UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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| Large Accelerated Filer ☐ | Accelerated Filer ☐ | Smaller
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| Emerging growth company | |
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OPTEX SYSTEMS HOLDINGS, INC.
FORM 10-Q
For the period ended January 1, 2023
INDEX
| PART I— FINANCIAL INFORMATION | F-1 | |
| Item 1. | Unaudited Condensed Consolidated Financial Statements | F-1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 |
| Item 4. | Controls and Procedures | 14 |
| PART II— OTHER INFORMATION | 14 | |
| Item 1. | Legal Proceedings | 14 |
| Item 1A. | Risk Factors | 14 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 14 |
| Item 3. | Defaults Upon Senior Securities | 14 |
| Item 4. | Mine Safety Disclosures | 14 |
| Item 6. | Exhibits | 15 |
| SIGNATURE | 16 | |
| 2 |
Part 1. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
OPTEX SYSTEMS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 1, 2023
| F-1 |
Optex Systems Holdings, Inc.
Condensed Consolidated Balance Sheets
| (Thousands, except share and per share data) | ||||||||
| January 1, 2023 | October 2, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Accounts Receivable, Net | ||||||||
| Inventory, Net | ||||||||
| Contract Asset | ||||||||
| Prepaid Expenses | ||||||||
| Current Assets | ||||||||
| Property and Equipment, Net | ||||||||
| Other Assets | ||||||||
| Deferred Tax Asset | ||||||||
| Right-of-use Asset | ||||||||
| Security Deposits | ||||||||
| Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | $ | $ | ||||||
| Operating Lease Liability | ||||||||
| Federal Income Taxes Payable | ||||||||
| Accrued Expenses | ||||||||
| Accrued Selling Expense | ||||||||
| Accrued Warranty Costs | ||||||||
| Contract Loss Reserves | ||||||||
| Customer Advance Deposits | ||||||||
| Current Liabilities | ||||||||
| Other Liabilities | ||||||||
| Operating Lease Liability, net of current portion | ||||||||
| Other Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common Stock – ($ par, authorized, and shares issued, and and shares outstanding, respectively) | ||||||||
| Additional Paid in capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| F-2 |
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| (Thousands, except share and per share data) | ||||||||
| Three months ended | ||||||||
| January 1, 2023 | January 2, 2022 | |||||||
| Revenue | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross Profit | ||||||||
| General and Administrative Expense | ||||||||
| Operating (Loss) Income | ( | ) | ||||||
| Other Expense | ||||||||
| (Loss) Income Before Taxes | ( | ) | ||||||
| Income Tax Benefit | $ | ( | ) | $ | ( | ) | ||
| Net (loss) income | $ | ( | ) | $ | ||||
| Basic (loss) income per share | $ | ( | ) | $ | ||||
| Weighted Average Common Shares Outstanding - basic | ||||||||
| Diluted (loss) income per share | $ | ( | ) | $ | ||||
| Weighted Average Common Shares Outstanding - diluted | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| F-3 |
Optex Systems Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| (Thousands) | ||||||||
| Three months ended | ||||||||
| January 1, 2023 | January 2, 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net (Loss) Income | $ | ( | ) | $ | ||||
| Adjustments to Reconcile Net (Loss) Income to Net Cash provided by Operating Activities: | ||||||||
| Depreciation and Amortization | ||||||||
| Stock Compensation Expense | ||||||||
| Deferred Tax | ( | ) | ( | ) | ||||
| Accounts Receivable | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Contract Asset | ( | ) | ||||||
| Prepaid Expenses | ||||||||
| Leases | ||||||||
| Accounts Payable and Accrued Expenses | ||||||||
| Accrued Warranty Costs | ||||||||
| Accrued Selling Expense | ||||||||
| Customer Advance Deposits | ||||||||
| Accrued Contract Losses | ( | ) | ||||||
| Total Adjustments | ||||||||
| Net Cash provided by Operating Activities | ||||||||
| Cash Flows used in Investing Activities | ||||||||
| Purchases of Property and Equipment | ( | ) | ( | ) | ||||
| Net Cash used in Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows used in Financing Activities | ||||||||
| Cash Paid for Taxes Withheld on Net Settled Restricted Stock Unit Shares Issued | ( | ) | ||||||
| Common Stock Repurchase | ( | ) | ||||||
| Net Cash used in Financing Activities | ( | ) | ( | ) | ||||
| Net Increase in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents at Beginning of Period | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| F-4 |
Optex Systems Holdings, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(Thousands, except share data)
| Three months ended January 1, 2023 | ||||||||||||||||||||||||||||
| Common | Additional | Total | ||||||||||||||||||||||||||
| Shares | Treasury | Common | Treasury | Paid in | Retained | Stockholders | ||||||||||||||||||||||
| Issued | Shares | Stock | Stock | Capital | Earnings | Equity | ||||||||||||||||||||||
