UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant ☒
Filed by a Party other than the Registrant ☐
Check the appropriate box:
Preliminary Proxy Statement | |
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
Definitive Proxy Statement | |
Definitive Additional Materials | |
Soliciting Material under §240.14a-12 |
Optex Systems Holdings, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box): | ||
No fee required. | ||
Fee paid previously with preliminary materials. | ||
0-11. |
Optex Systems Holdings, Inc.
1420 Presidential Drive
Richardson, TX 75081
January 21, 202117, 2023
To the Shareholders of Optex Systems Holdings, Inc.:
You are cordially invited to attend the 20212023 Annual Meeting of Shareholders (the “Annual Meeting”) of Optex Systems Holdings, Inc., a Delaware corporation (the “Company”), to be held virtually at 10:00 AM local timea.m. Central Time on February 24, 2021 virtually16, 2023, to consider and vote upon the following proposals:
1. | To elect four | |
2. | ||
3. | To approve the 2023 Equity Incentive Plan, as disclosed in the accompanying proxy statement (to which we refer as “Proposal 3” or the “2023 Equity Incentive Plan” proposal). | |
4. | To ratify the appointment of Whitley Penn LLP as the Company’s independent registered public accounting firm for the fiscal year ending October 1, 2023 (to which we refer as “Proposal 4” or the “Auditor Ratification” proposal). | |
5. | To transact such other business as may be properly brought before the |
WeThe Annual Meeting will hold our annualbe a virtual meeting virtually this year due to Covid-19 safety concerns. Because of this, webe held as a listen-only conference call by calling 877-407-3088 (Toll Free). There will not be able to check in attendees to verify that they are shareholders, per our normal procedure. In order to address this, we will instead require pre-registration. In order to pre-register, please email IR@optexsys.coma physical meeting location. If you encounter any technical difficulties with your Name, Number of shares owned, e-mail contact and phone number, and preference as to how you would like to be contacted. Please register at least 7 days ahead ofthe virtual meeting platform on the meeting to attend. We will then, one day, before the meeting, provide all pre-registered attendees instructions on how to virtually attend the meeting with credentials.please call 877-804-2062 (toll free) or email proxy@equitystock.com.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVALEACH OF THE ABOVE EIGHT PROPOSALS.NOMINEES IN the Director Election proposal, “FOR” the Reverse Split proposal, “FOR” the 2023 Equity Incentive Plan proposal, and “FOR” the proposal to ratify the appointment of Whitley Penn LLP as the Company’s independent registered public accounting firm for the fiscal year ending October 1, 2023.
Pursuant to the provisions of the Company’s bylaws, the board of directors of the Company (the “Board”)The Board has fixed the close of business on January 21, 20219, 2023 as the record date for determining the shareholders of the Company entitled to notice of, and to vote at, the Annual Meeting or any adjournment or postponement thereof. Accordingly, only shareholders of record at the close of business on January 21, 20219, 2023 are entitled to notice of, and shall be entitled to vote at, the Annual Meeting or any postponement or adjournment thereof.
Please review in detail the attachedaccompanying notice and proxy statement for a more complete statement of matters to be considered at the Annual Meeting.
Your vote is very important to us regardless of the number of shares you own. Whether or not you are able to attend the Annual Meeting in person, please read the proxy statement and promptly vote your proxy via the internet, by telephone or, if you received a printed form of proxy in the mail, by completing, dating, signing and returning the enclosed proxy in order to assure representation of your shares at the Annual Meeting. Granting a proxy will not limit your right to vote in personvirtually at the meeting if you wish to attend the Annual Meeting and vote in person.do so.
By Order of the Board of Directors: | |
/s/ Danny Schoening | |
Danny Schoening, | |
Chairman of the Board of Directors |
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The 20212023 Annual Meeting of shareholders (the “Annual Meeting”) of Optex Systems Holdings, Inc. (the “Company”) will be held virtually beginning at 10:00 AM local time.a.m. Central Time on February 16, 2023. At the Annual Meeting, the holders of the Company’s outstanding common stock will act on the following matters:
1. | To elect four | |
2. | ||
3. | To approve the 2023 Equity Incentive Plan, as disclosed in the accompanying proxy statement (to which we refer as “Proposal 3” or the “2023 Equity Incentive Plan” proposal). | |
4. | To ratify the appointment of Whitley Penn LLP as the Company’s independent registered public accounting firm for the fiscal year ending October 1, 2023 (to which we refer as “Proposal 4” or the “Auditor Ratification” proposal). | |
5. | To transact such other business as may be properly brought before the |
We
The Annual Meeting will hold our annualbe a virtual meeting virtually this year due to Covid-19 safety concerns. Because of this, webe held as a listen-only conference call by calling 877-407-3088 (Toll Free). There will not be able to check in attendees to verify that they are shareholders, per our normal procedure. In order to address this, we will instead require pre-registration. In order to pre-register, please email IR@optexsys.coma physical meeting location. If you encounter any technical difficulties with your Name, Number of shares owned, e-mail contact and phone number, and preference as to how you would like to be contacted. Please register at least 7 days ahead ofthe virtual meeting platform on the meeting to attend. We will then, one day, before the meeting, provide all pre-registered attendees instructions on how to virtually attend the meeting with credentials.please call 877-804-2062 (toll free) or email proxy@equitystock.com.
Shareholders of record at the close of business on January 21, 20219, 2023 are entitled to notice of and to vote at the 2020 Annual Meeting and any postponementspostponement or adjournmentsadjournment thereof.
It is hopedWe hope you will be able to attend the 2021 Annual Meeting virtually, but in any event, please vote according to the instructions on the enclosed proxy as promptly as possible. If you are able to be virtually present at the 2020 Annual Meeting, you may revoke your proxy and vote in person.
Important Notice Regarding the Availability of Proxy Materials for the Annual
Meeting of Shareholders to be Held on February 16, 2023
Pursuant to rules of the U.S. Securities and Exchange Commission, we have elected to provide access to our proxy materials both by sending you this full set of proxy materials, including a proxy card, and by notifying you of the availability of our proxy materials on the Internet. This Proxy Statement and our Annual Report on Form 10-K for the fiscal year ended October 2, 2022, are available at www.optex.vote.
Dated: January | By Order of the Board of Directors: |
/s/ Danny Schoening | |
Danny Schoening, | |
Chairman of the Board of Directors |
TABLE OF CONTENTS
OPTEX SYSTEMS HOLDINGS, INC.
1420 Presidential Drive
Richardson, TX 75081
ANNUAL MEETING OF SHAREHOLDERS
To Be Held February 24, 202116, 2023
PROXY STATEMENT
The Board of Directors (the “Board”) of Optex Systems Holdings, Inc. (the “Company”) is soliciting proxies from its shareholders to be used at the 20202023 Annual Meeting of shareholders (the “Annual Meeting”) to be held virtually on February 24, 2021,16, 2023, beginning at 10:00 AM local timea.m. Central Time, and at any postponements or adjournments thereof. This proxy statement contains information related to the Annual Meeting. This proxy statement and the accompanying form of proxy are first being sent to shareholders on or about January 25, 2021.18, 2023.
Why am I receiving this proxy statement?
You are receiving this proxy statement because you have been identified as a shareholder of the Company as of the record date, which our Board has determined to be January 21, 2021,9, 2023 (the “Record Date”), and thus you are entitled to vote at the Company’s 2021 Annual Meeting. This document serves as a proxy statement used to solicit proxies for the 2021 Annual Meeting. This document and the AppendixesAnnexes and Appendix hereto contain important information about the 2020 Annual Meeting and the Company and you should read it carefully.
Who is entitled to vote at the 2021 Annual Meeting?
Only shareholders of record as of the close of business on the record date will be entitled to vote at the 2021 Annual Meeting. On the record date, there were 8,914,261 shares of our common stock issued and outstanding and entitled to vote. Each common stock shareholder is entitled to one vote for each share of our common stock held by such shareholder on the record date on each of the proposals presented in this proxy statement.
May I vote in person?
If you are a shareholder of the Company and your shares are registered directly in your name with the Company’s transfer agent, Equity Stock Transfer LLC, you are considered, with respect to those shares, the shareholder of record or record holder, and the proxy materials and(including proxy card, attached hereto as Appendix A,card) are being sent directly to you by the Company. If you are a shareholder of record, you may attend the 2021 Annual Meeting to be held on February 24, 2021, and vote your shares in person, rather than signing and returning your proxy.
If your shares of common stock are held by a bank, broker, agent or other nominee, you are considered the beneficial owner of such shares held in “street name,” and the proxy materials are being forwarded to you together with a voting instruction card by such bank, broker, agent or other nominee. As
Who is entitled to vote at the beneficial owner, you are also invitedAnnual Meeting?
Only shareholders as of the close of business on the Record Date will be entitled to attendvote at the 2021 Annual Meeting. Since a beneficial ownerOn the Record Date, there were 6,763,070 shares of our common stock issued and outstanding and entitled to vote. Each shareholder is notentitled to one vote for each share of our common stock held by such shareholder on the shareholderRecord Date on each of record, you may not vote these sharesthe proposals presented in person atthis proxy statement.
How do I access the 2021proxy materials over the Internet?
Electronic copies of this proxy statement, the accompanying notice of Annual Meeting unless you obtain a proxy from your broker issued in your name giving youand the right to voteCompany’s annual report on Form 10-K for the sharesyear ended October 2, 2022 are available at www.optex.vote and at https://ir.stockpr.com/optexsys/all-sec-filings. All materials will remain posted at least until the 2021conclusion of the Annual Meeting.
We will hold our annual meeting virtually this year due to Covid-19 safety concerns. Because of this, we will not be able to check in attendees to verify that they are shareholders, per our normal procedure.How do I attend the Annual Meeting?
Shareholders may attend the Annual Meeting via phone call. In order to address this, we will instead require pre-registration. In order to pre-register, please email IR@optexsys.com with your Name, Number of shares owned, e-mail contact and phone number, and preference as to how you would like to be contacted. Please register at least 7 days ahead of the meeting to attend. We will then, one day before the meeting, provide all pre-registered attendees instructions on how to virtually attend the meeting with credentials.virtual Annual Meeting, you must:
Photo identification may be required (a valid driver’s license, state identification or passport). If a shareholder’s shares are registered in the name of a broker, trust, bank or other nominee, the shareholder must bring a proxy or a letter from that broker, trust, bank or other nominee or their most recent brokerage account statement that confirms that the shareholder was a beneficial owner of shares of stock of the Company as of the Record Date. Since seating is limited, admission to the meeting will be on a first-come, first-served basis.
Cameras (including cell phones with photographic capabilities), recording devices and other electronic devices will not be permitted at the meeting.
● | access an audio-only conference call by calling 877-407-3088 (Toll Free) or +1 877-407-3088 (International); and | |
● | present your unique 12-digit control number. |
Record holders can find their unique 12-digit control number on their proxy card.
Beneficial owners who hold their shares in “street name” must follow the following instructions in order to register for the Annual Meeting and obtain their 12-digit control number:
● | obtain a legal proxy from your broker, bank or other agent; | |
● | email the legal proxy to our transfer agent, Equity Stock Transfer, at proxy@equitystock.com, |
○ | with “Legal Proxy” appearing in the subject line of the email; and | |
○ | including proof from your broker, bank or other agent of your legal proxy (e.g., a forwarded email from your broker, bank or other agent with your legal proxy attached, or an image of your valid proxy attached to your email), |
so that your request for registration is received by Equity Stock Transfer no later than 5:00 p.m. Eastern Time, on February 14, 2023; and
● | receive a confirmation of your registration, with your unique 12-digit control number, by email from Equity Stock Transfer. |
Shareholders may submit live questions on the conference line while attending the virtual Annual Meeting.
