASSETS
            
             
Current Assets
            
Cash
   $ 782,294     $ 915,298  
Accounts Receivable
     2,715,171       1,802,429  
Net Inventory
     6,975,481       8,013,881  
Deferred Tax Asset
     953,916       711,177  
Prepaid Expenses
     232,631       318,833  
                 
Total Current Assets
   $ 11,659,493     $ 11,761,618  
                 
Property and Equipment
                
Property Plant and Equipment
   $ 1,348,932     $ 1,341,271  
Accumulated Depreciation
     (1,142,496 )     (1,094,526 )
                 
Total Property and Equipment
   $ 206,436     $ 246,745  
                 
Other Assets
                
Security Deposits
   $ 20,684     $ 20,684  
Intangibles
     1,187,411       1,965,596  
Goodwill
     7,110,415       7,110,415  
                 
Total Other Assets
   $ 8,318,510     $ 9,096,695  
                 
 Total Assets
   $ 20,184,439     $ 21,105,058  
 
The accompanying notes are an integral part of these financial statements

F-1
 
Optex Systems Holdings, Inc.
(formerly known as Sustut Exploration, Inc.)
Condensed Consolidated Balance Sheets – Continued

   
Successor
        
   
June 27, 2010
(Unaudited)
    
Successor 
September 27, 2009
  
             
LIABILITIES AND STOCKHOLDERS' EQUITY
            
             
Current Liabilities
            
Accounts Payable
   $ 868,597     $ 2,497,322  
Accrued Expenses
     510,596       671,045  
Accrued Warranties
     25,000       81,530  
Accrued Contract Losses
     1,331,007       1,348,060  
Credit Facility
     959,061       -  
                 
Total Current Liabilities
   $ 3,694,261     $ 4,597,957  
                 
Stockholders' Equity
                
Optex Systems Holdings, Inc. – (par $0.001, 200,000,000 authorized, 139,444,940 shares issued and outstanding)
   $ 139,445     $ 139,445  
Optex Systems Holdings, Inc. Preferred Stock (.001 par 5,000 authorized, 1027 series A preferred shares issued and outstanding)
     1       1  
Additional Paid-in-capital
     17,037,740       16,643,388  
Retained Earnings (Deficit)
     (687,008 )     (275,733 )
                 
Total Stockholders' Equity
   $ 16,490,178     $ 16,507,101  
                 
Total Liabilities and Stockholders' Equity
   $ 20,184,439     $ 21,105,058  
 
The accompanying notes are an integral part of these financial statements
 
 
F-2
 
 
Optex Systems Holdings, Inc.
(formerly known as Sustut Exploration, Inc.)
Condensed Consolidated Statements of Operations (Unaudited)
 
   
Successor
Three months
ended June 27,
2010
    
Successor
Three months
ended June 28,
2009
    
Successor
Nine months ended
June 27, 2010
    
Successor
For the period October
15, 2008 through June
28, 2009
    
Predecessor 
For the period
September 29,
2008 through
October 14, 2008
  
                               
Revenues
   $ 5,905,456     $ 6,983,930     $ 18,138,883     $ 20,084,362     $ 871,938  
                                         
Total Cost of Sales
     5,498,140       6,417,926       16,246,026       18,135,020       739,868  
                                         
Gross Margin
   $ 407,316     $ 566,004     $ 1,892,857     $ 1,949,342     $ 132,070  
                                         
General and Administrative
                                        
Salaries and Wages
   $ 225,174     $ 161,695     $ 571,032     $ 487,709     $ 22,028  
Employee Benefits and Taxes
     46,135       29,716       155,374       169,279       495  
Employee Stock/Option Bonus Plan
     24,937       15,174       72,374       19,986       (4,812 )
Amortization of Intangibles
     79,823       101,159       239,468       303,475       -  
Rent, Utilities and Building Maintenance
     29,713       50,838       134,263       150,780       12,493  
Investor Relations
     90,408       88,326       292,478       88,326       -  
Legal and Accounting Fees
     78,585       128,274       186,491       296,627       360  
Consulting and Contract Service Fees
     46,619       43,210       132,650       167,261       10,527  
Travel Expenses
     4,857       16,294       21,527       41,317       -  
Board of Director Fees
     30,000       37,500       100,000       87,500       -  
Other Expenses
     102,823       87,749       285,398       227,099       16,155  
Total General and Administrative
   $ 759,074     $ 759,935     $ 2,191,055     $ 2,039,359     $ 57,246  
                                         
Operating Income (Loss)
   $ (351,758 )   $ (193,931 )   $ (298,198 )   $ (90,017 )   $ 74,824  
                                         
Other Expenses
                                        
Other Income and Expense
   $ -     $ (351 )   $ -     $ (1,434 )   $ -  
Interest (Income) Expense - Net
     26,939       -       65,838       174,710       9,492  
Total Other
   $ 26,939     $ (351 )   $ 65,838     $ 173,276     $ 9,492  
                                         
