Item
8 Financial Statements and Supplementary Data
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Optex
Systems Holdings, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Optex Systems Holdings, Inc. and subsidiaries (the “Company”)
as of October 3, 2021 and September 27, 2020, and the related consolidated statements of income, stockholders’ equity, and cash
flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of October 3, 2021 and September
27, 2020, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matter
The
critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial
statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matter
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Deferred
Taxes
Critical
Audit Matter Description
As
described in notes 2 and 13 to the consolidated financial statements, deferred tax assets and liabilities are determined based on differing
treatment of items for financial reporting and income tax reporting purposes. 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. When assessing the recoverability
of deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies, and results of recent operations. Management has determined that a portion of the deferred tax assets may not
be realized and has established a valuation allowance against the deferred tax asset balance. For the year ended October 3, 2021, the
Company has a net carrying value of $1.3 million in deferred tax assets represented by deferred tax assets of $2.1 million and a deferred
tax asset valuation allowance of $0.8 million against those assets.
We
identified the evaluation of the deferred taxes as a critical audit matter because of the significant estimates and assumptions management
used in calculating the deferred tax assets and liabilities as well as the valuation allowance. Performing audit procedures to evaluate
the reasonableness of these estimates and assumptions required a high degree of auditor judgment. Additionally, the audit procedures
performed on deferred taxes required increased audit effort and involved the use of professionals with specialized skill and knowledge.
How
the Critical Audit Matter Was Addressed in the Audit
Our
audit procedures consisted of the following:
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Testing
management’s process for developing the accounting estimate for deferred taxes including the valuation allowance.
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Evaluating
the appropriateness of the significant estimates and assumptions used by management, including the scheduled reversal of deferred
tax liabilities, projected future taxable income, and results of recent operations. We considered the current and past performance
of the entity, the industry in which the Company operates, and whether audit evidence obtained from other audit procedures resulted
in any disconfirming evidence.
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Testing
the completeness and accuracy of underlying data used in calculating deferred taxes and the related valuation allowance.
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Utilizing
professionals with specialized skill and knowledge to assist in the evaluation of the reasonableness of deferred taxes and the related
valuation allowance.
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/s/ Whitley Penn LLP
We
have served as the Company’s auditor since 2017.
Fort
Worth, Texas
December
20, 2021
Optex
Systems Holdings, Inc.
Consolidated
Balance Sheets
The
accompanying notes are an integral part of these financial statements.
Optex
Systems Holdings, Inc.
Consolidated
Statements of Income
The
accompanying notes are an integral part of these financial statements.
Optex
Systems Holdings, Inc.
Consolidated
Statements of Cash Flows
The
accompanying notes are an integral part of these financial statements.
Optex
Systems Holdings, Inc.
Consolidated
Statement of Stockholders’ Equity
(1)
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100,000 restricted
common shares issued to each of the Independent Board of Directors (Rimmy Malhotra, Dale Lehman, Larry Hagenbuch) on April 30, 2020 with
20% vesting as of each January 1 each year over a five-year period. The value of the shares at issue date is $525,000 for 300,000 shares
to be amortized over the vesting period. As of October 3, 2021, 60,000 of the director shares were vested, and 240,000 were unvested.
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(2)
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Common shares
repurchased in the open market between June 11, 2020 and October 3, 2021. On June 14, 2021, 519,266 of the repurchased shares were cancelled,
and as of October 3, 2021, 35,555 shares were held in treasury stock using the cost method.
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(3)
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Exercise of
warrants for common shares at $1.50 for gross proceeds of $283 thousand and a fair market value of $9 thousand as of the exercise dates.
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The
accompanying notes are an integral part of these financial statements.
Note
1 — Organization and Operations
Optex
Systems Holdings, Inc. (“the Company”) manufactures optical sighting systems and assemblies for the U.S. Department of Defense,
foreign military applications and commercial markets. 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 or commercial customers. Optex Systems Holdings’
operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of October 3, 2021, the Company
operated with 84 full-time equivalent employees.
Note
2 — Summary of Significant 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. All significant inter-company balances and transactions have been eliminated in consolidation.
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: FASB ASC 280 requires that a public business enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about which separate financial information is available and evaluated
regularly by the chief operating decision maker in decisions regarding resource allocations and performance assessments. Generally, financial
information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to
allocate resources to segments. Segments are determined based on differences in products, internal reporting and how operational decisions
are made. Management has determined that the Optex Systems, Richardson plant, and the Applied Optics Center, Dallas plant are separately
managed, organized, and internally reported as separate business segments. The FASB ASC 280 requires that a public business enterprise
report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliations
of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding
amounts in the enterprise’s general-purpose financial statements.
Fiscal
Year: Optex System Holdings’ fiscal year ends on the Sunday nearest September 30. Fiscal year 2021 ended on October 3,
2021 and included 53 weeks. Fiscal year 2020 ended on September 27, 2020 and included 52 weeks.
Fair
Value of Financial Instruments: Fair value estimates discussed herein are based upon certain market assumptions and pertinent
information available to management as of the financial statement presentation date.
The
carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, are carried at, or approximate,
fair value as of the reporting date because of their short-term nature. The credit facility is reported at fair value as it bears market
rates of interest. Fair values for the Company’s warrant liabilities and derivatives are estimated by utilizing valuation models
that consider current and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates.
Besides the Company’s warrant liabilities, such amounts and the recognition of such amounts are subject to significant estimates
that may change in the future.
The
fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities
carried at fair value be classified and disclosed in one of the following three categories:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level
3: Unobservable inputs reflecting the reporting entity’s own assumptions.
The
accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use
of unobservable inputs. An asset or liability’s level is based on the lowest level of input that is significant to the fair value
measurement. Fair value estimates are reviewed at the origination date and again at each applicable measurement date and interim or annual
financial reporting dates, as applicable for the financial instrument, and are based upon certain market assumptions and pertinent information
available to management at those times.
Each
of the measurements is considered a Level 3 measurement based on the availability of market data and inputs and the significance of any
unobservable inputs as of the measurement date. The methods and significant inputs and assumptions utilized in estimating the fair value
of the warrant liabilities, as well as the respective hierarchy designations are discussed further in Note 12 “Warrant Liabilities”.
Cash
and Cash Equivalents: For financial statement presentation purposes, Optex Systems Holdings considers those short-term, highly
liquid investments with original maturities of three months or less to be cash or cash equivalents. Optex Systems Holdings has $3.9 million
in cash on deposit with our banks. Only a portion of the cash, currently $500 thousand, would be covered by federal deposit insurance
and the uninsured balances are substantially greater than the insured amounts.
Concentration
of Credit Risk: The Company’s revenues for fiscal year ended October 3, 2021 are derived from sales to U.S. government
agencies (28%), four U.S. defense contractors (27%, 11%, 5%, and 5%), one major commercial customer (10%) and all other customers (14%).
The Company’s revenues for fiscal year ended September 27, 2020 are derived from sales to U.S. government agencies (50%), three
major U.S. defense contractors (19%, 6% and 5%), one major commercial customer (9%) and all other customers (11%). Optex Systems Holdings
does not believe that this concentration results in undue credit risk because of the financial strength of the obligees.
Accounts
Receivable: Optex Systems Holdings records its accounts receivable at the original sales invoice amount less 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 Systems Holdings 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 of October 3, 2021, and September 27, 2020,
Optex Systems Holdings had an allowance for doubtful accounts of $5 thousand, for non U.S. government account balances greater than 120
days. As the customer base is primarily U.S. government and government prime contractors, Optex Systems Holdings allowance for doubtful
accounts is minimal. Optex Systems Holdings charges uncollectible accounts to bad debt expense in the period as they are first deemed
uncollectible. In the fiscal year 2021 we recognized zero in bad debt expenses associated with uncollectible accounts. In the fiscal
year 2020 we recognized $1 thousand in bad debt expenses associated with uncollectible accounts.