| Balance at October 2, 2022 | $ | | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
| Stock Compensation Expense | - | - | ||||||||||||||||||||||||||
| Vested Restricted Stock Units, net of withheld taxes | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Three months ended January 2, 2022 | ||||||||||||||||||||||||||||
| Common | Additional | Total | ||||||||||||||||||||||||||
| Shares | Treasury | Common | Treasury | Paid in | Retained | Stockholders | ||||||||||||||||||||||
| Issued | Shares | Stock | Stock | Capital | Earnings | Equity | ||||||||||||||||||||||
| Balance at October 3, 2021 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| Stock Compensation Expense | - | - | ||||||||||||||||||||||||||
| Common Stock Repurchase(1) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Vested Restricted Stock Units, net of withheld taxes | - | |||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance at January 2, 2022 | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||
| (1) |
The accompanying notes are an integral part of these condensed consolidated financial statements
| F-5 |
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. The Company 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. The Company’s consolidated
revenues for the three months ended January 1, 2023 were derived from the U.S. government (
Note 2 - Accounting Policies
Basis of Presentation
Principles of Consolidation: The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Optex Systems Holdings’ Form 10-K for the year ended October 2, 2022 and other reports filed with the SEC.
The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of Optex Systems Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required for interim financial reporting purposes has been omitted.
Inventory: As of January 1, 2023, and October 2, 2022, inventory included:
| (Thousands) | ||||||||
| January 1, 2023 | October 2, 2022 | |||||||
| Raw Materials | $ | $ | ||||||
| Work in Process | ||||||||
| Finished Goods | ||||||||
| Gross Inventory | $ | $ | ||||||
| Less: Inventory Reserves | ( | ) | ( | ) | ||||
| Net Inventory | $ | $ | ||||||
Concentration
of Credit Risk: Optex Systems Holdings’ accounts receivables as of January 1, 2023 consist of U.S. government agencies
(
| F-6 |
Accrued
Warranties: Optex Systems Holdings accrues product warranty liabilities based on the historical return rate against period shipments
as they occur and reviews and adjusts these accruals quarterly for any significant changes in estimated costs or return rates. The accrued
warranty liability includes estimated costs to repair or replace returned warranty backlog units currently in-house plus estimated costs
for future warranty returns that may be incurred against warranty covered products previously shipped as of the period end date. As of
January 1, 2023, and October 2, 2022, the Company had warranty reserve balances of $
| Three months ended | ||||||||
| January 1, 2023 | January 2, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Incurred costs for warranties satisfied during the period | ( | ) | ||||||
| Warranty expenses for new product shipped during the period(1) | ||||||||
| Ending balance | $ | $ | ||||||
| (1) |
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.
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 and 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.
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.
| F-7 |
Revenue
Recognition: 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. During the three months ended January 1, 2023 and January 2, 2022, there was $
During
the three-month periods ended January 1, 2023 and January 2, 2022, there was $
For
the three months ended January 1, 2023, there were $
Contract
Loss Reserves: The Company records loss provisions in the event that the current estimated total revenue against a
contract and the total estimated cost remaining to fulfill the contract indicate a loss upon completion. When the estimated costs
indicate a loss, we record the entire value of the loss against the contract loss reserve in the period the determination is made.
The Company has several long-term fixed price contracts that are currently indicative of a loss condition due to recent inflationary
pressures on material and labor, combined with increased manufacturing overhead costs. Some of these long-term contracts have option
year ordering periods ending in February 2025 with deliveries that may extend into February 2026. As of the three months ended
January 1, 2023 and October 2, 2022, the accrued contract loss reserves were $
Income
Tax/Deferred Tax: As of January 1, 2023 and October 2, 2022, Optex Systems, Inc. has a deferred tax asset valuation allowance
of ($
The Company has potentially dilutive securities outstanding which include unvested restricted stock units and stock options. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Unvested restricted stock units and stock options that are anti-dilutive are excluded from the calculation of diluted earnings per common share.