Income (Loss) Before Taxes
   $ (378,697 )   $ (193,580 )   $ (364,036 )   $ (263,293 )   $ 65,332  
Income Taxes (Benefit)
     (168,883 )     114,973       (242,739 )     465,291       -  
                                         
Net Income (Loss) After Taxes
   $ (209,814 )   $ (308,553 )   $ (121,297 )   $ (728,584 )   $ 65,332  
                                         
Less preferred stock dividend
   $ (98,102 )   $ -     $ (289,978 )   $ -     $ -  
                                         
Net loss applicable to common shareholders
   $ (307,916 )   $ (308,553 )   $ (411,275 )   $ (728,584 )   $ 65,332  
                                         
Basic and diluted loss per share
   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ 6.53  
                                         
Weighted Average Common Shares Outstanding
     139,444,940       138,914,940       139,444,940       121,891,852       10,000  
 
The accompanying notes are an integral part of these financial statements
 
 
F-3
 
 
Optex Systems Holdings, Inc.
(formerly known as Sustut Exploration, Inc.)
Condensed Consolidated Statements of Cash Flows (Unaudited)

   
Successor
Nine months ended June
27, 2010
    
Successor
For the period October 15,
2008 through June 28, 2009
    
Predecessor
For the period
September 29, 2008
through October 14,
2008
  
                   
Cash Flows from Operating Activities:
                  
Net Income (Loss)
   $ (121,297 )   $ (728,584 )   $ 65,332  
                         
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
                        
Depreciation and Amortization
     826,156       1,622,907       9,691  
Provision for Allowance for Inventory Valuation
     (106,933 )     158,273       27,363  
Noncash Interest Expense
     16,359       170,882       9,500  
Stock Option Compensation Expense
     72,374       15,174       -  
(Increase) Decrease in Accounts Receivable
     (912,742 )     (1,823,665 )     1,049,802  
(Increase) Decrease in Inventory (Net of Progress Billed)
     1,145,333       (1,617,361 )     (863,566 )
(Increase) Decrease in Other Current Assets
     118,202       317,669       18,541  
(Increase) Decrease in Deferred Tax Asset
     (242,739 )     -       -  
Increase (Decrease) in Accounts Payable and Accrued Expenses
     (1,805,534 )     1,416,854       (186,051 )
Increase (Decrease) in Accrued Warranty Costs
     (56,530 )     87,446       -  
Increase (Decrease) in Due to Parent
     -       -       1,428  
Increase (Decrease) in Accrued Estimated Loss on Contracts
     (17,053 )     (119,470 )     (15,304 )
Increase (Decrease) in Income Taxes Payable
     -       85,179       -  
Total Adjustments
   $ (963,107 )   $ 313,888     $ 51,404  
Net Cash (Used)/Provided by Operating Activities
   $ (1,084,404 )   $ (414,696 )   $ 116,736  
                         
Cash Flows from Investing Activities:
                        
Cash Received through Optex Texas Acquisition
   $ -     $ 253,581     $ -  
Purchase of Property and Equipment
     (7,661 )     (13,824 )     (13,338 )
Net Cash Used in Investing Activities
   $ (7,661 )   $ 239,757     $ (13,338 )
                         
Cash Flows from Financing Activities:
                        
 Private Placement Net of Stock Issuance Cost
     -       874,529       -  
 Proceeds (to) from Credit Facility (net)
     959,061       -       -  
 Proceeds from Loans Payable
     250,000       (207,265 )     (20,000 )
 Repayments of Loans Payable
     (250,000 )     -       -  
                         
Net Cash (Used In) Provided by Financing Activities
   $ 959,061     $ 667,264     $ (20,000 )
                         
Net Increase (Decrease) in Cash and Cash Equivalents
   $ (133,004 )   $ 492,325     $ 83,398  
Cash and Cash Equivalents at Beginning of Period
     915,298       -       170,183  
Cash and Cash Equivalents at End of Period
   $ 782,294     $ 492,325     $ 253,581  
 
The accompanying notes are an integral part of these financial statements
 
 
F-4
 
Optex Systems Holdings, Inc.
(formerly known as Sustut Exploration, Inc.)
Condensed Consolidated Statements of Cash Flows - continued (Unaudited)

   
Successor
Nine months ended June
 27, 2010
    
Successor
For the period October 15,
2008 through June
28, 2009
    
Predecessor
For the period
September 29, 2008
through October 14,
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     $ -  
                         
Issuance of Warrants as Debt Issuance Cost
                        
Additonal Paid in Capital (warrants to purchase 1,100,000 shares)
   $ 32,000     $ -     $ -  
                         
Supplemental cash flow information:
                        
Cash Paid for Interest
   $ 49,479       3,817     $ -  
Cash Paid for Taxes
   $ 119,847       380,112     $ -  
 