As
of October 3, 2021, 87% of the accounts receivable balance was comprised of six customers: the U.S. government, 34%, three major defense
contractors, 13%, 10% and 7%, a commercial customer, 16%, and a foreign military customer, 7%. As of September 27, 2020, 89% of the accounts
receivable balance was comprised of five customers: the U.S. government, 29%, three major defense contractors, 39%, 8% and 7%, and a
commercial customer, 6%.
Inventory:
Inventory is recorded at the lower of cost or net realizable value, and adjusted as appropriate for decreases in valuation and
obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected
sales activity, inventory costs and inventory balances to determine appropriate reserve levels. Cost is determined using the first-in
first-out method. As of October 3, 2021, and September 27, 2020 inventory included:
Schedule of Inventory
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2021
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2020
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(Thousands)
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As of
October 3, 2021
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As of
September 27, 2020
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Raw Materials
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$
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4,926
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$
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5,506
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Work in Process
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2,664
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3,214
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Finished Goods
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629
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638
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Gross Inventory
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8,219
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9,358
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Less: Inventory Reserves
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(636
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)
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(567
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)
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Net Inventory
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$
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7,583
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$
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8,791
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In
the twelve months ended October 3, 2021 Optex Systems recorded $69 thousand of obsolete and excess inventory reserves. Net Inventory
decreased by $1.2 million in support of deliveries against several long running contracts during the 2021 fiscal year.
Warranty
Costs: Some of Optex Systems Holdings’ customers require that the Company warrant the quality of its products to meet customer
requirements and be free of defects for up to twelve months subsequent to delivery. Future warranty costs are based on the estimated
cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of warranty covered sales.
Throughout the year, warranty costs are expensed as incurred, and as of each year end, Optex Systems Holdings reviews the prior 12-month
warranty experience rate and may adjust the warranty accrual as required to cover any estimated warranty expenses associated the period
end backlog of returned customer units awaiting repair or replacement plus any estimated warranty expenses related to anticipated future
returns on previous deliveries. As of October 3, 2021, and September 27, 2020, the existing warranty reserve balances of $78 thousand
and $83 thousand, respectively, were reviewed and determined to be adequate to satisfy any future warranty claims that may have existed
as of the end of each fiscal year for shipments occurring in the prior 12 months. We have made numerous improvements to our supplier
bases and internal production process to reduce the return rate on future shipments but will continue to review and monitor the reserve
balances related to this product line against any existing warranty backlog and current trend data as we repair and replace our current
warranty backlog and process future warranty returns.
The
table below summarizes the warranty expenses and incurred warranty costs for the twelve months ended October 3, 2021 and September 27,
2020.
Schedule of Warranty Reserves
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2021
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2020
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Years ended
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2021
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2020
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Beginning balance
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$
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83
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$
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46
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Incurred costs for warranties satisfied during the period
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(80
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)
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(39
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)
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Warranty Expenses:
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Warranties reserved for new product shipped during the period(1)
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38
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106
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Change in estimate for pre-existing warranty liabilities (2)
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37
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(30
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)
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Warranty Expense
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75
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76
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Ending balance
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$
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78
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$
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83
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(1)
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Warranty
expenses accrued to cost of sales (based on current year shipments and historical warranty return rate).
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(2)
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Changes
in estimated warranty liabilities recognized in cost of sales associated with: the period end customer returned warranty backlog,
or the actual costs of repaired/replaced warranty units which were shipped to the customer during the year.
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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.
Leases:
In February 2016, FASB issued ASU 2016-02—Leases (Topic 842). The update is intended to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. As such, Optex Systems Holdings adopted these provisions as of the fiscal year beginning on
September 30, 2019. Optex Systems Holdings has two significant operating facilities leases which extend beyond twelve months and fall
under the guidance of ASC Topic 842. Adoption of ASC Topic 842 resulted in the balance sheet recognition of a right-of-use asset of $1.9
million and corresponding operating lease liabilities of approximately $1.8 million as of the beginning of the fiscal year ended on September
27, 2020, representing the present value of future lease payments as of the beginning of the year, for the term of the equipment lease
and both segment facility leases and which assumed the exercise of a five-year renewal option at the Applied Optics Center as of November
1, 2021. On January 11, 2021, the Company executed amendments extending the lease terms of both facilities for eighty-six months. Execution
of the new lease amendments for the Dallas and Richardson facilities on January 11, 2021 resulted in the balance sheet recognition of
a right-of-use asset of $3.7 million and corresponding operating lease liabilities of approximately $3.7 million during the period.
As
of period ended September 27, 2021, the Company has recognized a $1.4 million in right-of-use-asset and corresponding operating lease
liabilities of $1.5 million. As of period ended October 3, 2021, the Company has recognized a $3.6 million in right-of-use-asset and
corresponding operating lease liabilities of $3.7 million. See also Note 7.
Revenue
Recognition: The Company has adopted FASB ASC 606—Revenue from Contracts with Customers which requires revenue recognition
based on a five-step model that includes: identifying the contract, identifying the performance obligations, determining the transaction
price, allocating the transaction price and recognizing the revenue. The standard results in the recognition of revenue depicting the
transfer of promised goods or services to customers in an amount reflecting the expected consideration to be received from the customer
for such goods and services, based on the satisfaction of performance obligations, occurring when the control of the goods or services
transfer to the customer. The majority of the Company’s contracts and customer orders originate with fixed determinable unit prices
for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the specific due
date for the transfer of control and title of each of those deliverables to the customer at pre-established payment terms, which are
generally within thirty to sixty days from the transfer of title and control. We have elected to account for shipping and handling costs
as fulfillment costs after the customer obtains control of the goods. In addition, the Company has one ongoing service contract which
relates to optimized weapon system support (OWSS) and includes ongoing program maintenance, repairs and spare inventory support for the
customer’s existing fleet units in service during the duration of the contract. Revenue recognition for this program has been recorded
by the Company, and compensated by the customer, at fixed monthly increments over time, consistent with the defined contract maintenance
period. The total revenue recognized over time related to the contract is $479 thousand for the twelve months ended October 3, 2021 and
$451 thousand for the twelve months ended September 27, 2020.
The
Company has on occasion, outside of the presented periods, received selective contract awards and modifications which included substantive
milestone performance obligations, contract modifications, negotiated settlements and financing arrangements which could fall within
the scope of FASB ASC 606 revenue recognition guidance on reoccurrence, and as such, the Company has expanded their contract review process
to ensure any new contract awards, changes, modifications, financing arrangements or potential negotiated settlements are recorded in
compliance to the new standard guidance.
During
the twelve months ended October 3, 2021, there was $1 thousand of revenue recognized during the period from customer deposit liabilities
(deferred contract revenue). During the twelve months ended September 27, 2020 there was $3 thousand of revenue recognized during the
period from customer deposit liabilities (deferred contract revenue. As of the twelve months ended October 3, 2021 and September 27,
2020, there are no significant deferred contract costs such as sales commissions.
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 October 3,
2021, and September 27, 2020, Optex Systems, Inc. had a balance of zero and $1 thousand, respectively, in customer advance deposits.
Government
Contracts: Many of Optex Systems Holdings’ contracts are prime or subcontracted directly with the Federal government and
as such, are subject to Federal Acquisition Regulation (Federal Acquisition Regulation) Subpart 49.5, “Contract Termination Clauses”
and more specifically Federal Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the Government (Fixed-Price)”,
and 49.504 “Termination of fixed-price contracts for default”. These clauses are standard clauses on prime military contracts
and are required by the government to be “flowed down” by the prime contractor to any subcontractors used to perform work
or provide components against the award. It has been Optex Systems Holdings’ experience that the termination for convenience is
rarely invoked, except where it has been mutually beneficial for both parties. Optex Systems Holdings is not currently aware of any pending
terminations for convenience or default on its existing prime contracts or customer purchase orders.