For the three months ended January 1, 2023, unvested shares of restricted stock (which convert to an aggregate of incremental shares) were excluded from the diluted earnings per share calculation as antidilutive due to the net loss for the period. For the three months ended January 2, 2022, unvested restricted stock units and shares of unvested restricted stock (which convert to an aggregate of incremental shares) were included in the diluted earnings per share calculation.
| F-8 |
Note 3 - 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
Optex
Systems is located in Richardson Texas, with leased premises consisting of approximately
Applied Optics Center (AOC) – Dallas, Texas
The
Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represent
The
Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately
The financial tables below present information on the reportable segments’ profit or loss for each period, as well as segment assets as of each period end. The Company does not allocate interest expense, income taxes or unusual items to segments.
| F-9 |
| Reportable
Segment Financial Information (thousands) | ||||||||||||||||
| As of and for the three months ended January 1, 2023 | ||||||||||||||||
| Optex
Systems Richardson | Applied
Optics Center Dallas | Other
(non-allocated costs and intersegment eliminations) | Consolidated
Total | |||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||
| Total Revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
| (Loss) income before taxes | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Other significant noncash items: | ||||||||||||||||
| Allocated home office expense | $ | ( | ) | $ | $ | $ | ||||||||||
| Stock compensation expense | $ | $ | $ | $ | ||||||||||||
| Warranty expense | $ | $ | $ | $ | ||||||||||||
| Segment Assets | $ | $ | $ | $ | ||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||
| Reportable
Segment Financial Information (thousands) | ||||||||||||||||
| As of and for the three months ended January 2, 2022 | ||||||||||||||||
| Optex
Systems Richardson | Applied
Optics Center Dallas | Other
(non-allocated costs and intersegment eliminations) | Consolidated
Total | |||||||||||||
| Revenues from external customers | $ | $ | $ | $ | ||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||
| Total Revenue | $ | $ | $ | ( | ) | $ | ||||||||||
| Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
| Income (loss) before taxes | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Other significant noncash items: | ||||||||||||||||
| Allocated home office expense | $ | ( | ) | $ | $ | $ | ||||||||||
| Stock compensation expense | $ | $ | $ | $ | ||||||||||||
| Warranty expense | $ | $ | $ | $ | ||||||||||||
| Segment Assets | $ | $ | $ | $ | ||||||||||||
| Expenditures for segment assets | $ | $ | $ | $ | ||||||||||||
| F-10 |
Note 4 - Commitments and Contingencies
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
The
leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of
As of January 1, 2023, the remaining minimum lease and estimated CAM payments under the non-cancelable facility space leases are as follows:
Non-cancellable Operating Leases Minimum Payments
| (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 | |||||||||||||||
| 2023 Base year lease | $ | $ | $ | $ | $ | |||||||||||||||
| 2024 Base year lease | ||||||||||||||||||||
| 2025 Base year lease | ||||||||||||||||||||
| 2026 Base year lease | ||||||||||||||||||||
| 2027 Base year lease | ||||||||||||||||||||
| 2028 Base year lease | ||||||||||||||||||||
| 2029 Base year lease | ||||||||||||||||||||
| Total base lease payments | $ | $ | $ | $ | $ | |||||||||||||||
| Imputed interest on lease payments (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total Operating Lease Liability(3) | $ | $ | $ | $ | ||||||||||||||||
| Right-of-use Asset(2) | $ | $ | $ | $ | ||||||||||||||||
| (1) |
| (2) |
| (3) |
Total
facilities rental and CAM expense for both facility lease agreements as of the three months ended January 1, 2023 and January 2, 2022
was $
Total
office equipment rentals included in operating expenses was $
| F-11 |
Note 5 - 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. (collectively, 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 was $ | |
| ● | ||
| ● | The
Facility contained commercially standard events of default including, but not limited to, not making payments when due; incurring
a judgment of $ | |
| ● | The Facility was secured by a first lien on all of the assets of Borrower. |
On
April 12, 2022, the Company and its subsidiary, Optex Systems, Inc. (collectively with the Company, the “Borrowers”),
entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association,
successor to BBVA USA (the “Lender”), pursuant to which the Borrowers’ existing revolving line of credit facility
was decreased from $
| F-12 |
On
November 21, 2022, the Borrowers issued an Amended and Restated Revolving Line of Credit Note (the “Line of Credit Note”)
to the Lender in connection with an increase of the Borrowers’ revolving line of credit facility under the Loan Agreement from
$
The Line of Credit Note and Loan Agreement contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The credit facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the credit facility are subject to acceleration upon the occurrence of an event of default as defined in the Line of Credit Note and Loan Agreement.