What if I have technical difficulties or trouble accessing the virtual Annual Meeting?
We will have technicians ready to assist you with any technical difficulties you may have in accessing the virtual Annual Meeting. If you encounter any difficulties, please call: 877-804-2062 (Toll Free) or email proxy@equitystock.com.
How do I participate in and vote at the Annual Meeting?
If you are a record holder, you can participate and vote your shares in the Annual Meeting by visiting www.optex.vote and entering the 12-digit control number included on your proxy card.
If you are a beneficial owner of shares held in “street name,” you can participate and vote at the meeting by obtaining a legal proxy from your broker, bank or other agent and emailing a copy to proxy@equitystock.com no later than 5:00 p.m. Eastern Time, on February 14, 2023. You will then be able to vote your shares at the meeting by going to www.optex.vote and entering the same control number used to enter the meeting.
Even if you plan to attend the Annual Meeting, we recommend that you also vote by proxy as described below so that your vote will be counted if you later decide not to participate in the Annual Meeting.
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How do I vote without participating in the Annual Meeting?
Record holders may vote without participating in the Annual Meeting by any of the following means:
1. | By Internet.* The website address for Internet voting is www.optex.vote. The deadline for Internet voting is 7:00 p.m. Eastern Time, on February 15, 2023. | |
2. | By Email.* Mark, date, sign and email the enclosed proxy card to proxy@equitystock.com ATTN: Shareholder Services. | |
3. | By mail. Mark, date, sign and mail promptly the enclosed proxy card to Equity Stock Transfer, 237 W 37th Street, Suite 602, New York, NY 10018, ATTN: Shareholder Services. | |
4. | By Fax.* Mark, date, sign and fax the enclosed proxy card to 646-201-9006 ATTN: Shareholder Services. |
* If you vote by Internet, fax or email, please do not mail your proxy card.
Because of possible delays with the mail, we recommend you use the Internet, email or fax to vote.
If you are a beneficial owner of shares held in “street name,” you must email to proxy@equitystock.com a legal proxy from your broker, bank or other agent authorizing you to vote your shares at least two business days prior to the Annual Meeting. Once submitted, you will receive a control number enabling you to vote your shares by any of the means set forth above.
If I am a record holder, will my Companyshares be voted if I do not return my proxy card?
If your shares are heldregistered in your name or if you have stock certificates, they will not be voted if you do not return your proxy card by a method discussed above or vote at the Annual Meeting.
If I hold my shares in “street name” by my broker, will my broker vote my shares for me?
Generally, if shares are held in street name, the beneficial owner of the shares is entitled to give voting instructions to the broker, bank, agent or other nominee holding the shares. If the beneficial owner does not provide voting instructions, the broker or nominee can still vote the shares with respect to matters that are considered to be “routine,“routine,” but not with respect to “non-routine”“non-routine” matters, as discussed further below. YourThus, your broker will not be able to vote your shares of common stock without specific instructions from you for “non-routine” matters.
If your shares are held by your broker, bank, agent or other agent as your nominee, you will need to obtain a proxy form from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker or other agent to vote your shares.
What are “broker non-votes”?
If you hold shares beneficially in street name and do not provide your broker with voting instructions, your shares may constitute “broker non-votes.” “Broker non-votes” occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. These matters are referred to as “non-routine” matters. Since brokers are permitted to vote on “routine” matters without instructions from the beneficial owner, “broker non-votes” do not occur with respect to “routine” matters.
Proposal 1 to elect four directors(the Director Election proposal) and Proposal 3 to transact such other business as may be properly brought before the 2021 Annual Meeting and any adjournments thereof(the 2023 Equity Incentive Plan proposal), are “non-routine“non-routine” matters.”
We consider Proposal 2 (the Reverse Split proposal) and Proposal 4 (the Auditor Ratification proposal) to ratify the appointment of Whitley Penn LLP, as the Company’s independent registered certified public accountant for the fiscal year ended September 27, 2021, is abe “routine” matter.matters.
The determination of “routine” and “non-routine” matters is determined by brokers and those firms responsible to tabulate votes cast by beneficial owners of shares held in street name and other nominees. Firms casting such votes have generally been guided by rules of the New York Stock Exchange (“NYSE”) when determining if proposals are considered “routine” or “non-routine”. When a matter to be voted on is the subject of a contested solicitation, banks, brokers and other nominees do not have discretion to vote your shares with respect to any proposal to be voted on.
How do I cast my vote if I am a shareholder of record?
If you are a shareholder with shares registered in your name with the Company’s transfer agent, Equity Stock Transfer, on the record date, you may vote in person at the 2021 Annual Meeting or vote by proxy by fax at 646-201-9006 or EMAIL: Email – proxy@equitystock.com or by mail, in the provided pre-paid envelope. Record holders can also vote online, by visiting proxyvote.equitystock.com.
Whether or not you plan to attend the 2021 Annual Meeting, please vote as soon as possible to ensure your vote is counted. You may still attend the 2021 Annual Meeting and vote in person even if you have already voted by proxy. For more detailed instructions on how to vote using one of these methods, please see the form of proxy card attached to this Schedule 14A and the information below.
How do I cast my vote if I am a beneficial owner of shares registered in the name of any broker or bank?
If you are a beneficial owner of shares registered in the name of your broker, bank, dealer or other similar organization, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from the Company. Simply complete and mail the proxy card to ensure that your vote is counted. Alternatively, you may vote by telephone or over the internet as instructed by your broker or other agent. To vote in person at the 2021 Annual Meeting, you must obtain a valid proxy from your broker or other agent. Follow the instructions from your broker or other agent included with these proxy materials or contact your broker or bank to request a proxy form.
What constitutes a quorum for purposes of the 2010 Annual Meeting?
The presence at the meeting, in person or by proxy, of theA quorum is present if holders of at least a majority of the issued and outstanding shares entitled to vote are present or represented by proxy at the Annual Meeting permittingMeeting. This permits the conduct of business at the meeting. On the record date,Record Date, there were 8,914,2616,763,070 shares of Common Stockcommon stock and 0no shares of preferred stock issued and outstanding and entitled to vote. Accordingly, the holders of 4,457,1313,381,536 shares eligible to vote must be present or represented by proxy at the 2021 Annual Meeting to have a quorum. Proxies received but marked as abstentions or broker non-votes, if any, will be included in the calculation of the number of votes considered to be present at the meeting for purposes of a quorum. Your shares will be counted toward the quorum at the 2021 Annual Meeting only if you vote in person at the virtual meeting, you submit a valid proxy or your broker, bank, dealeragent or similar organizationother nominee submits a valid proxy.
What vote is required to approve each item?
The following votes are required to approve each proposal, assuming in each case that a quorum is present:
● | Proposal 1 (Director Election proposal) – The election of the directors requires a plurality (the four nominees receiving the most “FOR” votes) of the votes cast on the proposal. Withhold votes and broker non-votes will not affect the outcome of the vote on Proposal 1. | |
● | Proposal 2 (Reverse Split proposal) – The approval of the Reverse Split Charter Amendment requires that holders of a majority of the outstanding stock entitled to vote on the proposal vote “FOR” the proposal. Abstentions will effectively count as a vote against the proposal. In addition, since brokers may exercise discretionary voting power with respect to this proposal, a shareholder’s failure to provide voting instructions will not prevent a broker vote and can therefore affect the outcome of the proposal. | |
● | Proposal 3 (2023 Equity Incentive Plan proposal) – The approval of the 2023 Equity Incentive Plan requires that holders of a majority of the stock represented in person or by proxy and entitled to vote on the proposal vote “FOR” the proposal. Abstentions will have the same effect as a vote against the proposal, while broker non-votes will not affect the outcome of the vote on the proposal. | |
● | Proposal 4 (Auditor Ratification proposal) – The ratification of the appointment of Whitley Penn LLP as the Company’s independent registered public accounting firm for the fiscal year ending October 1, 2023 requires that holders of a majority of the stock represented in person or by proxy and entitled to vote on the proposal vote “FOR” the proposal. Abstentions will have the same effect as a vote against the proposal. In addition, since brokers may exercise discretionary voting power with respect to this proposal, a shareholder’s failure to provide voting instructions will not prevent a broker vote and can therefore affect the outcome of the proposal. |
How are shares voted that are represented by proxy?
Shares represented by proxies will be voted as specified in such proxies, and if no choice is specified, will be voted in accordance with the Board’s recommendations consistent with Delaware law and NYSE rules: “FOR” each of the nominees in the Director Election proposal, “FOR” the Reverse Split proposal, “FOR” the 2023 Equity Incentive Plan proposal, and “FOR” the proposal to ratify the appointment of Whitley Penn LLP as the Company’s independent registered public accounting firm for the fiscal year ending October 1, 2023. With respect to any other matter that properly comes before the Annual Meeting, the proxyholder(s) will vote as recommended by the Board or, if no recommendation is given, in his or their own discretion.
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Can I change my vote?
Yes. Any shareholder of record holder voting by proxy has the right to revoke their proxy at any time before the polls close at the 2021 Annual Meeting by sending a written notice stating that they would like to revoke his, her or its proxy to the Corporate Secretary of the Company; by providing a duly executed proxy card bearing a later date than the proxy being revoked; or by attending the 2021 Annual Meeting virtually and voting in person. Attendance alone at the 2021 Annual Meeting will not revoke a proxy. If a shareholder of the Company has
Beneficial owners owning common stock in “street name” that have instructed atheir broker, bank, agent or other nominee to vote itstheir shares of common stock that are held in “street name,” the shareholder must follow directions received from itstheir broker, bank, agent or other nominee to change those instructions.
Who is soliciting this proxy –proxy? Who is paying for this proxy solicitation?
We are soliciting this proxy on behalf of our Board of Directors.the Board. The Company will bear the costs of and will pay all expenses associated with this solicitation, including the printing, mailing and filing of this proxy statement, the proxy card and any additional information furnished to shareholders. In addition to mailing these proxy materials, certain of ourCompany officers and other employees may, without compensation other than their regular compensation, solicit proxies through further mailing or personal conversations, or by telephone, facsimile or other electronic means. We will also, upon request, reimburse banks, brokers, nominees, custodians and fiduciariesfor their reasonable out-of-pocket expenses for forwarding proxy materials to the beneficial owners of ourthe Company’s stock and to obtain proxies.
What vote is required to approve each item?
The following votes are required to approve each proposal:
Will My Shares Be Voted If I Do Not Return My Proxy Card?
If your shares are registered in your name or if you have stock certificates, they will not be voted if you do not return your proxy card by mail or vote at the Annual Meeting. If your broker cannot vote your shares on a particular matter because it has not received instructions from you and does not have discretionary voting authority on that matter, or because your broker chooses not to vote on a matter for which it does have discretionary voting authority, this is referred to as a “broker non-vote.” The New York Stock Exchange (“NYSE”) has rules that govern brokers who have record ownership of listed company stock held in brokerage accounts for their clients who beneficially own the shares. Under these rules, brokers who do not receive voting instructions from their clients have the discretion to vote uninstructed shares on certain matters (“routine matters”), but do not have the discretion to vote uninstructed shares as to certain other matters (“non-routine matters”). Under NYSE interpretations, Proposals 2 is a routine matter.
If your shares are held in street name and you do not provide voting instructions to the bank, broker or other nominee that holds your shares the bank, broker or other nominee has the authority, even if it does not receive instructions from you, to vote your unvoted shares for Proposal 3 but does not have authority to vote your unvoted shares on any of the other proposals submitted to shareholders for a vote at the Annual Meeting. We encourage you to provide voting instructions. This ensures your shares will be voted at the Annual Meeting in the manner you desire.