Impairment
or Disposal of Long-Lived Assets: Optex Systems Holdings follows the provisions of FASB ASC 360-10, “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 cash flows are less than the carrying value of such assets, an impairment
loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management
to estimate future cash flows and the fair value of long-lived assets. No impairment of long-lived assets was recorded for the periods
presented.
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.
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 Optex Systems Holdings will not realize tax assets through future operations. When assessing
the recoverability of deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies and results of recent operations. Based on those estimates, management has determined that
a portion of the deferred tax assets may not be realized and has established a valuation allowance against the deferred tax asset balance.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it
is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those
tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than
50 percent likely to be realized upon ultimate settlement with the related tax authority.
As
of October 3, 2021, Optex Systems Inc. has a net carrying value of $1.3 million in deferred tax assets represented by deferred tax assets
of $2.1 million and a deferred tax asset valuation allowance of ($0.8) million against those assets. The valuation allowance has been
established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016 which
may not be fully recognized due to an IRS Section 382 limitation related to a change in control occurring in fiscal year 2018. Due to
historical losses, our valuation allowance reserve was set at 100% of the deferred tax asset for the years 2014 through 2018 for a net
carrying value of zero. As of October 3, 2021, and September 27, 2020, we reviewed the deferred tax assets and determined it was more
likely than not that we would be able to utilize a substantial portion of the deferred tax asset balance against future earnings. Our
assumptions were based on the previous three years earnings trend as well as anticipated future earnings expected with the increases
in U.S defense and Foreign Military market spending. During the twelve months ended October 3, 2021, we recognized an additional $0.04
million in tax benefits from the deferred tax assets. We will continue to review the deferred tax assets and related valuation reserves
in accordance with ASC 740 on an annual basis.
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 had outstanding were stock options and warrants. Optex Systems Holdings
uses the Treasury Stock Method to compute the dilutive effect of stock options and warrants. Stock options and warrants that are
anti-dilutive are excluded from the calculation of diluted earnings per common share.
For
the twelve months ended October 3, 2021, 99,000 unvested restricted stock units and 240,000 restricted unvested shares (which converts
to 82,788 incremental dilutive shares) were included in the diluted earnings per share calculation as dilutive. For the twelve months
ended September 27, 2020, 182,000 unvested restricted stock units and 300,000 restricted unvested shares (which converts to 125,347 incremental
dilutive shares) were included in the diluted earnings per share calculation as dilutive, and 4,125,200 warrants were excluded.
Our
outstanding warrants during the twelve months ended October 3, 2021 and September 27, 2020 are participating securities which share dividend
distributions and the allocation of any undistributed earnings (deemed dividends) with our common shareholders. During the twelve months
ended October 3, 2021 and September 27, 2020, there were no declared dividends and allocated undistributed earnings of $0.7 million and
$0.6 million attributable to the participating warrants, respectively.
Note
3 — Recent Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on recurring and
nonrecurring fair value measurements in Topic 820. The amendments in the update are effective for all entities for fiscal years and interim
periods within those fiscal years, beginning after December 15, 2019. As such, Optex Systems Holdings adopted these provisions as of
the fiscal year beginning on September 28, 2020. There was no material impact on our financial statement disclosures as a result of the
amendment adoption.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment
model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities
and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance
for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. As such, Optex Systems Holdings adopted these provisions as of the fiscal year beginning on September 28, 2020. There was no material
impact on our consolidated financial statements and results of operations as a result of adopting ASU 2016-13.
In
February 2016, FASB issued ASU 2016-02—Leases (Topic 842). The update is intended to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. As such, Optex Systems Holdings adopted these provisions as of the fiscal year beginning on September 30,
2019. Optex Systems Holdings has two significant operating facilities leases and one equipment lease which extends beyond twelve months
and fall under the guidance of ASC Topic 842. Adoption of ASC Topic 842 resulted in the balance sheet recognition of a right-of-use asset
of $1.8 million and corresponding operating lease liabilities of approximately $1.9 million as of September 30, 2019, representing the
present value of future lease payments as of the beginning of the year, for the term of the equipment lease and both segment facility
leases. See also Note 7.
Note
4 — Segment Reporting
The
Company’s reportable segments are strategic businesses offering similar products to similar markets and customers; however, the
companies are operated and managed separately due to differences in manufacturing technology, equipment, geographic location, and specific
product mix. Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was retained. Both the Applied
Optics Center and Optex Systems – Richardson operate as reportable segments under the Optex Systems, Inc. corporate umbrella.
The
Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies
for the Optex Systems-Richardson (“Optex Systems”) segment. Intersegment sales and transfers are accounted for at annually
agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general and administrative
costs, but exclude profits that would apply to third party external customers.
Optex
Systems (OPX) – Richardson, Texas
Optex
Systems revenues are primarily in support of prime and subcontracted military customers. Approximately 85% of the Optex Systems segment
revenue is comprised of domestic military customers, and 15% is comprised of foreign military customers. Optex Systems segment revenue
is derived from the U.S. government, 28%, and two major U.S. defense contractors representing 21% and 11%, of the Company’s consolidated
revenue, respectively.
Optex
Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of October 3, 2021, the
Richardson facility operated with 47 full time equivalent employees in a single shift operation. Optex Systems, Richardson serves as
the home office for both the Optex Systems and Applied Optics Center segments.
Applied
Optics Center (AOC) – Dallas, Texas
The
Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represent 35% and military sales to prime
and subcontracted customers represent 65% of the total segment revenue. Approximately 86% of the AOC revenue is derived from external
customers and approximately 14% is related to intersegment sales to Optex Systems in support of military contracts. For the twelve months
ended October 3, 2021, the AOC segment revenue from the U.S. government, one major commercial customer, and two major defense contractors
represent approximately 10%, 7% and 5% of the Company’s consolidated revenue, respectively.
The
Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of
October 3, 2021, AOC operated with 37 full time equivalent employees in a single shift operation.
The
financial table below presents the information for each of the reportable segments profit or loss as well as segment assets for each
year. The Company does not allocate interest expense, income taxes or unusual items to segments.
