Note 8 - Debt Financing

Related Parties

Acquisition by Sileas Corporation on February 20, 2009

On February 20, 2009, Sileas purchased 100% of the equity and debt interest held by Longview, which represented 90% of the Optex Systems, Inc. (Delaware) outstanding equity on that date.  Currently, Sileas is the majority owner of Optex Systems Holdings.

Sileas Secured Promissory Note Due on May 29, 2021 to Longview Fund, LP

As a result of the transaction described above between Sileas and Longview on February 20, 2009, Sileas, the new majority owner of Optex Systems, Inc. (Delaware), executed and delivered to Longview, a Secured Promissory Note in an original principal amount of $13,524,405 and bearing simple interest at the rate of 4% per annum.

On June 5, 2015, Sileas Corp. amended its Secured Note, with Longview Fund, L.P., as lender, as follows:

Simultaneously therewith, Sileas entered into a Blocker Agreement with us pursuant to which the Series A preferred stock shall not be convertible by Sileas into our common stock, and we shall not effect any conversion of the Series A Stock or otherwise issue any shares of our common stock pursuant hereto, to the extent (but only to the extent) that after giving effect to such conversion or other share issuance hereunder Sileas (together with its affiliates) would beneficially own in excess of 9.99% our common stock. Sileas also agreed to not vote any of its shares of Series A preferred stock in excess of 9.99% of our common stock. This Blocker Agreement has been waived by us until further notice.

Conversion of Sileas Owned Series A Preferred Shares to Common Stock

On March 27, 2016, Sileas exercised a conversion of 455.52 shares of Optex Systems, Inc. Preferred Series A shares at a total stated value of $3.1 million into 1,250,000 shares of common stock. The conversion rate to common stock was $2.50 per share. There was no impact to the balance sheet net equity as a result of this transaction.

Credit Facility — Avidbank (formerly known as Peninsula Bank Business Funding)

On April 20, 2016, the Company amended its revolving credit facility with Avidbank. The new renewable revolving maturity date is January 22, 2018. The facility provides up to $2 million in financing against eligible receivables and is subject to meeting certain covenants including an asset coverage ratio test for up to twenty months. The material terms of the amended revolving credit facility are as follows:

As of June 26, 2016 and September 27, 2015, the outstanding principal and accrued interest balance on the line of credit was $730 thousand and $817 thousand, respectively.  For the three and nine months ended June 26, 2016 and June 28, 2015, the total interest expense against the outstanding line of credit balance was $12 and $28 thousand and $10 and $20 thousand, respectively.

Issuance of Convertible Notes

On November 17, 2014, Optex Systems Holdings entered into a Subscription Agreement (the “Agreement”) to sell up to $2.1 million principal amount of convertible promissory notes (“Notes”) to several accredited investors (the “Investors”) in a private placement pursuant to which the Investors purchased a series of Notes with an aggregate principal amount of $1,550 thousand. An additional convertible promissory note for $10 thousand was issued to the placement agency in consideration for placement services on the transaction.

Optex Systems, Inc. incurred $74 thousand in debt issuance costs, for investment banking, legal and placements fee services, inclusive of the $10 thousand supplemental convertible note issued for placement fees. These costs are reflected in the June 28, 2015 cash flow statement as debt issuance costs and were amortized to interest expense across the term of the notes based on the effective interest method. For the three and nine months ending June 26, 2016 the total interest expense related to the debt was zero. For the three and nine months ending June 28, 2015 the total interest expense related to the debt was $3 and $146 thousand, respectively. As of June 26, 2016 and September 27, 2015 the unamortized debt issuance costs were zero.

On June 28, 2015, the holders of the Company’s $1,560,000 principal amount of convertible promissory notes, issued on or about November 17, 2014, converted the entire principal amount thereof and all accrued and unpaid interest thereon, into 1,000 shares of the Company’s Series B Preferred Stock.