Quarterly report pursuant to sections 13 or 15(d)

Accounting Policies (Policies)

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Accounting Policies (Policies)
 9 Months Ended
Jun. 30, 2013
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation: The consolidated financial statements include the accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.

 

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 for the year ended September 30, 2012 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
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: 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 30, 2013 and September 30, 2012, inventory included: 

 

    (Thousands)  
    As of 
June 30, 
2013		     As of 
September 30,
2012		  
             
Raw Materials   $ 6,419     $ 5,749  
Work in Process     2,663       1,890  
Finished Goods     390       599  
Gross Inventory   $ 9,472     $ 8,238  
Less:                
Unliquidated Progress Payments     (199 )     (62 )
Inventory Reserves     (1,082 )     (1,082 )
Net Inventory   $ 8,191     $ 7,094  

 

Net inventory increased by $1.1 million during the nine months ending June 30, 2013 primarily due to purchases required to support increased plastic periscope production for fiscal year 2013 and M36 production against the five year, $8 million DDAN contract awarded in October of 2011.
Revenue Recognition

Revenue Recognition: Optex Systems Holdings recognizes revenue based on the modified percentage of completion method utilizing the units-of-delivery method, in accordance with FASB ASC 605-35.

 

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 Systems Holdings contracts are fixed price production type contracts whereby a defined order quantity is delivered to the customer during a continuous or sequential production process tailored to the buyer’s specifications (build to print).  Optex Systems Holdings’ deliveries against these contracts generally occur in monthly increments across fixed delivery periods spanning from three to sixty months.

 

Optex Systems Holdings may at times have contracts that allow for invoicing based on achievement of milestone events. In such cases, Optex Systems Inc. recognizes revenue based on the milestone method in accordance with FASB ASC 605-28, as applicable. On October 24, 2011, Optex Systems Inc. was awarded an $8.0 million dollar contract with General Dynamics Land Systems - Canada which provides for milestone invoices up to a total of $3.9 million as outlined in the summarized contract table below. In accordance with FASB 605-28, Optex Systems Holdings recognizes milestone payments as revenue upon completion of a substantive milestone as commensurate with the following guidelines: our performance to achieve the milestone, the milestone relates solely to past performance and is reasonable relative to all of the deliverables and payment terms within the arrangement. Milestones are not considered as substantive if any portion of the associated milestone consideration relates to the remaining deliverables in the unit of accounting. Non-substantive milestone payments are reported as a liability on the balance sheet as Short Term and Long Term Customer Advance Deposits.

 

The following table depicts the current contract milestone schedule as of June 30, 2013.

 

        Thousands  
Milestone Event   Estimated
Completion /
Invoice Date		   Revenue     Customer Deposits / Liability  
                     
Start of Work Meeting 
System Functional Review 
Production Start of Work		   Complete   $ 34.4     $ 552.9  
                     
Delivery of Two Prototypes   Complete     63.7       61.8  
                     
Preliminary Design Review 
PRM #1 (Meeting) Production 
Readiness Review		   Complete     25.0       1,032.4  
                     
Critical Design Review 
PRM #2 (Meeting)		   Complete     25.0       150.0  
                     
Placement of Long Lead Material (LLM)   Complete     25.0       100.4  
                     
Delivery of Two Engineering Development Units   Complete     55.0       100.0  
                     
Delivery of One Production Ready Unit   Complete     68.2       125.6  
                     
PRM #3 (Meeting)   Complete     84.2       570.0  
                     
FAT and PCA Complete   Complete     275.2       449.4  
                     
Delivery of Two Final Production Ready Units   Complete     9.7       125.6  
Total Contract Milestones       $ 665.4     $ 3,268.1  
                     
Less: Liquidated Milestones (shipments)                 (361.6 )
                     
Total Customer Deposits/Milestones               $ 2,906.5  

   

In the three and nine months ending June 30, 2013, Optex recognized $0 and $10 thousand of revenue, respectively, as a result of achieving substantive milestone events. During the three and nine months ending July 1, 2012, Optex recognized $233 thousand and $356 thousand of revenue as a result of achieving substantive milestone events.
Customer Advance Deposits
Customer Advance Deposits: Customer advance deposits represent amounts collected from customers in advance of shipment or revenue recognition which relate to undelivered product due to non-substantive milestone payments or other cash in advance payment terms. As of June 30, 2013, Optex Systems, Inc. had collected $2.9 million in customer advance deposits related to non-substantive milestones. The terms of the contract extend through 2017 during which time we are required to purchase the necessary materials to fulfill the delivery of products required by the contract. Of the total collected customer advance deposits, $1.2 million is related to short term customer advance deposits for deliveries to occur within the next twelve months and $1.8 million is related to long term customer advance deposits for deliveries occurring after June 2014. As of June 30, 2013, the customer advance deposit balance was $3.0 million which included $2.9 million of unliquidated milestone invoices and $0.1 million of advance customer payments on two additional customer orders.
Stock-Based Compensation

Stock-Based Compensation: FASB ASC 718 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, but primarily focuses on transactions whereby an entity obtains employee services for share-based payments. FASB ASC 718 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. 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. 

 

The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC 505-50. 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, whichever is more readily determinable in accordance with FASB ASC 718.
Income Tax/Deferred Tax
Income Tax/Deferred Tax: FASB ASC 740 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differing treatment of items for financial reporting and income tax reporting purposes. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. Under FASB ASC 740, 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 the Company will not realize tax assets through future operations. Optex Systems Holdings has recognized deferred income tax benefits on net operating loss carry-forwards to the extent Optex Systems Holdings believes it will be able to utilize them in future tax filings. The difference between the statutory income tax expense and the accounting tax expense is primarily attributable to non-deductible expenses representing permanent timing differences between book income and taxable income during the three and nine months ended June 30, 2013.
Earnings per Share

Earnings per Share: Basic earnings per share is computed by dividing income available for common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

The potentially dilutive securities that Optex Systems Holdings has outstanding are convertible preferred stock, stock options and warrants. In computing the dilutive effect of convertible preferred stock, the numerator is adjusted to add back any convertible preferred dividends, and the denominator is increased to assume the conversion of the number of additional common shares. Optex Systems Holdings uses the Treasury Stock Method to compute the dilutive effect of stock options and warrants. Convertible preferred stock, stock options and warrants that are anti-dilutive are excluded from the calculation of diluted earnings per common share.

 

For the three and nine months ended June 30, 2013, 1,016 shares of Series A preferred stock, 48,267,649 stock options and 4,547,000 warrants were excluded from the earnings per share calculation as anti-dilutive. For the three and nine months ended July 1, 2012, 1,027 shares of Series A preferred stock, 48,488,649 stock options and 9,948,667 warrants were excluded from the earnings per share calculation as anti-dilutive.