Schedule of Segment Reporting Information
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
Twelve months ended October 3, 2021
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
Other
(non-allocated costs and intersegment eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
11,827
|
|
|
$
|
6,395
|
|
|
$
|
-
|
|
|
$
|
18,222
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
1,056
|
|
|
|
(1,056
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
11,827
|
|
|
$
|
7,451
|
|
|
$
|
(1,056
|
)
|
|
$
|
18,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
41
|
|
|
$
|
222
|
|
|
$
|
-
|
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
|
|
$
|
)
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(677
|
)
|
|
$
|
677
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain on change in fair value of warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,535
|
)
|
|
$
|
(2,535
|
)
|
Stock compensation expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
228
|
|
|
$
|
228
|
|
Warranty expense
|
|
$
|
(15
|
)
|
|
$
|
90
|
|
|
$
|
-
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
14,010
|
|
|
$
|
6,845
|
|
|
$
|
-
|
|
|
$
|
20,855
|
|
Expenditures for segment assets
|
|
$
|
20
|
|
|
$
|
254
|
|
|
$
|
-
|
|
|
$
|
274
|
|
|
|
Reportable Segment Financial Information
(thousands)
|
|
|
|
Twelve months ended September 27, 2020
|
|
|
|
Optex Systems
Richardson
|
|
|
Applied Optics Center
Dallas
|
|
|
Other
(non-allocated costs and intersegment eliminations)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
17,233
|
|
|
$
|
8,657
|
|
|
$
|
-
|
|
|
$
|
25,890
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
1,689
|
|
|
|
(1,689
|
)
|
|
|
-
|
|
Total Revenue
|
|
$
|
17,233
|
|
|
$
|
10,346
|
|
|
$
|
(1,689
|
)
|
|
$
|
25,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
36
|
|
|
$
|
212
|
|
|
$
|
-
|
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
|
|
$
|
|
|
$
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other significant noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated home office expense
|
|
$
|
(673
|
)
|
|
$
|
673
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Loss on change in fair value of warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
508
|
|
|
$
|
508
|
|
Stock option compensation expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
197
|
|
|
$
|
197
|
|
Warranty Expense
|
|
$
|
-
|
|
|
$
|
76
|
|
|
$
|
-
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
$
|
14,642
|
|
|
$
|
5,703
|
|
|
$
|
-
|
|
|
$
|
20,345
|
|
Expenditures for segment assets
|
|
$
|
102
|
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
152
|
|
Note
5 — Property and Equipment
A
summary of property and equipment at October 3, 2021 and September 27, 2020 is as follows:
Schedule of Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
|
|
Estimated
Useful Life
|
|
Year Ended
October 3, 2021
|
|
|
Year Ended
September 27, 2020
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
Furniture and Fixtures
|
|
3-5 yrs
|
|
$
|
398
|
|
|
$
|
398
|
|
Machinery and Equipment
|
|
5 yrs
|
|
|
4,035
|
|
|
|
3,782
|
|
Leasehold Improvements
|
|
7 yrs
|
|
|
296
|
|
|
|
276
|
|
Property and Equipment, gross
|
|
7 yrs
|
|
|
296
|
|
|
|
276
|
|
Less: Accumulated Depreciation
|
|
|
|
|
(3,712
|
)
|
|
|
(3,450
|
)
|
Net Property & Equipment
|
|
|
|
$
|
1,017
|
|
|
$
|
1,006
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
|
|
$
|
263
|
|
|
$
|
248
|
|
During
the twelve months ended October 3, 2021, Optex Systems Holdings’ purchased $254 thousand in new furniture and fixtures and $20
thousand in leasehold improvements. During the twelve months ended October 3, 2021, there were no sales or retirements of fixed assets.
During the twelve months ended September 27, 2020, Optex Systems Holdings’ purchased $20 thousand in new furniture and fixtures
and $132 thousand in machinery and equipment. During the twelve months ended September 27, 2020, there were no sales or retirements of
fixed assets.
Note
6 — Accrued Expenses
The
components of accrued liabilities for the years ended October 3, 2021 and September 27, 2020 are summarized below:
Schedule of Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
October 3, 2021
|
|
|
September 27, 2020
|
|
|
|
|
|
|
|
|
Contract Loss Reserves
|
|
$
|
51
|
|
|
$
|
-
|
|
Accrued Vacation
|
|
|
376
|
|
|
|
469
|
|
Property Taxes
|
|
|
117
|
|
|
|
113
|
|
Operating Expenses
|
|
|
99
|
|
|
|
323
|
|
Payroll & Payroll Related
|
|
|
208
|
|
|
|
172
|
|
Total Accrued Expenses
|
|
$
|
851
|
|
|
$
|
1,077
|
|
Note
7 — Commitments and Contingencies
Rental
Payments under Non-cancellable Operating Leases
Optex
Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc. Richardson location and the Applied Optics
Center Dallas location. The company also leases certain office equipment under non-cancellable operating leases.
The
leased facility under Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space
at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through
March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months,
commencing on April 1, 2021 and ending on May 31, 2028. The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each
year thereafter. The initial term included 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately
$11.6 thousand for additional Common Area Maintenance fees and taxes (“CAM”), to be adjusted annually based on actual expenses
incurred by the landlord.
The
leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet
of space at the premises. The previous lease term for this location expired on October 31, 2021 and the monthly base rent was $21.9 thousand
through the end of the lease. On January 11, 2021 the Company executed a first amendment extending the terms of the lease for eighty-six
(86) months, commencing on November 1, 2021 and ending on December 31, 2028. The initial base rent is set at $23.6 thousand as of January
1, 2022 and escalates 2.75% on January 1 each year thereafter. The initial term includes 2 months of rent abatement for November and
December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing
rental rate” or the then current base rental rate. Our obligations to make payments under the lease are secured by a $125,000 standby
letter of credit. The monthly rent includes approximately $7.8 thousand for additional CAM, to be adjusted annually based on actual expenses
incurred by the landlord.
The
Company has one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease
cost for the equipment is $1.5 thousand per month from October 1, 2018 through December 31, 2021.
Optex
Systems Holdings adopted the provisions of ASC Topic 842 “Leases” as of the fiscal year beginning on September 30, 2019.
Optex Systems Holdings has two significant operating facilities leases and one equipment lease which extend beyond twelve months and
fall under the guidance of ASC Topic 842. Adoption of ASC Topic 842 resulted in the balance sheet recognition of a right-of-use asset
of $1.8 million and corresponding operating lease liabilities of approximately $1.9 million as of September 30, 2019, which represented
the present value of future lease payments for the term of the equipment lease and both segment facility leases and which assumed the
exercise of a five-year renewal option at the Applied Optics Center as of November 1, 2021. Execution of the new lease amendments for
the Dallas and Richardson facilities on January 11, 2021 resulted in the balance sheet recognition of a right-of-use asset of $3.7 million
and corresponding operating lease liabilities of approximately $3.7 million during the twelve months ended October 3, 2021.
As
of October 3, 2021, the remaining minimum base lease and estimated common area maintenance (CAM) payments under the non-cancellable office
equipment and facility space leases are as follows:
Schedule
of Non-cancellable Operating Leases Minimum Payments
Non-cancellable
Operating Leases Minimum Payments
Fiscal Year
|
|
Facility
Lease
Payments
|
|
|
Facility
Lease
Payments
|
|
|
Lease
Payments
|
|
|
Total Lease Payments
|
|
|
Total Variable CAM Estimate
|
|
|
|
(Thousands)
|
|
|
|
|
|
|
Optex Richardson
|
|
|
Applied Optics Center
|
|
|
Office Equipment
|
|
|
Consolidated
|
|
Fiscal Year
|
|
Facility
Lease
Payments
|
|
|
Facility
Lease
Payments
|
|
|
Lease
Payments
|
|
|
Total Lease Payments
|
|
|
Total Variable CAM Estimate
|
|
2022 Base year lease
|
|
|
308
|
|
|
|
234
|
|
|
|
4
|
|
|
|
546
|
|
|
|
235
|
|
2023 Base year lease
|
|
|
317
|
|
|
|
288
|
|
|
|
|
|
|
|
605
|
|
|
|
240
|
|
2024 Base year lease
|
|
|
327
|
|
|
|
296
|
|
|
|
|
|
|
|
623
|
|
|
|
245
|
|
2025 Base year lease
|
|
|
336
|
|
|
|
305
|
|
|
|
|
|
|
|
641
|
|
|
|
249
|
|
2026 Base year lease
|
|
|
346
|
|
|
|
313
|
|
|
|
|
|
|
|
659
|
|
|
|
254
|
|
2027 Base year lease
|
|
|
357
|
|
|
|
322
|
|
|
|
|
|
|
|
679
|
|
|
|
259
|
|
2028 Base year lease
|
|
|
241
|
|
|
|
330
|
|
|
|
|
|
|
|
571
|
|
|
|
186
|
|
2029 Base year lease
|
|
|
-
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
|
|
27
|
|
Total base lease payments
|
|
|
2,232
|
|
|
$
|
2,171
|
|
|
$
|
4
|
|
|
|
4,407
|
|
|
$
|
1,695
|
|
Imputed interest on lease payments (1)
|
(1)
|
|
(339
|
)
|
|
|
(407
|
)
|
|
|
-
|
|
|
|
(746
|
)
|
|
|
|
|
Total Operating Lease Liability(2)
|
(2)
|
$
|
1,893
|
|
|
$
|
1,764
|
|
|
$
|
4
|
|
|
$
|
3,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use Asset(3)
|
(3)
|
$
|
1,831
|
|
|
$
|
1,764
|
|
|
$
|
4
|
|
|
$
|
3,599
|
|
|
|
|
|
(1)
|
Assumes
a discount borrowing rate of 5.0% on the new lease amendments effective as of January 11,
2021 and 7.5% on the remaining lease term for the Applied Optics Dallas facility through
October 31, 2021.