The accompanying notes are an integral part of these financial statements
 
 
F-5
 
 
Note 1 - Organization and Operations   

On March 30, 2009, Optex Systems Holdings, Inc. (formerly known as Sustut Exploration, Inc.), a Delaware corporation (“Optex Systems Holdings” or “Successor”), along with Optex Systems, Inc., a privately held Delaware corporation (“Optex Systems, Inc. (Delaware)”), which is a wholly-owned subsidiary of Optex Systems Holdings, entered into a reorganization agreement, pursuant to which Optex Systems, Inc. (Delaware) was acquired by Optex Systems Holdings in a share exchange transaction.  Optex Systems Holdings became the surviving corporation. At the closing, there was a name change from Sustut Exploration Inc. to Optex Systems Holdings, Inc., and its year end changed 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 Corporation, Longview Fund, L.P. and Alpha Capital Anstalt formed Optex Systems, Inc. (Delaware), which acquired all of the assets and assumed certain liabilities of Optex Systems, Inc., a Texas corporation (“Optex Systems, Inc. (Texas)” or “Predecessor), and a wholly-owned subsidiary of Irvine Sensors Corporation, in a transaction that was consummated via purchase at a public auction.  Following this asset purchase, Optex Systems, Inc. (Texas) remained a wholly-owned subsidiary of Irvine Sensors Corporation. 

In accordance with FASB ASC 805 (Prior authoritative literature:  SFAS No. 141(R), “Business Combinations” and EITF 98-3 “Determining Whether a Non-monetary Transaction Involves Receipt of Productive Assets or of a Business”), Optex Systems, Inc. (Delaware)’s purchase of substantially all of the assets and assumption of certain liabilities represented the acquisition of a business.  FASB ASC 805 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 Systems, Inc. (Delaware) obtained the inputs and processes necessary for normal operations.

On February 20, 2009, Sileas Corporation, a newly-formed Delaware corporation, owned by present members of Optex Systems Holdings’ management, purchased 100% of Longview's equity and debt interest in Optex Systems, Inc. (Delaware)  (Longview’s interest in Optex Systems, Inc. (Delaware) then representing 90% of the issued and outstanding common equity interests in Optex Systems, Inc. (Delaware)), in a private transaction .  See Note 4 for additional details regarding the Sileas transaction.

Optex Systems, Inc. (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 Optex Systems Holdings.  Sileas is the majority owner (parent) of Optex Systems Holdings, owning approximately 73.5% of the issued and outstanding equity interests in Optex Systems Holdings.  Optex Systems Holdings plans to carry on the business of Optex Systems, Inc. (Delaware) as its sole line of business, and all of Optex Systems Holdings’ operations are conducted by and through its wholly-owned subsidiary, Optex Systems, Inc. (Delaware).  Accordingly, in subsequent periods the financial statements presented are those of the accounting acquirer.  The financial statements of Optex Systems Holdings 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 27, 2010, Optex Systems Holdings operated with 84 full-time equivalent employees.

Optex Systems Holdings 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. Optex Systems Holdings also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems Holdings’ 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, Optex Systems Holdings’ ISO certification status was upgraded from 9001:2000 to 9001:2008, bringing Optex Systems Holdings into compliance with the new ISO standards rewritten to align with ISO 14001.
 
F-6
 
 
Note 2 - Accounting Policies

Basis of Presentation

Principles of Consolidation:  The consolidated financial statements include the accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex Systems, Inc. (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 Systems, Inc. (Delaware), the accounting acquirer in the Sustut reorganization and the successor in the October 14, 2008 Optex Systems, Inc. (Texas) asset purchase transaction, for the three and nine months ending June 27, 2010, the three months ended June 28, 2009 and the period from October 15, 2008 through June 28, 2009 and the results of operations and cash flows for the period from September 29, 2008 through October 14, 2008 of Optex Systems, Inc. (Texas), Predecessor.  The accompanying financial statements include the balance sheets at June 27, 2010 and September 27, 2009 for Optex Systems, Inc. (Delaware), the accounting acquirer.

These financial statements have been presented as subsidiary-only financial statements, reflecting the statements of operations and cash flows of the subsidiary as a stand-alone entity.

Although, Optex Systems, Inc. (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 Systems, Inc. (Texas) accounts have been presented on the basis of push down accounting in accordance with FASB ASC 805-50-S99 (Prior authoritative literature:  Staff Accounting Bulletin No. 54 Application of “Push Down” Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase). FASB ASC 805-50-S99 states that the push down basis of accounting should be used in a purchase transaction in which the entity becomes wholly-owned by another entity. 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 Systems, Inc. (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 Optex Systems Holdings.

The condensed consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings, 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 Optex Systems Holdings believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the annual audited financial statements and the notes thereto included in the Optex Systems Holdings’ Form 10-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 Optex Systems Holdings 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 necessary, 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 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 June 27, 2010 and September 27, 2009, inventory included:

 
F-7
 
 
 
As of
June 27, 2010
   
As of
September 27, 2009
  
   
(unaudited)
        
             
Raw Materials
  
$
4,986,965
    
$
7,161,241
  
Work in Process
    
4,307,016
      
4,043,308
  
Finished Goods
    
231,851