Can I access these proxy materials on the Internet?
Yes. The Notice of Annual Meeting, this proxy statement and the Appendixes hereto (including the Company’s Annual Report on Form 10-K for the year ended October 3, 2021, attached as Appendix B hereto) are available for viewing, printing, and downloading at www.optexsys.com. All materials will remain posted on www.optexsys.com at least until the conclusion of the meeting.
What should I do if I receive more than one set of voting materials?
You may receive more than one set of voting materials, including multiple copies of this proxy statement and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you may receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a shareholder of record holder and your shares are registered in more than one name, you will receive more than one proxy card. Please vote your shares applicable to each proxy card and voting instruction card that you receive.
How can I find out the results of the voting at the Annual Meeting?
Preliminary voting results will be announced at the Annual Meeting. Final voting results will be published in a Current Report on Form 8-K filed with the Securities and Exchange Commission within four business days of the 2021 Annual Meeting.
What interest do officers and directors have in matters to be acted upon?
No person who has been a director or executive officer of the Company at any time since the beginning of our fiscal year, and no associate of any of the foregoing persons, has any substantial interest, direct or indirect, in any matter to be acted upon, other than Proposal No. 1, the election of the nominees as directors set forth herein.
Who can provide me with additional information and help answer my questions?
If you would like additional copies, without charge, of this proxy statement or if you have questions about the proposals being considered at the 2021 Annual Meeting, including the procedures for voting your shares, you should contact Karen Hawkins, the Company’s Chief Financial Officer and Corporate Secretary, by telephone at (972) 764-5700.
Householding of Annual Disclosure Documents
The SEC previously adopted a rule concerning the delivery of annual disclosure documents. The rule allows us or brokers holding our shares on yourshareholders’ behalf to send a single set of our annual report and proxy statement to any household at which two or more of our shareholders reside, if either we or the brokers believe that thesuch shareholders are members of the same family. This practice, referred to as “householding,” benefits both shareholders and us. It reduces the volume of duplicate information received by youshareholders and helps to reduce our expenses. The rule applies to our annual reports, proxy statements and information statements. Once shareholders receive notice from their brokers or from us that communications to their addresses will be “householded,” the practice will continue until shareholders are otherwise notified or until they revoke their consent to the practice. Each shareholder will continue to receive a separate proxy card or voting instruction card.
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Those shareholders who either (i) do not wish to participate in “householding” and would like to receive their own sets of our annual disclosure documents in future years or (ii) who share an address with another one of our shareholders and who would like to receive only a single set of our annual disclosure documents should follow the instructions described below:
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MANAGEMENT AND CORPORATE GOVERNANCE
Corporate Leadership Structure
Our Board directs the management of the business and affairs of our company as provided in our certificate of incorporation, our by-laws and the General Corporation Law of Delaware. Members of our Board of Directors keep informed about our business through discussions with senior management, by reviewing analyses and reports sent to them, and by participating in regularly scheduled Board and committee meetings.
As of January 9, 2023, our Board of Directors consists of five directors, which includes four independent directors and one non-independent director as discussed below. On December 16, 2022, our director Lawrence Hagenbuch notified us that he will not be standing for re-election at the Annual Meeting. The Board has therefore reduced the number of seats on the Board to four effective immediately after the Annual Meeting. Our directors serve for a one-year term and until their successors are elected and duly qualify.
Our Company is led by Danny Schoening, who has served as COO since 2009, was appointed CEO and Director in 2013, and became Chairman in 2017. In his role as Chairman, Mr. Schoening presides over meetings of the full Board of Directors, provides guidance to the Board and management on a variety of key issues, and is responsible for long-range strategic planning for the Company. As Chief Executive Officer, Mr. Schoening is responsible for the active management, day-to-day leadership, and overall performance of the Company.
Our Board leadership structure is used by other smaller public companies in the United States, and we believe that this leadership structure appropriately strikes the balance between strong and informed Company leadership and appropriate oversight by independent directors. We believe that our directors provide effective oversight of the risk management function, especially through dialogue between the full Board and our management.
Our Board of Directors believes that sound governance practices and policies provide an important framework to assist them in fulfilling their duty to shareholders. Our Board of Directors actively supports management’s adoption and implementation of many “best practices” in the area of corporate governance, including annual review of internal control changes, compensation practices, executive management and auditor retention.
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Directors and Executive Officers
The names, positions and ages of our directors and executive officers as of the date of this proxy statement are as follows: he following table sets forth information regarding the members of our boardBoard of directorsDirectors and our executive officers and other significant employees.
The following table sets forth certain information with respect to our directors and executive officers:a key employee.
Name | Age | Position | ||
Danny Schoening | Chairman and Director, Chief Executive Officer, Chief Operating Officer | |||
Karen L. Hawkins | 57 | Chief Financial Officer | ||
Larry Hagenbuch | 56 | |||
Director, Compensation Committee Chair | ||||
Rimmy Malhotra | 46 | Director, Nominating Committee Chair | ||
Dayton Judd | 51 | Director, Audit Committee Chair | ||
General Manager, Applied Optics Center
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Danny R. Schoening (58). Mr. Schoening joined Optex Systems, Inc. (Texas) in January 2008. Upon the acquisition of the assets of Optex Systems, Inc. (Texas) by Optex Systems, Inc. (Delaware), Mr. SchoeningDanny became the COO of Optex Systems, Inc. (Delaware) (as of September 28, 2008) and he commenced service with Optex Systems Holdings as its Chief Operating Officer as of the date of the reorganization, March 30, 2009 and was appointed Chief Executive Officer and as a Director in 2013. He has been instrumental in establishing the systems and infrastructure required to continue Optex System’s rapid growth. This activity was rewarded with Optex System’s recent ISO 9001:2000 Certification. From February 2004 to January 2008, Danny was the Vice President of Operations for The Finisar Corporation AOC Division for 4 years where he led a team of up to 200 employees to produce vertical cavity lasers for the data communications industry at production rates of hundreds of thousands of units per week. Prior to Finisar, Danny was the Director of Operations for multiple divisions of Honeywell International. Serving the Automotive, Medical, Aerospace, and Consumer Commercial Markets. During this 17-year period, Danny was recognized with Honeywell’s Lund Award, their highest award for developing employee resources. Danny has a broad experience level in the following technologies: Mechanical Assembly Processes, Micro-Electronic Assembly Processes, Laser Manufacturing, Plastic Molding, Metal Machining, Plating, Thick Film Printing, Surface Mount Technology, Hall Effect Technology and MEMS based Pressure Devices. Danny received a Bachelor’s of Science in Manufacturing Engineering Technology from the University of Nebraska, an MBA from Southern Methodist University, and holds three U.S. patents. The Board of Directors has determined that Mr. SchoeningDanny is suited to sit on our Board because of his industry experience and as he is the CEO.
Karen L. Hawkins (57). On November 19, 2014, Karen Hawkins was appointed as our Chief Financial Officer. Ms. Hawkins had previously served as our Vice President, Finance and Controller, since the date of the reorganization, March 30, 2009 and was the controller of Optex Systems, Inc. (Delaware), effective September 28, 2009. She began her employment with Optex Systems, Inc. (Texas) in April 2007. Ms. Hawkins has over 30 years’ experience in Financial Accounting and Management, primarily focused in the Defense and Transportation Industries. She has a strong background in both Financial & Cost Accounting, with extensive Government Pricing, Financial Analysis, and Internal Auditing experience. Her past history also includes Program Management, Materials Management and Business Development. She brings over 25 years’ direct experience in Government Contracting with a strong knowledge of Cost Accounting Standards Board and Federal Acquisition Regulation. Her previous employment includes General Dynamics — Ordinance and Tactical Division, Garland (formerly known as Intercontinental Manufacturing) for over 13 years from November, 1994 through March, 2007. During her tenure there she served in the roles of Controller (Accounting & IT), Program Manager over a $250M 3-year Army Indefinite Delivery/Indefinite Quantity (Indefinite Delivery/Indefinite Quantity) type contract, as well as Materials Manager with oversight of Purchasing, Production Control & Warehousing functions. Prior to her employment at General Dynamics, Ms. Hawkins served in various finance and accounting positions at Luminator, a Mark IV Industries Co, and Johnson Controls, Battery Division - Garland. Karen received her Bachelor’s Degree in Business Administration in Accounting from Stephen F. Austin State University in Texas in 1986 and became a Certified Public Accountant in 1992.
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Larry Hagenbuch Bill Bates (60).joins Mr. Bates joined the Company in 2014. He has thirty-five years of experience related to optical component and system manufacturing. He is currently the General Manager of the Applied Optics Center in Dallas, Texas where he oversees the Thin-film Coating and Optical Assembly Operations where he has served since November of 2014. He has held various positions throughout his thirty-five years of experience within Litton Industries, Northrop Grumman Corporation, and L-3 Communications. He previously served as Vice President and General Manager within the Warrior Systems Division of L-3 Communications. Mr. Bates received a Bachelor of Science of Business Administration from DeVry University and an MBA from the University of Texas at Dallas.
R. Rimmy Malhotra (46) joined the Board in November 2019 and has acceptedholds the role of AuditNominating Committee Chair. Rimmy currently manages The Nicoya Fund, an investment partnership whose partners include, high net worth individuals, entrepreneurs and family offices and has acted in that capacity since 2013. He currently serves as Vice-Chairman of HireQuest, Inc., a NASDAQ listed staffing operator. He holds an MBA from The Wharton School in Finance, MA in International Affairs from The University of Pennsylvania and a Bachelor of Science in Computer Science from Johns Hopkins University. The Board of Directors has determined that Rimmy is suited to sit on our Board because of his experience with public equities and financial matters.
Lawrence F. Hagenbuch (56) joined the Board in November 2019. Larry is currently a Managing Director at Huron Consulting Group. Prior to that, Larry was the Chief Operating Officer and Chief Financial Officer for J. Hilburn, Inc., a custom clothier for men from DecDecember 2009 to May 2019. He served on the board of directors of Remy International (REMY) from November 2008 until that company’s sale to BorgWarner in November 2015, where he served on the audit and compensation committees. Larry also currently served on the board of directors of Arotech (ARTX) prior to its sale to Greenbriar Partners. Larry currently serves on the board of directors for both Arotech (ARTX) and HireQuest (HQI). Larry has served in senior management positions for SunTx Capital Partners, Alix Partners, GE / GE Capital, and American National Can Group, Inc. Larry began his professional career in the United States Navy. The Board of Directors has determined that Larry is suited to sit on our Board because of his operating experience at both large and growth-oriented companies, in addition to his experience as a director of other public companies. On December 16, 2022, Mr. Hagenbuch notified the Company that he will not be standing for re-election at the 2023 annual meeting of shareholders.
Dale E. Lehmann (64) joinsjoined the Board in November 2019 as an industry expert having over 30 years of management, strategy, product development, delivery and operational experience in the electro-optical industry. Dale was the Director of Business Development & Strategy for General Dynamics Global Imaging Technologies Group from 2014 through 2017. Prior to that, Dale was the Senior Vice President & General Manager of the Infrared Products Group for L-3 Communications/Cincinnati Electronics from 1995 through 2014. Dale currently sits on the Board of Directors for Adimec USA, a provider of application specific imaging solutions. The Board of Directors has determined that Dale is suited to sit on our Board because of his experience with companies in similar industries.