|
|
|
(2)
|
Includes $62
thousand of unamortized deferred rent.
|
|
|
(3)
|
Short-term and
Long-term portion of Operating Lease Liability is $528 thousand and $3,133 thousand, respectively.
|
Total
expense under both facility lease agreements for the twelve months ended October 3, 2021 was $769 thousand. Total expense under both
facility lease agreements as of the twelve months ended September 27, 2020 was $735 thousand.
Total
office equipment rentals included in operating expenses was $22 thousand for the twelve months ended October 3, 2021 and for the twelve
months ended September 27, 2020.
Note
8 — Debt Financing
Credit
Facility — PNC Bank (formerly BBVA, USA)
On
April 16, 2020, the Company terminated its facility with Avidbank and entered into a new facility with BBVA USA.
On
April 16, 2020, Optex Systems Holdings, Inc. and its subsidiary, Optex Systems, Inc. (the “Borrower”) entered into a line
of credit facility (the “Facility”) with BBVA, USA. In June 2021, PNC Bank completed its acquisition of BBVA, USA and the
bank name changed to PNC Bank (“PNC”). The substantive terms are as follows:
|
●
|
The
principal amount of the Facility is $2.25 million. The Facility matures on April 15, 2022. The interest rate is variable based on
PNC’s Prime Rate plus a margin of -0.250%, initially set at 3% at loan origination, and all accrued and unpaid interest is
payable monthly in arrears starting on May 15, 2020; and the principal amount is due in full with all accrued and unpaid interest
and any other fees on April 15, 2022.
|
|
|
|
|
●
|
There
are commercially standard covenants including, but not limited to, covenants regarding maintenance of corporate existence, not incurring
other indebtedness except trade debt, not changing more than 25% stock ownership of Borrower, and a Fixed Charge Coverage Ratio of
1.25:1, with the Fixed Charge Coverage Ratio defined as (earnings before taxes, amortization, depreciation, amortization and rent
expense less cash taxes, distribution, dividends and fair value of warrants) divided by (current maturities on long term debt plus
interest expense plus rent expense). As of October 3, 2021, the Company was in compliance with the covenants.
|
|
|
|
|
●
|
The
Facility contains commercially standard events of default including, but not limited to, not making payments when due; incurring
a judgment of $10,000 or more not covered by insurance; not maintaining collateral and the like.
|
|
|
|
|
●
|
The
Facility is secured by a first lien on all of the assets of Borrower.
|
The
outstanding balance on the credit facility was zero and $377 thousand as of October 3, 2021 and September 27, 2020, respectively. For
the years ended October 3, 2021 and September 27, 2020, the total interest expense against the outstanding line of credit balance was
$11 thousand and $19 thousand, respectively.
Note
9 — Stock Based Compensation
Stock
Options issued to Employees, Officers and Directors
The
Optex Systems Holdings 2009 Stock Option Plan provides for the issuance of up to 75,000 shares to the Company’s officers, directors,
employees and to independent contractors who provide services to Optex Systems Holdings as either incentive or non-statutory stock options
determined at the time of grant. During the twelve months ended September 27, 2020, all of the 25,000 outstanding stock options were
repurchased at $0.01 per option for a total transaction of $250. There were no new grants of stock options during the twelve months ended
October 3, 2021. As of October 3, 2021, there are zero stock options outstanding.
Restricted
Stock Units issued to Officers and Employees
On
June 14, 2016, the Compensation Committee (“Committee”) of the Board of Directors of Optex Systems Holdings, Inc. approved
the Company’s 2016 Restricted Stock Unit Plan (the “Plan”). The Plan provides for the issuance of restricted stock
units (“RSU”) for up to 1,000,000 shares of the Company’s common stock to Optex Systems Holdings officers and employees.
Each RSU constitutes a right to receive one share of the Company’s common stock, subject to vesting, which unless otherwise stated
in an RSU agreement, shall vest in equal amounts on the first, second and third anniversary of the grant date. Shares of the Company’s
common stock underlying the number of vested RSUs will be delivered as soon as practicable after vesting. During the period between grant
and vesting, the RSUs may not be transferred, and the grantee has no rights as a shareholder until vesting has occurred. If the grantee’s
employment is terminated for any reason (other than following a change in control of the Company or a termination of an officer other
than for cause), then any unvested RSUs under the award will automatically terminate and be forfeited. If an officer grantee’s
employment is terminated by the Company without cause or by the grantee for good reason, then, provided that the RSUs have not been previously
forfeited, the remaining unvested portion of the RSUs will immediately vest as of the officer grantee’s termination date. In the
event of a change in control, the Company’s obligations regarding outstanding RSUs shall, on such terms as may be approved by the
Committee prior to such event, immediately vest, be assumed by the surviving or continuing company or cancelled in exchange for property
(including cash).
On
January 7, 2020, the Company issued 59,447 common shares to one director and two officers, net of tax withholding of $54 thousand, in
settlement of 84,500 restricted stock units which vested on January 1, 2020.
On
February 17, 2020, the Company granted 50,000 restricted stock units to Bill Bates, General Manager of the Applied Optics Center. The
restricted stock units vest as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34% in year
one, and 33% each year thereafter. The stock price at grant date was $2.13 per share. The Company will amortize the grant date fair market
value of $107 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February
17, 2020.
On
January 2, 2021, the Company issued 58,392 common shares to directors and officers, net of tax withholding of $44 thousand, in settlement
of 83,000 restricted stock units which vested on January 1, 2021.
Effective
December 1, 2021, the vesting terms of Danny Schoening’s RSU grant from January 2019 were revised as described in “Item
11. Executive Compensation – Employment Agreements - Danny Schoening,” which disclosure is incorporated by reference
herein.
Restricted
Shares Issued to Independent Board Members
On
April 30, 2020, the Optex Systems Holdings, Inc. Board of Directors held a meeting and voted to increase the annual board compensation
for the three independent directors from $22,000 to $36,000 with an effective date of January 1, 2020, in addition to granting 100,000
restricted shares to each independent director which shall vest at a rate of 20% per year (20,000 shares) each January 1st,
over the next five years, through January 1, 2025. The total market value for the 300,000 shares is $525 thousand based on the stock
price of $1.75 as of April 30, 2020. The Company will amortize the fair market value to stock compensation expense on a straight-line
basis across the five-year vesting period beginning on April 30, 2020. On January 1, 2021, 60,000 of the restricted director shares vested.
There
were no new grants of restricted stock units during the twelve months ended October 3, 2021.