The
outstanding balance on the facility was
Stock Options issued to Employees, Officers and Directors
The Optex Systems Holdings 2009 Stock Option Plan provides for the issuance of up to 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. There were no new grants of stock options during the three months ended January 1, 2023. As of January 1, 2023, there are stock options outstanding.
Restricted Stock and Restricted Stock Units issued to Officers and Employees
The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units, with the latter granted under the Company’s 2016 Restricted Stock Unit Plan:
| Restricted Stock Units | Weighted Average Grant Date Fair Value | Restricted Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Outstanding at October 3, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | $ | ( | ) | $ | ||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at October 2, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | $ | ( | ) | $ | ||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at January 1, 2023 | $ | $ | ||||||||||||||
On January 2, 2019, the Company granted and restricted stock units with a January 2, 2019 grant date to Danny Schoening and Karen Hawkins, respectively, vesting as of January 1 each year subsequent to the grant date over a three-year period at a rate of % in year one, and % each year thereafter. The stock price at grant date was $ per share. Effective December 1, 2021, the vesting terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described below. The Company amortizes the grant date fair value of $ thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019. As of January 1, 2023, there was no unrecognized compensation cost relating to this award.
| F-13 |
The
Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021.
As of the December 1, 2021 modification date related to the third and final vesting date of the unvested restricted stock units held by Danny Schoening, there was no change in the fair value of the modified award as compared to the original award immediately prior to the modification date. The restricted stock units initially were certain to vest on January 1, 2022, but due to the modification, they were less certain to vest, contingent on a “change in control” occurring, which change in control, in case Mr. Schoening is terminated by the Company without cause or he resigns with good reason prior to such change in control, was required to occur prior to March 13, 2023. As of the modification date, there was $ thousand of unrecognized compensation cost associated with the original award. As a matter of expediency, the unrecognized compensation expense as of the modification date was fully expensed through January 1, 2022. There is no additional compensation expense associated with the modification of the restricted stock unit agreement.
On November 28, 2022, the Company entered into a new employment agreement with Danny Schoening which amended Mr. Schoening’s RSU Agreement, dated January 2, 2019, which had been previously amended as of December 1, 2021, by changing the third and final vesting date for the restricted stock units granted under such agreement from the “change of control date” to January 1, 2023.
On February 17, 2020, the Company granted 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 period at a rate of % in year one, and % each year thereafter. The stock price at grant date was $ per share. The Company will amortize the grant date fair value of $ thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February 17, 2020.
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 $ to $ with . The total market value for the shares is $ thousand based on the stock price of $ as of April 30, 2020. The Company amortizes the grant date fair value to stock compensation expense on a straight-line basis across the vesting period beginning on April 30, 2020. On each of January 1, 2021, January 1, 2022, and January 1, 2023, of the restricted director shares vested. As of January 1, 2023, there were unvested restricted shares.