Dayton Judd (51) joined the Board in October 2022 and holds the role of Audit Committee Chair. He is the founder and Managing Partner of Sudbury Capital Management, LLC (“Sudbury”). He also serves as the Chairman and CEO of FitLife Brands, Inc. (OTC: FTLF)(“FitLife”). He has served as a director of FitLife since June 2017 and Chief Executive Officer since February 2018. Prior to founding Sudbury, Mr. Judd worked from 2007 through 2011 as a Portfolio Manager at Q Investments, a multi-billion dollar hedge fund in Fort Worth, Texas. Prior to Q Investments, he worked with McKinsey & Company from 1996 through 1998, and again from 2000 through 2007. He graduated from Brigham Young University in 1995 with a Bachelor’s Degree, summa cum laude, and a Master’s Degree, both in Accounting. He also earned an M.B.A. with high distinction from Harvard Business School in 2000, where he was a Baker Scholar. Mr. Judd has previously served on the board of directors for RLJ Entertainment (NASDAQ: RLJE) from 2015 until the sale of the company in 2018, and for Otelco (NASDAQ: OTEL) from 2019 until the sale of the company in 2021. He has also served on the board of directors for several private companies. Mr. Judd is a Certified Public Accountant.
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Rimmy Malhotra joins the Board and has accepted the role of Compensation Committee Chair. Rimmy currently manages The Nicoya Fund, an investment partnership whose partners include, high net worth individuals, entrepreneurs and family offices and has acted in that capacity since 2013. He currently serves as Vice-Chairman of HireQuest, a NASDAQ listed staffing operator. He holds an MBA from The Wharton School in Finance, MA in International Affairs from The University of Pennsylvania and a Bachelor of Science in Computer Science from Johns Hopkins University.
Bill Bates. Mr. Bates has thirty-five years of experience related to optical component and system manufacturing. He is currently the General Manager of the Applied Optics Center in Dallas, Texas where he oversees the Thin-film Coating and Optical Assembly Operations. He has held various positions throughout his thirty-five years of experience within Litton Industries, Northrop Grumman Corporation, and L-3 Communications. He previously served as Vice President and General Manager within the Warrior Systems Division of L-3 Communications. Mr. Bates received a Bachelor of Science of Business Administration from DeVry University and an MBA from the University of Texas at Dallas.
Family Relationships
There are no family relationships among the officers and directors.
Presiding DirectorBoard Meetings
Our Chairman, Danny Schoening, isWe are incorporated under the presiding director at meetings.laws of the State of Delaware. The interests of our shareholders are represented by the Board of Directors, which oversees our business and management.
The Board of Directors meets regularly during the year and holds special meetings and acts by unanimous written consent whenever circumstances require. The Board held six meetings (including special meetings) and took action by unanimous written consent one time during our fiscal year ended October 2, 2022. In the event that the Chairman is unavailable to serve at a particular meeting, responsibility for the presiding director function will rotate among the directors in attendance.
Corporate Governance
Our board of directors believes that sound governance practices and policies provide an important framework to assist them in fulfilling their duty to stockholders. Our board of directors actively supports management’s adoption and implementation of many “best practices” in the area of corporate governance, including annual review of internal control changes, compensation practices, executive management and auditor retention. In 2019 and 2018,fiscal year ended October 2, 2022, all directors attended a minimum of 75% of the meetings of the boardBoard of Directors and of the committees on which they served.
Board Independence
Our Board of Directors has determined that four of our current directors and three of our directors standing for re-election (all except Mr. Schoening) meet the independence requirements of NASDAQ. In reaching its conclusions, the Board of Directors considered all relevant facts and circumstances with respect to any direct or indirect relationships between the Company and each of the directors.
Board Committees
The Company has a separately-designated audit committee, of which Dayton Judd serves as the chair and the “audit committee financial expert.” The Company has a separately-designated compensation committee, of which Dale Lehman serves as the chair. The Company has a separately-designated nominating committee, of which Rimmy Malhotra serves as the chair. Each committee consists of independent directors Dayton Judd, Rimmy Malhotra and Dale Lehmann.
Audit Committee
The purpose of the Audit Committee is to serve as representative of the Board for the general oversight of the Company affairs relating to the (i) the quality and integrity of the Company’s financial statements; (ii) the Company’s compliance with legal and regulatory requirements; (iii) the independent auditor’s qualifications and independence; and (iv) the performance of the Company’s financial reporting and internal control processes.
The Audit Committee had 4 meetings during our fiscal year ended October 2, 2022.
The Audit Committee’s charter is accessible as an exhibit to its 2022 Annual Report and the Company expects it to be available on the Company’s website under “Investor Relations – Governance – Governance Documents” in the future.
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Audit Committee Report
Management has the primary responsibility for the Company’s internal controls and financial reporting process. The independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board and issuing an opinion thereon. The Audit Committee’s responsibility is to monitor and oversee these processes. As part of its ongoing activities, the Audit Committee has:
● | reviewed and discussed with management and the independent registered public accounting firm the Company’s audited consolidated financial statements for the fiscal year ended October 2, 2022; | |
● | discussed with the independent registered public accounting firm the matters required to be discussed by Public Company Accounting Oversight Board Auditing Standard No. 1301 (Communications with Audit Committees), and SEC Regulation S-X, Rule 2-07 (Communication with Audit Committee); | |
● | received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence, and discussed with the independent registered public accounting firm its independence from the Company; and |
based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s annual report on Form 10-K for the fiscal year ended October 2, 2022, for filing with the Securities and Exchange Commission.
Audit Committee
Dayton Judd
Rimmy Malhotra
Dale Lehman
Compensation Committee
The purpose of the Compensation Committee is to (i) discharge the responsibilities of the Board relating to compensation of the CEO and other reportable officers (defined in the same manner as “officer” in rule 16a-1(f) of the Securities Exchange Act of 1934, as amended); (ii) produce annually the Compensation Committee report on Executive Compensation for inclusion in the Company’s proxy statement (if required); (iii) ensure that the Company’s compensation plans for the CEO and other reportable officers are competitive and support the Company’s overall business strategy; (iv) review, evaluate and recommend for board approval the director and reportable officer compensation plans; (v) review and discuss with management any compensation, discussion and analysis to be included in the Company’s annual proxy statement (as applicable); and (vi) to monitor the Company’s overall compensation policies and employment benefit plans.
The Compensation Committee had three meetings during our fiscal year ended October 2, 2022.
The Compensation Committee’s charter is accessible as an exhibit to its 2022 Annual Report and the Company expects it to be available on the Company’s website under “Investor Relations – Governance – Governance Documents” in the future.
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Nominating Committee
The purpose of the Nominating Committee is (i) to identify individuals qualified to become members of the Board consistent with criteria agreed to by the Board; (ii) to recommend to the Board of Directors nominees for election to the Board of Directors or to recommend candidates to fill vacancies on the Board of Directors and (iii) to address related matters.
The Nominating Committee had one meeting and took action by unanimous written consent one time during our fiscal year ended October 2, 2022.
The Nominating Committee’s charter is accessible as an exhibit to its 2022 Annual Report and the Company expects it to be available on the Company’s website under “Investor Relations – Governance – Governance Documents” in the future.
Board Nominations
The Board of Directors nominates directors for election at each annual meeting of shareholders and appoints new directors to fill vacancies when they arise. The Nominating Committee has the responsibility to identify, evaluate, recruit, and recommend qualified candidates to the Board of Directors for nomination or election.
One of the Board of Directors’ objectives in evaluating director nominations is to ensure that its membership is composed of experienced and dedicated individuals with a diversity of backgrounds, perspectives, and skills. The Nominating Committee will select nominees for director based on their character, judgment, diversity of experience, business acumen, and ability to act on behalf of all shareholders. We do not have a formal diversity policy, however, the Nominating Committee endeavors to have a Board representing diverse viewpoints as well as diverse expertise at policy-making levels in many areas, including business, accounting and finance, marketing and sales, business development, human capital management, public company governance, growth through mergers and acquisitions, risk management and in other areas that are relevant to our activities.
The Nominating Committee believes that nominees for director should have experience, such as those mentioned above, that may be useful to the Company and the Board of Directors, high personal and professional ethics and the willingness and ability to devote sufficient time to carry out their duties as directors effectively.
Prior to each annual meeting of shareholders, the Nominating Committee identifies nominees first by evaluating the current directors who are willing to continue in service. These candidates are evaluated based on the criteria described above and the needs of the Board of Directors with respect to the talents and experience of its directors. In the event that a director does not wish to continue in service, the Nominating Committee determines not to re-nominate the director, a vacancy is created on the Board of Directors as a result of a resignation, an increase in the size of the Board, or other relevant event, the Nominating Committee will consider various candidates for Board membership, including those suggested by the Nominating Committee members, by other Board members, by any executive search firm engaged by the Nominating Committee, by management, or by shareholders.
Shareholders wishing to bring a nomination for a director candidate before a shareholders meeting must give written notice to our Corporate Secretary, either by personal delivery or by United States mail, postage prepaid. The shareholder’s notice must be received by the Corporate Secretary not later than (a) with respect to an Annual Meeting of Shareholders, 90 days prior to the anniversary date of the immediately preceding annual meeting, and (b) with respect to a special meeting of shareholders for the election of directors, the close of business on the tenth day following the date on which notice of the meeting is first given to shareholders. The shareholder’s notice must set forth all information relating to each person whom the shareholder proposes to nominate that is required to be disclosed under applicable rules and regulations of the SEC, including the written consent of the person proposed to be nominated to being named in the proxy statement as a nominee and to serving as a director if elected. The shareholder’s notice must also set forth as to the shareholder making the nomination (i) the name and address of the shareholder, (ii) the number of shares held by the shareholder, (iii) a representation that the shareholder is a holder of record of stock of the Optex Systems Holdings, entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person named in the notice, and (iv) a description of all arrangements or understandings between the shareholder and each nominee.
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Shareholder Communications with the Board of Directors
Shareholders may communicate directly with the Board of Directors or any Board member by writing to them at Optex Systems Holdings, Inc., 1420 Presidential Drive, Richardson, TX 75081. The outside of the envelope should prominently indicate that the correspondence is intended for the Board of Directors or for a specific director. The secretary will forward all such written communications to the director to whom it is addressed or, if no director is specified, to the entire Board of Directors.
Director Attendance at Annual Meetings of Shareholders
Directors are encouraged to attend annual meetings, although such attendance is not required. All four directors then in office attended the Company’s 2022 Annual Meeting of Shareholders.
Code of Ethics
Our boardBoard of directorsDirectors has adopted a Code of Business Conduct and Ethics, which has been distributed to all directors and executive officers, and will be distributedis available to employees and will be given to new employees at the time of hire. The Financial Code of Business Conduct and Ethics contains a number of provisions that apply principallyapplies, among other persons, to our Principal Executive Officer, Principal Financial Officer and other keyprincipal executive officer, principal financial officer, principal accounting and financial personnel.officer or controller, or persons performing similar functions. A copy of our Code of Business Conduct and Ethics can be found under the “Investor Relations” section of our website (www.optexsys.com) under the section for corporate governance. We also intend to disclose any amendments or waivers of our Code on our website. We undertake to provide a copy of the Code of Business Conduct and Ethics to anyone without charge who requests a copy in writing addressed to: Optex Systems Holdings, Inc., Attn: Corporate Secretary, 1420 Presidential Drive, Richardson, TX 75081.
Board MeetingsPolicy against Hedging
We are incorporated under the lawsUnder our Insider Trading Policy, no insider may engage in hedging transactions involving Company securities, including forward sale or purchase contracts, equity swaps, collars or exchange funds.
Section 16(a) of the StateExchange Act requires officers, directors and persons who own more than ten percent of Delaware. The interestsa registered class of our stockholders are representedequity securities to, within specified time periods, file certain reports of ownership and changes in ownership with the SEC. Based solely on its review of the copies of such forms received by it, the board of directors, which oversees our business and management.