The
following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock units and restricted shares
granted as of October 3, 2021:
Schedule of Aggregate Non-vested Restricted Stock Units Granted
|
|
Restricted
Stock Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Restricted
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at September 29, 2019
|
|
|
216,500
|
|
|
$
|
1.29
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
50,000
|
|
|
$
|
2.13
|
|
|
|
300,000
|
|
|
$
|
1.75
|
|
Vested
|
|
|
(84,500
|
)
|
|
$
|
1.25
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 27, 2020
|
|
|
182,000
|
|
|
$
|
1.54
|
|
|
|
300,000
|
|
|
$
|
1.75
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(83,000
|
)
|
|
$
|
1.49
|
|
|
|
(60,000
|
)
|
|
$
|
1.75
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at October 3, 2021
|
|
|
99,000
|
|
|
$
|
1.59
|
|
|
|
240,000
|
|
|
$
|
1.75
|
|
Stock
Based Compensation Expense
Equity
compensation is amortized to general and administrative expenses based on a straight-line basis across the vesting or service period
as applicable. The recorded compensation costs for restricted shares granted and restricted stock units awarded as well as the unrecognized
compensation costs are summarized in the table below:
Schedule of Unrecognized Compensation Costs
|
|
Stock Compensation
|
|
|
|
(thousands)
|
|
|
|
Recognized Compensation
Expense
|
|
|
Unrecognized Compensation
Expense
|
|
|
|
Twelve months ended
|
|
|
As of year ended
|
|
|
|
October 3, 2021
|
|
|
September 27, 2020
|
|
|
October 3, 2021
|
|
|
September 27, 2020
|
|
Restricted Shares
|
|
$
|
105
|
|
|
$
|
79
|
|
|
$
|
341
|
|
|
$
|
446
|
|
Restricted Stock Units
|
|
|
123
|
|
|
|
118
|
|
|
|
66
|
|
|
|
188
|
|
Total Stock Compensation
|
|
$
|
228
|
|
|
$
|
197
|
|
|
$
|
407
|
|
|
$
|
634
|
|
The
unrecognized compensation expense for restricted shares and restricted stock units is expected to be recognized over a weighted-average
period of 3.25 years and 0.92 years, respectively.
Note
10 — Defined Contribution Plan
The
Company sponsors a defined contribution pension plan under Section 401(k) of the Internal Revenue Code for all employees. Company contributions
are voluntary and are determined annually at the discretion of the Board of Directors at the beginning of each fiscal year. For the fiscal
years ended October 3, 2021 and September 27, 2020, the Company offered a qualified automatic contribution arrangement (QACA) with a
100% match of the first 1% and 50% matching of the next 5% and a 2-year vesting requirement. The Company’s contribution expense
for the fiscal years ended October 3, 2021 and September 27, 2020 were $158 thousand and $165 thousand, respectively.
Note
11 — Stockholders’ Equity
Dividends
There
were no dividends declared or paid during the twelve months ended October 3, 2021 and September 27, 2020.
Common
stock
During
the twelve months ended September 27, 2020, there were 59,447 common shares issued, net of tax withholding, in settlement of 84,500 restricted
stock units which vested on January 1 2020. On April 30, 2020, there were 300,000 restricted shares issued to independent board members.
There were no other issuances of common stock during the twelve months ended September 27, 2020.
During
the twelve months ended October 3, 2021, there were 58,392 common shares issued, net of tax withholding, in settlement of 83,000 restricted
stock units which vested on January 1 2021.
On
August 10, 2021 and August 23, 2021, there were 148,300 and 40,509 warrants exercised, respectively, at $1.50 per common share at a total
transaction cost of $283 thousand. The total fair market value at the time of exercise was $292 thousand. There were no other issuances
of common stock during the twelve months ended October 3, 2021.
On
August 31, 2021, the Company repurchased 100 shares from a private investor for a total transaction cost of $150 which were subsequently
cancelled.
On
June 8, 2020 the Company announced authorization for a $1 million stock repurchase program. As of September 27, 2020 there were 105,733
shares held in treasury purchased under the June 2020 stock repurchase plan. The Company purchased a total of 519,266 shares against
the program through April 2021, which were subsequently cancelled in June 2021.
On
September 22, 2021 the Company announced authorization for an additional $1 million stock repurchase program. As of October 3, 2021,
there were 35,555 shares held in treasury purchased under the September 2021 stock repurchase plan. The shares authorized to be repurchased
under the repurchase program may be purchased from time to time at prevailing market prices, through open market or in negotiated transactions,
depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC.
During
the twelve months ended October 3, 2021, there were 449,088 common shares repurchased through the program at a cost of $869 thousand.
During the twelve months ended September 27, 2020, there were 105,733 common shares repurchased through the program at a cost of $200
thousand. A summary of the purchases under the plan follows:
Summary of Purchases Under Plan
Fiscal Period
|
|
Total number of shares purchased
|
|
|
Total purchase cost
|
|
|
Average price paid per share (with commission)
|
|
|
Maximum dollar value that may yet be purchased under the plan
|
|
May 24, 2020 through June 28, 2020
|
|
|
34,243
|
|
|
$
|
63
|
|
|
$
|
1.84
|
|
|
$
|
937
|
|
Stock Buyback Plan initiated May 2020 ($1,000,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 24, 2020 through June 28, 2020
|
|
|
34,243
|
|
|
$
|
63
|
|
|
$
|
1.84
|
|
|
$
|
937
|
|
June 29, 2020 through July 26, 2020
|
|
|
6,806
|
|
|
|
13
|
|
|
|
1.89
|
|
|
|
924
|
|
July 27, 2020 through August 23, 2020
|
|
|
10,688
|
|
|
|
21
|
|
|
|
1.96
|
|
|
|
903
|
|
August 23, 2020 through September 27, 2020
|
|
|
53,996
|
|
|
|
103
|
|
|
|
1.90
|
|
|
|
800
|
|
September 28, 2020 through October 25, 2020
|
|
|
20,948
|
|
|
|
42
|
|
|
|
2.01
|
|
|
|
758
|
|
October 26, 2020 through November 22, 2020
|
|
|
129,245
|
|
|
|
265
|
|
|
|
2.05
|
|
|
|
493
|
|
November 23, 2020 through December 27, 2020
|
|
|
58,399
|
|
|
|
109
|
|
|
|
1.86
|
|
|
|
384
|
|
December 28, 2020 through January 24, 2021
|
|
|
40,362
|
|
|
|
73
|
|
|
|
1.80
|
|
|
|
311
|
|
January 25, 2021 through February 21, 2021
|
|
|
52,180
|
|
|
|
101
|
|
|
|
1.94
|
|
|
|
210
|
|
February 22, 2021 through March 28, 2021
|
|
|
73,800
|
|
|
|
140
|
|
|
|
1.90
|
|
|
|
70
|
|
March 29, 2021 through April 19, 2021
|
|
|
38,599
|
|
|
|
70
|
|
|
|
1.82
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased and cancelled
|
|
|
519,266
|
|
|
$
|
1,000
|
|
|
$
|
1.93
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Buyback Plan initiated September 2021 ($1,000,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 23, 2021 through October 1, 2021
|
|
|
35,555
|
|
|
$
|
69
|
|
|
$
|
1.93
|
|
|
$
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurched for the twelve months ended September 27, 2020
|
|
|
105,733
|
|
|
$
|
200
|
|
|
$
|
1.89
|
|
|
|
|
|
Total shares repurched for the twelve months ended October 3, 2021
|
|
|
449,088
|
|
|
|
869
|
|
|
|
1.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased as of October 3, 2021
|
|
|
554,821
|
|
|
$
|
1,069
|
|
|
$
|
1.93
|
|
|
$
|
931
|
|
As
of October 3, 2021, and September 27, 2020, the total outstanding common shares were 8,488,149 and 8,690,136, respectively.