On
January 4, 2022, the Company issued common shares to Karen Hawkins, CFO and Bill Bates (AOC GM), net of tax withholding of $
On
January 4, 2023, the Company issued common shares to Danny Schoening, CEO, and Bill Bates (AOC GM), net of tax withholding of $
| F-14 |
Stock Based Compensation Expense
Equity compensation is amortized based on a straight-line basis across the vesting or service period as applicable. The recorded compensation costs for options and shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized in the table below:
| Stock Compensation | ||||||||||||||||
| (thousands) | ||||||||||||||||
| Recognized Compensation Expense | Unrecognized Compensation Expense | |||||||||||||||
| Three months ended | As of | |||||||||||||||
| January 1, 2023 | January 2, 2022 | January 1, 2023 | October 2, 2022 | |||||||||||||
| Restricted Shares | $ | $ | $ | $ | ||||||||||||
| Restricted Stock Units | ||||||||||||||||
| Total Stock Compensation | $ | $ | $ | $ | ||||||||||||
Note 7 - Stockholders’ Equity
Dividends
As
of the three months ended January 1, 2023 and the twelve months ended October 2, 2022, there were
Common stock
On
June 8, 2020 the Company announced authorization for a $
On
September 22, 2021 the Company announced authorization for an additional $
| F-15 |
During the three months ended January 1, 2023, there were zero common shares repurchased under the program. All shares purchased have been cancelled. A summary of the purchases under the program follows:
| Fiscal Period | Total number of shares purchased | Total purchase cost | Average price paid
per (with | Maximum value
that yet
be under
the | ||||||||||||
| October 4, 2021 through October 31, 2021 | $ | $ | $ | |||||||||||||
| November 1, 2021 through November 28, 2021 | ||||||||||||||||
| November 29, 2021 through January 2, 2022 | ||||||||||||||||
| January 3, 2022 through January 30, 2022 | ||||||||||||||||
| January 31, 2022 through February 27, 2022 | ||||||||||||||||
| February 28, 2022 through April 3, 2022 | ||||||||||||||||
| April 4, 2022 through May 1, 2022 | ||||||||||||||||
| May 2, 2022 through May 29, 2022 | ||||||||||||||||
| May 30, 2022 through July 3, 2022 | ||||||||||||||||
| July 4, 2022 through July 25,2022 | ||||||||||||||||
| July 26, 2022 through August 13, 2022 | ||||||||||||||||
| Total shares repurchased for twelve months ended October 2, 2022 | $ | $ | $ | |||||||||||||
Furthermore,
on August 18, 2022, the Company announced the commencement of a tender offer to purchase up to $
As of October 2, 2022, and January 1, 2023, the total issued and outstanding common shares were and , respectively. As of October 2, 2022, and January 1, 2023 there were zero shares held in Treasury.
Note 8 - Subsequent Events
None.
| F-16 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to supplement and complement our audited consolidated financial statements and notes thereto for the fiscal year ended October 2, 2022 and our unaudited condensed consolidated financial statements and notes thereto for the quarter ended January 1, 2023, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to review our condensed consolidated financial statements in conjunction with your review of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial results as supplemental information, as we believe their use provides more insight into our performance. When a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP measure and reconciled to the most closely corresponding GAAP measure.
The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. The operating results for the periods presented were not significantly affected by inflation.
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q, in particular the MD&A, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Quarterly Report on Form 10-Q and other reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”), in our press releases, presentations to securities analysts or investors, or in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements.
These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding growth strategy; product and development programs; financial performance (including revenue and net income); backlog; expected timing of shipments; increases in the cost of materials and labor; labor shortages; follow-on orders; the impact of the COVID-19 pandemic; supply chain challenges; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the defense industry.
We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Some of these risks and uncertainties are identified in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the section “Risk Factors” in our Annual Report on Form 10-K and you are urged to review those sections. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.
We do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.
Background
Optex Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies, primarily for Department of Defense applications. Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems, Inc. (Delaware) also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems, Inc. (Delaware) products consist primarily of build-to-customer print products that are delivered both directly to the armed services and to other defense prime contractors. Less than 1% of today’s revenue is related to the resale of products substantially manufactured by others. In this case, the product would likely be a simple replacement part of a larger system previously produced by Optex Systems, Inc. (Delaware).
| 3 |
We are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE, ADS Inc. and others. We are also a military supplier to foreign governments such as Israel, Australia and South American countries and as a subcontractor for several large U.S. defense companies serving foreign governments.
The Federal Acquisition Regulation is the principal set of regulations that govern the acquisition process of government agencies and contracts with the U.S. government. In general, parts of the Federal Acquisition Regulation are incorporated into government solicitations and contracts by reference as terms and conditions effecting contract awards and pricing solicitations.
Many of our contracts are prime or subcontracted directly with the Federal government and, as such, are subject to 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 our prime military contracts and generally apply to us as subcontractors. It has been our experience that the termination for convenience is rarely invoked, except where it is mutually beneficial for both parties. We are currently not aware of any pending terminations for convenience or for default on our existing contracts.