The board of directors meets regularlyCompany believes that, during the year and holds special meetings and acts by unanimous written consent whenever circumstances require. The board held one meeting (including special meetings) and took action by unanimous written consent one time during ourits most recently completed fiscal year ended September 29, 2019.on October 2, 2022, all Section 16(a) reports required to be filed by its officers, directors, and greater than ten percent beneficial owners were timely filed, except one report was filed late by Karen L. Hawkins, reporting one late transaction, and one report was filed late by Rimmy Malhotra, reporting one late transaction.
Board Committees
As of November 4, 2019, Larry Hagenbuch was appointed to the board as an independent director and has accepted the role of Audit Committee Chair and Rimmy Malhotra was appointed to the board as an independent director and has accepted the role of Compensation Committee Chair. The board has determined that Mr. Hagenbuch qualifies as a financial expert for purposes of the Audit Committee as defined under SEC rules. Each committee has three independent board members. Board Charters are expected to be adopted in the next few months.
Mr. Kittay, resigned as of November 4, 2019 and previously served as our only independent director, and as chair of the Audit and Compensation Committee until November 3, 2019.
Board nominations
Stockholders wishing to bring a nomination for a director candidate before a stockholders meeting must give written notice to our Corporate Secretary, either by personal delivery or by United States mail, postage prepaid. The stockholder’s notice must be received by the Corporate Secretary not later than (a) with respect to an Annual Meeting of Stockholders, 90 days prior to the anniversary date of the immediately preceding annual meeting, and (b) with respect to a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of the meeting is first given to stockholders. The stockholder’s notice must set forth all information relating to each person whom the stockholder proposes to nominate that is required to be disclosed under applicable rules and regulations of the SEC, including the written consent of the person proposed to be nominated to being named in the proxy statement as a nominee and to serving as a director if elected. The stockholder’s notice must also set forth as to the stockholder making the nomination (i) the name and address of the stockholder, (ii) the number of shares held by the stockholder, (iii) a representation that the stockholder is a holder of record of stock of the Optex Systems Holdings, entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person named in the notice, and (iv) a description of all arrangements or understandings between the stockholder and each nominee.
Stockholder Communications with the Board of Directors
Stockholders may communicate directly with the board of directors or any board member by writing to them at Optex Systems Holdings, Inc., 1420 Presidential Drive, Richardson, TX 75081. The outside of the envelope should prominently indicate that the correspondence is intended for the board of directors or for a specific director. The secretary will forward all such written communications to the director to whom it is addressed or, if no director is specified, to the entire board of directors.
Director Attendance at Annual Meetings of Stockholders
Directors are encouraged to attend annual meetings, although such attendance is not required.
Board Independence
Our board of directors has determined that three of our directors would meet the independence requirements of the Nasdaq Capital Market, if such standards applied to the Company. In reaching its conclusions, the board of directors considered all relevant facts and circumstances with respect to any direct or indirect relationships between the Company and each of the directors, including those discussed under the caption “Certain Relationships and Related Transactions” below. Our board of directors determined that any relationships that exist or existed in the past between the Company and each of the independent directors were immaterial on the basis of the information set forth in the above-referenced sections.
Director Independence
Our Board of Directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, our Board of Directors has determined that all directors except Danny Schoening are independent within the meaning of the NASDAQ Rules.
Section 16(a) Beneficial Ownership Reporting Compliance
We do not intend to report compliance thereunder in our proxy statement.
The board of directors administers our option compensation plan. Our Principal Executive Officer and other members of management regularly discuss our compensation issues with the Board of Directors. Subject to Board review, modification and approval, Danny Schoening typically makes recommendations respecting bonuses and equity incentive awards for the other members of the executive management team. The Board establishes all bonus and equity incentive awards for officers and directors in consultation with other members of the management team.
Summary Compensation Table
The following table sets forth, for the fiscal years indicated, all compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by our principal executive officer, principal financial officer and all other executive officerskey employees who received or are entitled to receive remuneration in excess of $100,000 during the stated periods. These officers and key employee are referred to herein as the “named executive officers.” Except as provided below, none of our executive officers received annual compensation in excess of $100,000 during the last two fiscal years.
Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) (2) | Option Awards ($) (1) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
2020 | $ | 284,645 | $ | 74,719 | $ | 110,670 | $ | - | $ | - | $ | 470,034 | ||||||||||||||||
Danny Schoening, | 2019 | 279,504 | 76,216 | 73,740 | - | - | 429,460 | |||||||||||||||||||||
CEO & Board Chairman | 2018 | 262,417 | 152,432 | 93,000 | 4,273 | - | 512,122 | |||||||||||||||||||||
2020 | $ | 205,425 | $ | 53,924 | $ | 36,890 | $ | - | $ | - | $ | 296,239 | ||||||||||||||||
Karen Hawkins | 2019 | 201,537 | 55,691 | 24,580 | - | - | 281,808 | |||||||||||||||||||||
CFO & Board Director | 2018 | 188,055 | 55,691 | 31,000 | 2,137 | - | 276,883 | |||||||||||||||||||||
2020 | $ | 150,834 | $ | 22,236 | $ | 35,805 | $ | - | $ | - | $ | 208,875 | ||||||||||||||||
Bill Bates | 2019 | 148,269 | 28,561 | 15,675 | $ | - | - | 192,505 | ||||||||||||||||||||
AOC GM & Board Director | 2018 | 140,220 | 28,044 | 19,210 | - | - | 187,474 | |||||||||||||||||||||
Stanley A. Hirschman, | 2018 | $ | - | $ | - | $ | - | $ | 2,137 | $ | - | $ | 2,137 | |||||||||||||||
President, resigned (3) |
Name and Principal Position | Fiscal Year | Salary | Bonus (3) | Stock Awards (4) | All Other Compensation | Total | ||||||||||||||||||
Danny Schoening, | 2022 | $ | 293,841 | $ | 88,810 | $ | 16,335 | $ | - | $ | 398,986 | |||||||||||||
CEO, COO & Board Chairman | 2021 | 271,515 | (1) | - | 65,340 | 120 | 336,975 | |||||||||||||||||
2020 | 284,645 | - | 65,835 | - | 350,480 | |||||||||||||||||||
Karen Hawkins | 2022 | 209,534 | 64,093 | 5,445 | - | 279,072 | ||||||||||||||||||
CFO | 2021 | 199,500 | (2) | - | 21,780 | 120 | 221,400 | |||||||||||||||||
2020 | 205,425 | - | 21,945 | - | 227,370 | |||||||||||||||||||
Bill Bates | 2022 | 156,497 | 31,914 | 35,145 | - | 223,556 | ||||||||||||||||||
AOC General Manager* | 2021 | 149,002 | - | 35,411 | 120 | 184,533 | ||||||||||||||||||
2020 | 150,834 | - | 31,076 | - | 181,910 |
* Key employee – not an executive officer
(1) | In January 2021, Mr. Schoening agreed to a temporary salary reduction of 8% from February 20, 2021 through October 1, 2021. | |
(2) | In January 2021, Ms. Hawkins agreed to a temporary salary reduction of 5% from February 20, 2021 through October 1, 2021, at which time her salary was reinstated to $205,425 per annum. | |
(3) | Amounts shown represent bonuses earned in the fiscal year indicated, even if paid in the subsequent fiscal year. Not shown in the table are bonuses earned with respect to fiscal year 2019, whether or not paid in fiscal year 2020, which amounted to $47,632 for Mr. Schoening, $37,158 for Ms. Hawkins and $23,014 for Mr. Bates. | |
(4) | The amounts in the |
Option Grants in Last Fiscal Year
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There were no Option Grants during the twelve months ended September 27, 2020 or September 29, 2019.
Employment Agreements - Danny Schoening
WeDanny Schoening
On November 28, 2022, the Company entered into ana new employment agreement with Danny Schoening dated December 1, 2008. The term ofSchoening. Pursuant to the agreement, commencedwhich is dated as of December 1, 2008 and the current term has automatically renewed through December 1, 2020. The term of the agreement shall be automatically extended for successive 18-month periods, unless we shall provide a written notice of termination at least ninety (90) days, or2022, Mr. Schoening shall provide a written notice of termination at least 90 days, priorwill continue to serve as the end of the initial term or any extended term, as applicable.
On each subsequent renewal date of the commencement of employment,Company’s President and Chief Executive Officer through November 30, 2025. Mr. Schoening’s base salary shall be reviewed by the Boardinitially is $304,912 per annum, and maywill be increased to such rate as the Board, in its sole discretion, may hereafter from time to time determine. During the term of the agreement,$314,060 on December 1, 2023 and $323,481 on December 1, 2024.
Mr. Schoening shallwill be entitled to receive bonuses of up to 30% of his base salary per year at the discretion of our Board of Directors pursuant toeligible for a performance objectives to be determinedbonus based on a one-year operating plan adopted by the Board of Directors. Any bonuses shallThe bonus will be payablebased on financial and/or operating metrics decided annually by the Board or its Compensation Committee and tied to such one-year plan. The target bonus will equate to 30% of Mr. Schoening’s base salary. The Board has discretion in cashgood 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, which had been previously amended as of December 1, 2021, by changing the third and shall be paid within ninety (90) daysfinal vesting date for the restricted stock units granted under such agreement from the “change of any year anniversary of the date of the agreement.control date” to January 1, 2023.
The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by usthe Company for cause (including conviction of a felony, commission of fraudulent, illegal or dishonest acts, certain willful misconduct or gross negligence by Mr. Schoening, continued failure to perform material duties or cure material breach after written notice, violation of securities laws and material breach of the employment agreement), (iii) termination by the Company without cause by us and (iv) termination by Mr. Schoening for good reason (including continued breach by usthe Company of its material obligations under the agreement after written notice, 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 us or ourits successor changing ownership or a sale of all or substantially all of ourits assets, without the surviving entity assuming the obligations under the agreement). For a termination by usthe Company for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening will be paid accrued and unpaid salary and 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.
Karen Hawkins
On August 4, 2016, our Board approved an employment agreement for Karen Hawkins, our Chief Financial Officer, dated as of August 1, 2016. The term of the agreement commenced on August 1, 2016, and the current term expires on December 31, 2023 and automatically renews for subsequent 18-month periods unless Ms. Hawkins or we give notice of termination at least 90 days before the end of the term then in effect.
On March 28, 2022, the Compensation Committee approved a salary increase of 4% for Ms. Hawkins effective April 1, 2022. As a result of the increase, Ms. Hawkins’ current salary is $213,642.
On each subsequent renewal date of the commencement of employment, Ms. Hawkins’ base salary is subject to review by the Board and may be increased to such rate as the Board, in its sole discretion, may from time to time determine. In addition, Ms. Hawkins is entitled to annual bonuses of up to 30% of her base salary as approved by the Board.
Ms. Hawkins is entitled to 20 days’ vacation and all other benefits accorded to our other senior executives.
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The employment agreement events of termination consist of: (i) death of Ms. Hawkins; (ii) termination by the Company for cause (including conviction of a felony, commission of fraudulent acts, willful misconduct by Ms. Hawkins, 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 Ms. Hawkins for good reason (including breach by the Company of its obligations under the agreement, the requirement for Ms. Hawkins to move more than 100 miles away for her 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 of Mr. Schoening, Mr. Schoening shallMs. Hawkins, Ms. Hawkins will be paid salary and bonus earned through the date of termination. For a termination by usthe Company without cause or by Mr. SchoeningMs. Hawkins with good reason, Mr. Schoening shallMs. Hawkins will also be paid six months’ base salary in effect and all granted stock options shall remain exercisable for a period of two years after such termination, with all unvested stock options immediately vesting. The agreement contains a standard non-solicitation and non-compete agreement that extends for one year subsequent to termination thereof.