Warrants
On
August 26, 2016, Optex Systems Holdings Inc. issued 4,323,135 warrants to new shareholders and the underwriter, in connection with a
public share offering. The warrants entitled the holder to purchase one share of our common stock at an exercise price equal to $1.50
per share at any time on or after August 26, 2016 (the “Initial Exercise Date”) and on or prior to the close of business
on August 26, 2021 (the “Termination Date”).
Pursuant
to a warrant agreement between Optex Systems Inc. and Equity Stock Transfer, LLC, as warrant agent, the warrants were issued in book-entry
form and were initially represented only by one or more global warrants deposited with the warrant agent, as custodian on behalf of The
Depository Trust Company, or DTC, and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.
The
exercise price and number of shares of common stock issuable upon exercise of the warrants could be adjusted in certain circumstances,
including in the event of a stock split, stock dividend, extraordinary dividend on or recapitalization, reorganization, merger or consolidation.
Under
the terms of the warrant agreement, Optex Systems Holdings Inc. agreed to use their best efforts to maintain the effectiveness of the
registration statement and current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of
the warrants. During any period in which Optex failed to have an effective registration statement covering the shares underlying the
warrants, the warrant holder was permitted to exercise the warrants on a cashless basis. The warrant holders did not have the rights
or privileges of holders of common stock and any voting rights until they exercised their warrants and received shares of common stock,
except as set forth in the warrants. After the issuance of shares of common stock upon exercise of the warrants, each holder was entitled
to one vote for each share held of record on all matters to be voted on by stockholders.
Subject
to limited exceptions, a holder of warrants did have the right to exercise any portion of its warrants if the holder (together with such
holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would
beneficially own a number of shares of common stock in excess of 4.99% of the shares of our common stock then outstanding after giving
effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that, upon notice to the Company, the
holder could increase or decrease the Beneficial Ownership Limitation, provided that in no event could the Beneficial Ownership Limitation
have exceeded 9.99% and any increase in the Beneficial Ownership Limitation would not be effective until 61 days following notice of
such increase from the holder to us.
No
fractional shares of common stock would be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be
entitled to receive a fractional interest in a share, Optex Systems Holdings Inc. would, upon exercise, round up to the nearest whole
number of shares of common stock to be issued to the warrant holder. If multiple warrants were exercised by the holder at the same time,
Optex Systems Holdings Inc. would aggregate the number of whole shares issuable upon exercise of all the warrants. There was no established
trading market for the warrants.
In
the event of a fundamental transaction (as defined in warrant), then the Company or any successor entity would pay at the holder’s
option, exercisable at any time concurrently with or within 30 days after the consummation of the fundamental transaction, an amount
of cash equal to the value of the remaining unexercised portion of the warrants on the date of consummation of the fundamental transaction
as determined in accordance with the Black Scholes option pricing model.
As
of September 27, 2020 there were 4,125,200 warrants outstanding. During the twelve months ended September 27, 2020, there were zero warrants
exercised or repurchased. During the twelve months ended October 3, 2021, 188,809 of the warrants were exercised and zero warrants repurchased.
On August 26, 2021, the remaining 3,936,391 warrants expired worthless. As of October 3, 2021, there were zero outstanding warrants remaining.
Note
12 — Warrant Liabilities
On
August 26, 2016, Optex Systems Holdings, Inc. issued 4,323,135 warrants to new shareholders and the underwriter, in connection with a
public share offering. The warrants entitle the holder to purchase one share of our common stock at an exercise price equal to $1.50
per share at any time on or after August 26, 2016, and on or prior to the close of business on August 26, 2021. The Company determined
that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock
included in the public share offering. Management also determined that the warrants are puttable for cash upon a fundamental transaction
at the option of the holder and as such required classification as a liability pursuant to ASC 480 “Distinguishing Liabilities
from Equity”. The Company had no plans to consummate a fundamental transaction and did not believe a fundamental transaction was
likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants
were recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured
at each reporting period with changes being recorded as a component of other income in the consolidated statement of income.
The
fair value of the warrant liabilities presented below were measured using either a BSM valuation model. Significant inputs into the respective
model at the inception and reporting period measurement dates are as follows:
Schedule
of Warrant Liabilities Assumptions Used
|
|
Issuance date
|
|
|
Period ended
|
|
|
Period ended
|
|
|
Period ended
|
|
|
Period ended
|
|
|
Expiration date
|
|
Valuation Assumptions
|
|
August 26, 2016
|
|
|
October 1, 2017
|
|
|
September 30, 2018
|
|
|
September 29, 2019
|
|
|
September 27, 2020
|
|
|
August 26, 2021(5)
|
|
Exercise Price(1)
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
|
$
|
1.50
|
|
Warrant Expiration Date (1)
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
|
|
8/26/2021
|
|
Stock Price (2)
|
|
$
|
0.95
|
|
|
$
|
0.98
|
|
|
$
|
1.71
|
|
|
$
|
1.56
|
|
|
$
|
1.96
|
|
|
$
|
1.49
|
|
Interest Rate (annual) (3)
|
|
|
1.23
|
%
|
|
|
1.62
|
%
|
|
|
2.88
|
%
|
|
|
1.63
|
%
|
|
|
0.12
|
%
|
|
|
-
|
|
Volatility (annual) (4)
|
|
|
246.44
|
%
|
|
|
179.36
|
%
|
|
|
64.05
|
%
|
|
|
53.66
|
%
|
|
|
51.67
|
%
|
|
|
-
|
|
Time to Maturity (Years)
|
|
|
5
|
|
|
|
3.9
|
|
|
|
2.9
|
|
|
|
1.9
|
|
|
|
0.9
|
|
|
|
Expired
|
|
Calculated fair value per share
|
|
$
|
0.93
|
|
|
$
|
0.87
|
|
|
$
|
0.82
|
|
|
$
|
0.49
|
|
|
$
|
0.62
|
|
|
$
|
-
|
|
(1)
|
Based on the
terms provided in the warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26, 2016.
|
(2)
|
Based on the
trading value of common stock of Optex Systems Holdings, Inc. as of each presented period ending date. August 26, 2021 stock price based
on the volume weighted average price for 618,451 share trades on that date. Closing price was $1.55 based trades of 2,400 final shares
traded.
|
(3)
|
Interest rate
for U.S. Treasury Bonds, as of each presented period ending date, as published by the U.S. Federal Reserve.
|
(4)
|
Based on the
historical daily volatility of Optex Systems Holdings, Inc. as of each presented period ending date.
|
(5)
|
Warrants expired
worthless without cashless exchange pursuant to the Warrant Agreement Section 2(c) determination that the August 26, 2021 VWAP calculation
of $1.49 was below the exercise price of $1.50.
|
The
warrants outstanding and fair values at each of the respective valuation dates are summarized below:
Summary of Warrants Outstanding and Fair Values
|
|
Warrants
|
|
|
Fair Value
|
|
|
Fair Value
|
|
Warrant Liability
|
|
Outstanding
|
|
|
per Share
|
|
|
(000’s)
|
|
Fair Value as of period ended 9/29/2019
|
|
|
4,125,200
|
|
|
$
|
0.49
|
|
|
$
|
2,036
|
|
Loss on Change in Fair Value of Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
508
|
|
(Gain) Loss on Change in Fair Value of Warrant Liability, Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to additional paid in capital on exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to additional paid in capital on exercise of warrants, Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of period ended 9/27/2020
|
|
|
4,125,200
|
|
|
$
|
0.62
|
|
|
$
|
2,544
|
|
Reclassification to additional paid in capital on exercise of warrants (1)
|
|
|
(188,809
|
)
|
|
|
|
|
|
|
(9
|
)
|
Gain on Change in Fair Value of Warrant Liability (2)
|
|
|
(3,936,391
|
)
|
|
|
|
|
|
|
(2,535
|
)
|
Fair Value as of period ended 10/03/2021
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
Exercise
of warrants for gross proceeds of $283 thousand and a warrant liability fair market value of $292 thousand as of the exercise date.
|
(2)
|
Expiration
of Warrants on August 26, 2021.
|
The
warrant liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various
assumptions about of future activities and the Company’s stock prices and historical volatility as inputs.