We entered into an updated employment agreement with Danny Schoening dated October 15, 2020. The term of the agreement commenced as of October 15, 2020 and the current term ends on November 30, 2021. Mr. Schoening’s base salary continues to be $284,645 per annum. Mr. Schoening will be eligible for a performance bonus which is based upon a rolling three-year operating plan adopted by our Board of Directors. The bonus will be tied to operating metrics decided by our board against the three-year plan, and such metrics will be decided annually and tie to the three-year plan. The target bonus equates to 30% of Mr. Schoening’s base salary. Our board will have discretion to alter the performance bonus upward or downward by 20% based on its good faith discretion.
The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by us 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 without cause by us and (iv) termination by Mr. Schoening for good reason (including breach by us 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 then outstanding securities of us or our successor changing ownership or a sale of all or substantially all of our assets, without the surviving entity assuming the obligations under the agreement). For a termination by us for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening shall 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 us without cause or by Mr. Schoening with good reason, Mr. Schoening shall also be paid six months’ base salary in effect.
Karen Hawkins
On August 4, 2016, our Board of Directors approved an employment agreement for Karen Hawkins, Chief Financial Officer, dated as of August 1, 2016. This agreement has the following salient terms:
We do not have any other employment agreements with our executive officers.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information regarding the outstanding equity awards held by the named executive officers and directors.at October 2, 2022.
Number of Shares or Units of Stock that have not Vested | Market Value of Shares or Units of Stock that have not Vested | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that have not Vested | |||||||||||||
Name | ||||||||||||||||
Danny Schoening(1) | 49,500 | $ | 125,730 | - | - | |||||||||||
Karen Hawkins | - | - | - | - | ||||||||||||
Bill Bates(2) | 16,500 | 41,910 | - | - |
(1) | Represents RSUs. 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. Effective January 4, 2023, the Company issued 34,824 shares, net of tax withholding of $43 thousand, in settlement of these RSUs. |
(2) | Represents RSUs, which vested on January 1, 2023 in accordance with their terms. Effective January 4, 2023, the Company issued 11,608 shares, net of tax withholding of $14 thousand, in settlement of these RSUs. |
In addition, on January 4, 2022, the Company issued 23,216 common shares to officers, net of tax withholding of $19 thousand, in settlement of 33,000 restricted stock units which vested on January 1, 2022.
As of January 9, 2023, there are zero outstanding unvested restricted stock units.
EquityPost-Termination Compensation Plan Information
We currently have an option compensation plan covering the issuance of both incentive and non-statutory options, determined at the time of grant, for the purchase of up to 75,000 shares, which was increased from 50,000 shares on December 19, 2013. The purpose of the Plan is to assist us in attracting and retaining highly competent employees and to act as an incentive in motivating selected officers and other employees of us and our subsidiaries, and directors and consultants of us and our subsidiaries, to achieve long-term corporate objectives. On December 19, 2013, the Board of Directors authorized the grant of 20,000 options to three board members and a grant of 5,000 to an officer. There are 75,000, shares of common stock reserved for issuance under this Plan.
As of September 29, 2019, there were 25,000 fully vested stock options outstanding at an exercise price of $10 per share and an expiration date of December 18, 2020. During the twelve months ended September 27, 2020, all 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 September 27, 2020. As of September 27, 2020, 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 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 portionentered into change of the RSUs will immediately vest ascontrol agreements with any of the officer grantee’s termination date.our named executive officers. In the event of a change inof control, the Company’sour obligations regarding outstanding RSUs shall, on such terms as may be approved by the Compensation Committee prior to such event, immediately vest, be assumed by the surviving or continuing company or cancelled in exchange for property (including cash).
On June 15, 2016,The change of control provisions that will govern awards made under our 2023 Equity Incentive Plan, should such plan be adopted by the Company issued 150,000 RSUsshareholders, are described in “Proposal 3 – The 2023 Equity Incentive Plan Proposal” in this proxy statement.
Director Compensation
The following table provides information regarding compensation paid to itsnon-employee directors for services rendered during the fiscal year ended October 2, 2022. Mr. Schoening receives compensation as our Chief Executive Officer Danny Schoening, and 50,000 RSUs to its Chief Financial Officer, Karen Hawkins. The RSUs issued to Mr. Schoening and Ms. Hawkins vestdoes not receive additional compensation for his services as follows: 34% on January 1, 2017, 33% on January 1, 2018 and 33% on January 1, 2019. The total market value of the restricted stock units based on the shares price of $1.85 as of June 15, 2016 is $372 thousand. The cost of the shares is amortized on a straight line basis across the vesting periods.director or Chairman.
On January 5, 2017, Optex Systems Holdings issued 45,799 common shares related to the vesting of the 68,000 restricted stock units on January 1, 2017. The shares issued were net of 22,201 common shares withheld for employee federal income tax requirements.
Name | Fees Earned or Paid in Cash (1) | Vested Restricted Stock Awards(2) | Total Compensation | |||||||||
Rimmy Malhotra | $ | 36,000 | $ | 35,000 | $ | 71,000 | ||||||
Dale Lehmann | 36,000 | 35,000 | 71,000 | |||||||||
Lawrence Hagenbuch(3) | 36,000 | 35,000 | 71,000 |
On June 15, 2017, the Company issued 50,000 RSUs to its Applied Optics Center General Manager and new board member, Bill Bates. Pursuant to the RSU agreements the RSUs issued to Mr. Bates will vest as follows: 34% on January 1, 2018, 33% on January 1, 2019 and 33% on January 1, 2020. The total market value of the restricted stock units based on the shares price of $0.95 as of June 15, 2016 is $47.5 thousand. The cost of the shares is amortized on a straight line basis across the vesting periods.
On January 2, 2018 the Company issued 55,902 common shares related to the vesting of 83,000 restricted stock units on January 1, 2018. The shares issued were net of 27,098 common shares withheld for employee federal income tax requirements.
Director fees paid quarterly. | |
(2) | Represents restricted shares issued to each independent director vesting at a rate of 20% per year. The amounts in the “Stock awards” column reflect the dollar amounts recognized as the director portion of compensation expense for financial statement reporting purposes for each named director, as required by FASB ASC 718, disregarding any estimates for forfeitures relating to service-based vesting conditions. |
(3) | Not standing for re-election. |
On November 20, 2018 the Company’s board of directors approved the issuance of 150,000 and 50,000 restricted stock units to Danny Schoening and Karen Hawkins, respectively, with a January 2, 2019 grant date, vesting 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 total market value of the restricted stock units based on the shares price of $1.32 as of January 2, 2019 is $264 thousand.
On January 7, 2019, the Company issued 55,565 common shares to three directors and officers, net of tax withholding of $37 thousand, in settlement of 82,500 restricted stock units which vested on January 1, 2019.
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.
As of September 27, 2020, there are 182,000 outstanding unvested restricted stock units remaining to vest, of which 83,000 will vest as of January 1, 2020 and the remaining 99,000 will vest on January 1, 2021 and January 1, 2022 and January 1, 2023.
Restricted Shares Issued to Independent Board Members
On April 30, 2020, the Optex Systems Holdings, Inc.Company’s Board of Directors held a meeting and voted to increase the annual boardBoard compensation for the then 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 nextsucceeding 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 amortizeamortizes the fair market value to stock compensation expense on a straight-line basis across the five-year vesting period beginning on April 30, 2020. As of period ended September 27, 2020, noneOctober 2, 2022, 40,000 (20%) of the restricted shares had vested. As of January 9, 2023, 60,000 (30%) of the restricted shares had vested. As a result of his pending departure from the Board, Mr. Hagenbuch’s remaining 40,000 unvested restricted shares will be forfeited.
Consulting and Vendor Equity Compensation
There was no equity compensation to consultants or vendors during the years ended September 27, 2020 or September 29, 2019.
Nonqualified deferred compensation
We had no non-qualified deferred compensation plans during year ended September 27, 2020.
Post-Termination Compensation
We have not entered into change in control agreements with any of our named executive officers or other membersAs of the executive management team other thandate of this proxy statement, the provision with respectCompany has not yet made a restricted share grant to Mr. Schoening and Ms. Hawkins described above. No awards of equity incentives under our 2009 Stock Option Plan provide for immediate vesting uponJudd, who joined the Board on October 19, 2022. The Company expects to make a change in control. However, our Board of Directors has the full and exclusive powergrant to interpret the plans, including the powerMr. Judd consistent with those made to accelerate the vesting of outstanding, unvested awards. A “change in control” is generally defined as (1) the acquisition by any person of 66% or more of the combined voting power of our outstanding securities or (2) the occurrence of a transaction requiring stockholder approval and involving the sale of all or substantially all of our assets or the merger of us with or into another corporation.its other independent directors.
16 |
Director Compensation
The following table provides information regarding compensation paid to directors for services rendered during the year ended September 27, 2020.
Fees Earned or | ||||
Name | Paid in Cash ($)(1) | |||
Rimmy Malhotra | $ | 30,667 | ||
Larry Hagenbuch | 30,667 | |||
Dale Lehmann | 30,667 | |||
Danny Schoening | - |
The members of our board of directors are actively involved in various aspects of our business ranging from relatively narrow board oversight functions to providing hands-on guidance to our executives and scientific staff with respect to matters within their personal experience and expertise. We believe that the active involvement of all directors in our principal business and policy decisions increases our board of directors’ understanding of our needs and improves the overall quality of our management decisions.
With the exception of Danny Schoening, our directors are compensated separately for service as independent members of our board of directors.
On November 14, 2019, the Board of Directors reviewed the independent director compensation and concluded to leave the pay as is currently in place for former independent directors, currently set at $5.5 thousand per quarter served. The board determined to revisit the independent board compensation during the first calendar quarter of 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 $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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On December 10, 2020,January 9, 2023, we had 8,519,7286,763,070 shares of common stock outstanding, 4,125,200zero options, zero warrants, and 182,000zero granted and unvested restricted stock units. The following table sets forth certain information with respect to the beneficial ownership of our securities as of December 10, 2020,January 9, 2023, for (i) each of our directors and executive officers; (ii) all of our directors and executive officers as a group (not noting our three new directors who have not yet been issued any stock or options which have vested);group; and (iii) each person who we know beneficially owns more than 5% of our common stock.
Beneficial ownership data in the table has been calculated based on Commission rules that require us to identify all securities that are exercisable or convertible into shares of our common stock within 60 days of December 10, 2020January 9, 2023 and treat the underlying stock as outstanding for the purpose of computing the percentage of ownership of the holder.
Except as indicated by the footnotes following the table, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all capital stock held by that person. The address of each named executive officer and director, unless indicated otherwise by footnote, is c/o our corporate headquarters.
Except as otherwise set forth below, the address of each of the persons listed below is our address.
Title of Class | Name of Beneficial Owner | Number of Shares | Percentage of Outstanding Shares | Name of Beneficial Owner | Number of Shares | Percentage of Outstanding Shares | |||||||||||||
5% Holders | Gate City Capital Management LLC (1) | 1,417,518 | 16.5 | % | Collin McBirney, Topline Capital Partners, LP(1) | 788,663 | 11.7 | % | |||||||||||
Ephraim Fields (2) | 1,179,174 | 13.7 | % | Howard Deshong, Galileo Partners, LLC(2) | 423,300 | 6.3 | % | ||||||||||||
Directors and Officers: | Danny Schoening (3) | 854,006 | 9.9 | % | |||||||||||||||
Directors and officers and key employee: | Danny Schoening | 868,854 | 12.8 | % | |||||||||||||||
Karen Hawkins (4) | 244,536 | 2.8 | % | Karen Hawkins | 17,642 | 0.3 | % | ||||||||||||
Bill Bates (5) | 51,171 | 0.6 | % | Bill Bates | 69,347 | 1.0 | % | ||||||||||||
Dayton Judd (3) | 829,383 | 12.3 | % | ||||||||||||||||
Directors and officers as a group (3 Individuals) (6) | 1,149,713 | 13.4 | % | ||||||||||||||||
Rimmy Malhotra, Nicoya Fund LLC (4)(5) | 108,565 | 1.6 | % | ||||||||||||||||
Larry Hagenbuch(5) | 110,000 | 1.6 | % | ||||||||||||||||
Dale Lehmann (5) | 166,558 | 2.5 | % | ||||||||||||||||
Directors and officers and key employee as a group (7 Individuals) (6) | 2,170,349 | 32.1 | % |
Represents | |
Represents | |
Certain Relationships and Related Transactions, and Director Independence
None
Transactions with Executive Management
See the “Executive Compensation” section for a discussion of the material elements of compensation awarded to, earned by or paid to our named executive officers. Other than as stated in the “Executive Compensation” section, we have not entered into any transactions with executive management.
Director Independence
As of the date of filing of this Annual Report, the Company has three independent directors, as such term is defined under NASDAQ standards and one non independent director.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the Board or compensation committee of any other entity that has one or more of its executive officers serving as a member of our Board.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. We are not providing disclosure on this point.
General
Four directors are to be elected at this Annual Meeting to serve until the 2021 annual meeting of shareholders or until for each a successor has been elected and qualified. Unless otherwise instructed, the persons named in the accompanying proxy intend to vote the shares represented by the proxy for the election of the nominees listed below. Although it is not contemplated that the nominees will decline or be unable to serve as directors, in such event, proxies will be voted by the proxy holder for such other persons as may be designated by the Board, Election of the directors requires a plurality of the votes cast at the Annual Meeting.
The following table sets forth the nominees for the Board of Directors. See “Management” for a description of the directors as of the Record Date.
Nominee for Director
Vote Required
The affirmative vote of a majority of votes cast for this proposal is required to approve the election of directors until the 2022 annual meeting of shareholders and until their respective successors have been duly elected and qualified, or until such director’s earlier resignation, removal or death.
Independence
The Board believes all directors except Mr. Schoening meet the definition of independence under SEC and Nasdaq rules.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL NO. 1.
THE RATIFICATION OF THE APPOINTMENT OF WHITLEY PENN LLP AS THE COMPANY’S INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2021
The Board of Directors has appointed Whitley Penn LLP (“Whitley Penn”) as our independent registered certified public accounting firm for the fiscal year 2021 and has further directed that the selection of Whitley Penn be submitted to a vote of shareholders at the Annual Meeting for ratification.
As described below, the shareholder vote is not binding on the Board. If the appointment of Whitley Penn is not ratified, the Board will evaluate the basis for the shareholders’ vote when determining whether to continue the firm’s engagement, but may ultimately determine to continue the engagement of the firm or another audit firm without re-submitting the matter to shareholders. Even if the appointment of Whitley Penn is ratified, the Board may in its sole discretion terminate the engagement of the firm and direct the appointment of another independent auditor at any time during the year if it determines that such an appointment would be in the best interests of our Company and our shareholders.
Representatives of Whitley Penn are expected to attend the Annual Meeting, where they will be available to respond to appropriate questions and, if they desire, to make a statement.
Vote Required
The affirmative vote of the majority of the votes cast at the Annual Meeting is required for the ratification of the appointment of Whitley Penn as the Company’s independent registered public accounting firm for the fiscal year ending October 3, 2021.
The following table sets forth the fees paid to date for audit services rendered during fiscal years ended September 27, 2020 and September 29, 2019, respectively.
Fee Category | 2020 | 2019 | ||||||
Audit Fees (1) | $ | 89,802 | $ | 75,650 | ||||
Audit-Related Fees-registration statement consents (2) | - | 5,000 | ||||||
Tax Fees | 7,613 | 7,300 |
Audit fees consist of fees related to professional services rendered in connection with the audit of our annual financial statements. All other fees relate to professional services rendered in connection with the review of the quarterly financial statements.
Our policy is to pre-approve all audit and permissible non-audit services performed by the independent accountants. These services may include audit services, audit-related services, tax services and other services. Under our audit committee’s policy, pre-approval is generally provided for particular services or categories of services, including planned services, project based services and routine consultations. In addition, the audit committee may also pre-approve particular services on a case-by-case basis. Our audit committee approved all services that our independent accountants provided to us in the past two fiscal years.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL NO. 2.
PROPOSAL NO. 3 - OTHER MATTERS
The Board knows of no matter to be brought before the Annual Meeting other than the matters identified in this proxy statement. However, if any other matter properly comes before the Annual Meeting or any adjournment of the meeting, it is the intention of the persons named in the proxy solicited by the Board to vote the shares represented by them in accordance with their best judgment.
SHAREHOLDER PROPOSALS FOR THE 2022 MEETING
Our bylaws provide that, for matters to be properly brought before an annual meeting, business must be either (i) specified in the notice of annual meeting (or any supplement or amendment thereto) given by or at the direction of the Board of Directors, (ii) otherwise brought before the annual meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the annual meeting by a shareholder.
Shareholder proposals intended for inclusion in our proxy statement relating to the next annual meeting in 2022 must be received by us no later than January 7, 2022. If the date of next year’s annual meeting is moved by more than 30 days before or after the anniversary date of this year’s Annual Meeting, then the deadline for inclusion of a shareholder proposal in our proxy materials is instead a reasonable time before we begin to print and send our proxy materials for that meeting. Any such proposal must comply with Rule 14a-8 of Regulation 14A of the proxy rules of the SEC.
Notice to us of a shareholder proposal submitted otherwise than pursuant to Rule 14a-8 also will be considered untimely if received at our principal executive offices other than during the time period set forth below and will not be placed on the agenda for the meeting. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to our secretary. To be timely, a shareholder’s notice must be delivered to the secretary at our principal executive offices not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than seventy (70) days after such anniversary date, notice by the shareholder must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by us.
ANNUAL REPORT
Upon written request to Secretary, Optex Systems Holdings, Inc. at 1420 Presidential Drive, Richardson, TX 75081, we will provide without charge to each person requesting a copy of our 2019 Annual Report, including the financial statements filed therewith. We will furnish a requesting shareholder with any exhibit not contained therein upon specific request. In addition, this Proxy Statement, as well as our 2019 Annual Report, are available on our Internet website at www.optexsys.com
PROXY CARD
ANNUAL REPORT ON FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 2020
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ until ___
Commission File Number 000-54114
OPTEX SYSTEMS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code (972) 764-5700
Securities Registered under Section 12(b) of the Act
None
Securities Registered under Section 12(g) of the Act
Common Stock, par value $.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2Fund’s investment program to Sudbury Capital Management, LLC (the “Investment Advisor”), Mr. Judd is the managing member of the Investment Advisor and partner and manager of the GP, and the address for all is 136 Oak Trail, Coppell, TX 75019. Dayton Judd was appointed as a director of the Exchange Act). Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Act:
The aggregate market value of the 4,673,802 shares of voting stock held by non-affiliates of the registrant based on the closing price on the OTCQB on March 27, 2020 was $7,805,249.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Information
This Report on Form 10-K, in particular Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; 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, all of which were subject to various risks and uncertainties.
When used in this Report on Form 10- K 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, 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. However, any statements contained in this Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. 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.
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 annual report. In this Form 10-K, Optex Systems Holdings, Inc. (“Optex Systems Holdings”) has identified important factors that could cause actual results to differ from expected or historic results. 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.
Item 1 Description of Business
Background
Current Line of Business
We manufacture optical sighting systems and assemblies, primarily for Department of Defense applications. Our 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. We also manufacture and deliver numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Our 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 us.
We continue to field new product opportunities from both domestic and international customers. Given continuing unrest in multiple global hot spots, the need for precision optics continues to increase. Most of these requirements are for observation and situational awareness applications; however, we continue to see requests for higher magnification and custom reticles in various product modifications. The basic need to protect the soldier while providing information about the mission environment continues to be the primary driver for these requirements.
Recent Events
New Employment Agreement for Danny Schoening
We entered into an updated employment agreement with Danny Schoening dated October 15, 2020. The term of the agreement commenced as of October 15, 2020 and the current term ends on November 30, 2021. Mr. Schoening’s base salary continues to be $284,645 per annum. Mr. Schoening will be eligible for a performance bonus which is based upon a rolling three-year operating plan adopted by our Board of Directors. The bonus will be tied to operating metrics decided by our board against the three-year plan, and such metrics will be decided annually and tie to the three-year plan. The target bonus equates to 30% of Mr. Schoening’s base salary. Our board will have discretion to alter the performance bonus upward or downward by 20% based on its good faith discretion.
The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by us 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 without cause by us and (iv) termination by Mr. Schoening for good reason (including breach by us 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 then outstanding securities of us or our successor changing ownership or a sale of all or substantially all of our assets, without the surviving entity assuming the obligations under the agreement). For a termination by us for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening shall 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 us without cause or by Mr. Schoening with good reason, Mr. Schoening shall also be paid six months’ base salary in effect.
On December 15, 2020, the Company’s Board of Directors approved executive bonuses for Danny Schoening, CEO, of $48 thousand to be paid in January, 2021, and Karen Hawkins, CFO, of $37 thousand to be paid in December 2020.
Board Changes
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.
Stock & Warrant Repurchases
On June 8, 2020 the Company announced authorization for a $1 million stock repurchase program. The shares authorized to be repurchased under the new 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 year ended September 27, 2020, there were 105,733 common shares repurchased through the program at a cost of $200 thousand. The shares have been returned to the Treasury.
On June 26, 2019, we repurchased 88,081 of the outstanding warrants from private investors at a warrant price of $0.85 per warrant, for a total purchase price of $75 thousand. Upon repurchase, the warrants were cancelled.
Recent Orders
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Products
Our products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley, and Stryker families of fighting vehicles, as well as light armored and armored security vehicles. We also manufacture and deliver numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. We deliver our products both directly to the federal government and to prime contractors.
On August 31, 2020, the Company announced it is now offering mil-spec quality High Efficiency Anti-Reflective Coatings for Infrared applications in both the military and commercial markets. These coatings will be manufactured at the Applied Optics Center (AOC) Division of Optex Systems, Inc. in Dallas, Texas.
We deliver high volume products, under multi-year contracts, to large defense contractors and government customers. Increased emphasis in the past two years has been on new opportunities to promote and deliver our products in foreign military sales, where U.S.-manufactured, combat and wheeled vehicles, are supplied (and upgraded) in cooperation with the U.S. Department of Defense. We have a reputation for quality and credibility with our customers as a strategic supplier. We also anticipate the opportunity to integrate some of our night vision and optical sights products into commercial applications.
Specific product categories are grouped by product line and include:
Location and Facility
We are headquartered in Richardson, TX and lease approximately 93,967 combined square feet of facilities between Richardson, Texas and Dallas, Texas. As of December 10, 2020, we had 98 full time equivalent employees. We operate with a single shift, and capacity could be expanded by adding a second shift. Our proprietary processes and methodologies provide barriers to entry for other competing suppliers. In many cases, we are the sole source provider or one of only two providers of a product. We have capabilities which include machining, bonding, painting, tracking, engraving and assembly and can perform both optical and environmental testing in-house.
We renewed the lease on our 49,100 square foot, Richardson, Texas facility, effective as of December 10, 2013, with a lease expiration of March 31, 2021. As of December 10, 2020, the Richardson facility operated with 62 full time equivalent employees in a single shift operation.