Note
13 — Income Taxes
The
income tax provision for the years ended October 3, 2021 and September 27, 2020 include the following:
Schedule
of Income Tax Provision
|
|
2021
|
|
|
2020
|
|
|
|
(Thousands)
|
|
|
|
2021
|
|
|
2020
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
Current year federal income tax
|
|
$
|
-
|
|
|
$
|
403
|
|
Prior year tax adjustment
|
|
|
(62
|
)
|
|
|
(59
|
)
|
Current income tax expense
|
|
|
(62
|
)
|
|
|
344
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(39
|
)
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
Provision for (Benefit from) income taxes, net
|
|
$
|
(101
|
)
|
|
$
|
531
|
|
As
of October 3, 2021, Optex Systems Inc. has a net carrying value of $1.3 million in deferred tax assets represented by deferred tax assets
of $2.1 million and a deferred tax asset valuation allowance of ($0.8) million against those assets. The valuation allowance has been
established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016 which
may not be fully recognized due to an IRS Section 382 limitation related to a change in control occurring in fiscal year 2018. As of
October 3, 2021, and September 27, 2020, we reviewed the deferred tax assets and determined it was more likely than not that we would
be able to utilize a substantial portion of the deferred tax asset balance against future earnings. Our assumptions were based on the
previous three years earnings trend as well as anticipated future earnings expected with the recent orders and increased backlog as of
October 3, 2021. During the twelve months ended October 3, 2021, the Company recognized ($0.04) million in tax benefits to deferred tax
assets. During the twelve months ended September 27, 2020, the Company recognized $0.2 million in tax expenses from deferred tax assets.
We will continue to review the deferred tax assets and related valuation reserves in accordance with ASC 740 on an annual basis.
The
income tax provision for Optex Systems as of October 3, 2021 differs from those computed using the statutory federal tax rate in the
respective years due to the following permanent differences:
Schedule of Effective Income Tax Rate Reconciliation
|
|
2021
|
|
|
%
|
|
|
2020
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit) at statutory federal rate
|
|
$
|
426
|
|
|
|
21
|
|
|
$
|
495
|
|
|
|
21
|
|
Nondeductible expenses
|
|
|
(531
|
)
|
|
|
(26)
|
|
|
|
108
|
|
|
|
5
|
|
Other temporary adjustments
|
|
|
221
|
|
|
|
11
|
|
|
|
35
|
|
|
|
1
|
|
Prior year federal income tax adjustment
|
|
|
(62
|
)
|
|
|
(3)
|
|
|
|
(59
|
)
|
|
|
(2)
|
|
Change in deferred tax valuation allowance
|
|
|
(155
|
)
|
|
|
(8)
|
|
|
|
(48
|
)
|
|
|
(2)
|
|
Provision for (benefit from) income taxes, net
|
|
$
|
(101
|
)
|
|
|
(5)
|
|
|
$
|
531
|
|
|
|
23
|
|
Deferred
income taxes recorded in the balance sheets result from differences between financial statement and tax reporting of income and deductions.
A summary of the composition of the deferred income tax assets (liabilities) follows:
Schedule of Deferred Income Taxes
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
|
|
Deferred Tax Asset
|
|
|
|
As of
October 3, 2021
|
|
|
As of
September 27, 2020
|
|
|
|
|
|
|
|
|
Stock Compensation
|
|
$
|
73
|
|
|
$
|
64
|
|
Inventory Reserve
|
|
|
134
|
|
|
|
119
|
|
Unicap
|
|
|
27
|
|
|
|
31
|
|
Deferred Compensation
|
|
|
-
|
|
|
|
39
|
|
Fixed assets
|
|
|
(226
|
)
|
|
|
(18
|
)
|
Goodwill Amortization
|
|
|
199
|
|
|
|
299
|
|
Intangible Asset Amortization
|
|
|
113
|
|
|
|
170
|
|
Net Operating Losses
|
|
|
1,657
|
|
|
|
1,362
|
|
Other
|
|
|
119
|
|
|
|
124
|
|
Subtotal
|
|
$
|
2,096
|
|
|
$
|
2,190
|
|
Valuation allowance
|
|
|
(808
|
)
|
|
|
(963
|
)
|
Net deferred asset
|
|
$
|
1,288
|
|
|
$
|
1,227
|
|
The
Company has a net loss carryforward of $7.9 million as of October 3, 2021 as compared to a net loss carryforward of $6.5 million as of
September 27, 2020. Due to an IRS section 382 change in control limitation which was effective during the fiscal year ended 2017, it
is anticipated that the Company may only realize $4.0 million of the current net operating loss carryforward for a net tax benefit of
$0.8 million through fiscal year ending in 2037. For the year ended October 3, 2021, the Company realized a ($1.4) million net
operating tax loss which is not subject to the IRS section 382 limitation and is available for a tax loss carryback up to five years.
The
Company applied FASB ASC 740-10 and has no unrecognized tax benefits. By statute, the tax years ended October 3, 2021, September 27,
2020 and September 29, 2019 are open to examination by the major taxing jurisdictions to which the Optex Systems Holdings is subject.
During
the twelve months ended October 3, 2021 the Company paid $48 thousand in income taxes, and has a net tax refund due related to the fiscal
year 2021 tax year of ($48) thousand included in prepaid expenses. During the twelve months ended September 27, 2020 the Company paid
$289 thousand in income taxes, and had a net tax refund due related to the fiscal year 2020 tax year of ($20) thousand included in prepaid
expenses. There were additional tax benefit adjustments of $40 thousand due to changes from the provisional 2020 rates as compared to
the federal income tax report associated with research and development tax credits and other adjustments.
Note
14 — Subsequent Events
The
Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021. The term of the agreement
commenced as of December 1, 2021 and the current term ends on November 30, 2022. Mr. Schoening’s base salary is $296,031 per annum.
Mr. Schoening will be eligible for a performance bonus based upon a rolling three-year operating plan adopted by the Company’s
Board of Directors (the “Board”). The bonus will be based on operating metrics decided annually by our Board and tied to
such three-year plan. The target bonus equates to 30% of Mr. Schoening’s base salary. Our Board will have discretion in good faith
to alter the performance bonus upward or downward by 20%.
The
updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and
final vesting date for the restricted stock units granted under such agreement from January 2, 2022 to the “change of control date,”
that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions,
is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding
securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation
which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting
power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or
(B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction)
in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s
then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.
The
employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by the Company
for cause (including conviction of a felony, commission of fraudulent acts, willful misconduct by Mr. Schoening, continued failure to
perform duties after written notice, violation of securities laws and breach of the employment agreement), (iii) termination by the Company
without cause and (iv) termination by Mr. Schoening for good reason (including breach by the Company of its obligations under the agreement,
the requirement for Mr. Schoening to move more than 100 miles away for his employment without consent, and merger or consolidation that
results in more than 66% of the combined voting power of the Company’s then outstanding securities or those of its successor changing
ownership or a sale of all or substantially all of its assets, without the surviving entity assuming the obligations under the agreement).
For a termination by the Company for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening will be paid salary
and for a termination due to his death or permanent disability, also any bonus earned through the date of termination. For a termination
by the Company without cause or by Mr. Schoening with good reason, Mr. Schoening will also be paid six months’ base salary in effect
and, if such termination occurs prior to a change of control, Mr. Schoening will not forfeit the unvested RSUs until and unless the change
of control does not occur by March 13, 2023.