In November 2014, we acquired the Applied Optics Center (formerly a business unit of L-3 Communications, Inc.), which is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of December 10, 2020, the Applied Optics Center operated with 36 full time equivalent employees in a single shift operation.
Contracts
Some of our contracts may allow for government contract financing in the form of contract progress payments pursuant to Federal Acquisition Regulation 52.232-16, “Progress Payments”. As a small business, and subject to certain limitations, this clause provides for government payment of up to 90% of incurred program costs prior to product delivery. To the extent any contracts allow for progress payments and the respective contracts would result in significant preproduction cash requirements for design, process development, tooling, material or other resources which could exceed our current working capital or line of credit availability, we intend to utilize this benefit to minimize any potential negative impact on working capital prior to receipt of payment for the associated contract deliveries.
Our contracts allow for Federal Acquisition Regulation 52.243-1 which entitles the contractor to an “equitable adjustment” for contract or statement of work changes effecting cost or time of performance. In essence, an equitable price adjustment request is a request for a contract price modification (generally an increase) that allows for the contractor to be “made whole” for additional costs incurred which were necessitated by some modification of the contract effort. This modification may come from an overt change in U.S. Government requirements or scope, or it may come from a change in the conditions surrounding the contract (e.g., differing site conditions or late delivery of U.S. Government-furnished property) which result in statement of work additions, deletions, part substitutions, schedule or other changes to the contract which impact the contractor’s overall cost to complete.
Each contract with our customers has specific quantities of material that need to be purchased, assembled, and then shipped. Prior to bidding a contract, we contact potential sources of material and receive qualified quotations for each material. In some cases, the entire volume is given to a single supplier and in other cases, the volume might be split between several suppliers. If a contract has a single source supplier and that supplier fails to meet their obligations (e.g., quality, delivery), then we would attempt to find an acceptable alternate supplier, and if successful, we would then renegotiate contractual deliverables (e.g., specifications, delivery or price). As of December 6, 2020, approximately 4% of our material requirements are single-sourced across 12 suppliers representing approximately 31% of our active supplier order values. Single-sourced component requirements span across all of our major product lines. Of these single sourced components, we have material contracts (purchase orders) with firm pricing and delivery schedules in place with each of the suppliers to supply the parts necessary to satisfy our current contractual needs.
We are subject to, and must comply with, various governmental regulations that impact, among other things, our revenue, operating costs, profit margins and the internal organization and operation of our business. The material regulations affecting our U.S. government business are summarized in the table below.
We are responsible for full compliance with the Federal Acquisition Regulation (FAR). Upon award, the contract may identify certain regulations that we need to meet. For example, a contract may allow progress billing pursuant to specific FAR clauses incorporated into the contract. Other contracts may call for specific first article acceptance and testing requirements. The FAR will identify the specific regulations that we must follow based on the type of contract awarded and contains guidelines and regulations for managing a contract after award, including conditions under which contracts may be terminated, in whole or in part, at the government’s convenience or for default. These regulations also subject us to financial audits and other reviews by the government of our costs, performance, accounting and general business practices relating to our government contracts, which may result in adjustment of our contract-related costs and fees and, among other things and impose accounting rules that define allowable and unallowable costs governing our right to reimbursement under certain contracts.
First Article Testing and Acceptance requirements consist of specific steps which could be comprehensive and time consuming. The dimensions and material specifications of each piece of the assembly must be verified, and some products may have in excess of 100 assembled parts. Once the individual piece parts are verified to be compliant to the specification, the assembly processes are documented and verified. A sample of the production (typically three units) is verified to meet final performance specifications. Once the units meet the final performance specification, they are then subjected to accelerated life testing, a series of tests which simulate the lifetime use of the product in the field. This consists of exposing the units to thermal extremes, humidity, mechanical shock, vibration, and other physical exposure tests. Once completed, the units undergo a final verification process to ensure that no damage has occurred as a result of the testing and that they continue to meet the performance specification. All of the information and data is recorded into a final first article inspection and test report and submitted to the customer along with the test units for final approval. First Article Acceptance and Testing is generally required on new contracts/product awards but may also be required on existing products or contracts where there has been a significant gap in production, or where the product has undergone significant manufacturing process, material, tooling, equipment or product configuration changes.
We are also subject to laws, regulations and executive orders restricting the use and dissemination of information deemed classified for national security purposes and the exportation of certain products and technical data as covered by the International Traffic in Arms Regulation (ITAR). In order to import or export items listed on the U.S. Munitions List, we are required to be registered with the Directorate of Defense Trade Controls office. The registration is valid for one year, and the registration fees are established based on the number of license applications submitted the previous year. We currently have an approved and current registration on file with the Directorate of Defense Trade Controls office. Once the registration is approved, each import/export license must be filed separately. License approval requires the company to provide proof of need, such as a valid contract or purchase order requirement for the specific product or technical data requested on the license and requires a detailed listing of the items requested for export/import, the end-user, the end-user statement, the value of the items, consignees/freight forwarders and a copy of a valid contract or purchase order from the end-user. The approval process for the license can vary from several weeks to six months or more. The licenses we currently use are the Department of State licenses: DSP-5 (permanent export), DSP-6 (license revisions) and DSP-73 (temporary export) and Department of Commerce: BIS-711 (export).
The aforementioned licenses are valid for 48 months from date that each license is issued. A summary of our active ITAR licenses is presented below (updated as of December 10, 2020):
Fiscal Year | Number of | Total Contract | ||||||||||
Active ITAR Licenses | of Expiration | Licenses | Value of Licenses | |||||||||
DSP-5 | ||||||||||||
Issued in 2017 | 2021 | 6 | $ | 1,686,003 | ||||||||
Issued 2018 | 2022 | 8 | 2,742,658 | |||||||||
Issued 2019 | 2023 | 3 | 20,921,961 | |||||||||
Issued 2020 | 2024 | 4 | 64,294 | |||||||||
Total DSP-5 Licenses | 21 | $ | 25,414,916 | |||||||||
DSP-6 (no active licenses) | N/A | — | $ | — | ||||||||
DSP-73 | ||||||||||||
Issued in 2019 | 2023 | 1 | $ | 4,000 | ||||||||
Total DSP-73 Licenses | 1 | $ | 4,000 | |||||||||
BIS-711 | ||||||||||||
Issued in 2017 | 2021 | 8 | 1,708,894 | |||||||||
Issued in 2018 | 2022 | 4 | $ | 113,907 | ||||||||
Issued in 2019 | 2023 | 4 | 3,416 | |||||||||
Issued in 2020 | 2024 | 5 | 92,554 | |||||||||
Total BIS-711 Licenses | 21 | $ | 1,918,771 | |||||||||
Total All Licenses | 43 | $ | 27,337,687 |
These licenses are subject to termination if a licensee is found to be in violation of the Arms Export Control Act or the ITAR requirements. If a licensee is found to be in violation, in addition to a termination of its licenses, it can be subject to fines and penalties by the government.
Our contracts may also be governed by the Truth in Negotiation Act (TINA) requirements where certain of our contracts or proposals exceed the TINA threshold ($2 million for awards after June 30, 2018), and/or are deemed as sole source, or non-competitive awards, covered under this act. For these contracts, we must provide a vast array of cost and pricing data in addition to certification that our pricing data and disclosure materials are current, accurate and complete upon conclusion of the negotiation. Due to the additional disclosure and certification requirements, if a post contract award audit were to uncover that the pricing data provided was in any way not current, accurate or complete as of the certification date, we could be subjected to a defective pricing claim adjustment with accrued interest. We have no history of defective pricing claim adjustments and have no outstanding defective pricing claims pending. Additionally, as a result of this requirement, contract price negotiations may span from two to six months and can result in undefinitized or not to exceed ceiling priced contracts subject to future downward negotiations and price adjustments. Currently, we do not have any undefinitized contracts subject to further price negotiation.
Our failure to comply with applicable regulations, rules and approvals or misconduct by any of our employees could result in the imposition of fines and penalties, the loss of security clearances, the loss of our U.S. government contracts or our suspension or debarment from contracting with the U.S. government generally, any of which could have a material adverse effect our business, financial condition, results of operations and cash flows. We are currently in compliance with all applicable regulations and do not have any pending claims as a result of noncompliance.
The terms of our material contracts as of September 27, 2020, are as follows:
Customer | Customer PO/Contract | Contract Type(1) | Total Award Value(2) (millions) | Remaining Value(3) (millions) | Delivery Period | |||||||||
GDLS - Canada(4) | Subcontract | FFPQ | $ | 1.6 | $ | 0.3 | Dec 2017- Feb 2022 | |||||||
Periscopes | PO 35506523 | |||||||||||||
DLA Land at Aberdeen(5) | Prime | IDIQ | $ | 4.4 | $ | 0.0 | No Open Task Orders | |||||||
Laser Filter Assemblies (AOC) | SPRBL1-17-D-0008 | |||||||||||||
GDLS – Canada(6) | Subcontract | FFPQ | $ | 2.5 | $ | 1.1 | Oct 2017- Feb 2023 | |||||||
Sighting Systems | PO 35515590 | |||||||||||||
DLA Land and Maritime(7) | Prime | IDIQ | $ | 2.2 | $ | 0.0 | No Open Task Orders | |||||||
Periscopes | SPE7LX-17-D-0053 | |||||||||||||
DLA Land and Maritime(8) | Prime | IDIQ | $ | 3.4 | $ | 0.0 | No Open Task Orders | |||||||
Periscopes | SPE7MX-18-D-0061 | |||||||||||||
DLA Land and Maritime(9) | Prime | IDIQ | $ | 0.5 | $ | 0.0 | No Open Task Orders | |||||||
Periscopes | SPE7LX-18-D-0108 | |||||||||||||
U.S. Army Contracting Command-Warren(10) | Prime | IDIQ LTC | $ | 2.5 | $ | 0.0 | No Open Task Orders | |||||||
Periscopes | SPRDL1-16-D-0062/ W56HZV-19-F-0544 | |||||||||||||
General Dynamics-Canada(11) | Subcontract | FFPQ | $ | 0.9 | $ | 0.3 | Jul 2020- Dec 2020 | |||||||
Sighting Systems | PO 35558221 | |||||||||||||
DLA Land and Maritime(12) | Prime | FFPQ | $ | 2.0 | $ | 0.3 | Oct 2019- Nov 2020 | |||||||
Glass Periscopes | SPE7M8-19-C-0003 | |||||||||||||
General Dynamics(13) | Subcontract | FFPQ | $ | 2.6 | $ | 1.3 | Aug 2017- Mar 2022 | |||||||
Day Windows (AOC) | PO 40269398 | |||||||||||||
DLA Land and Maritime(14) | Prime | IDIQ | $ | - | $ | - | No task awards have been released | |||||||
Periscopes | SPE7LX-19-D-0089 | |||||||||||||
DLA Land and Maritime(15) | Prime | IDIQ | $ | - | $ | - | No task awards have been released | |||||||
Glass Periscopes | SPE7LX-20-D-0020 | |||||||||||||
DLA Land and Maritime(16) | Prime/Shared | IDIQ | $ | - | $ | - | No task awards have been released |
Customer | Customer PO/Contract | Contract Type(1) | Total Award Value(2) (millions) | Remaining Value(3) (millions) | Delivery Period | |||||||||
Glass Periscopes | SPE7MX-20-D-0012 | |||||||||||||
DLA Land and Maritime(17) | Prime | IDIQ | $ | - | $ | - | No task awards as of current date | |||||||
Periscopes | SPE7MX-20-D-0028 | |||||||||||||
DLA Land and Maritime(18) | Prime | IDIQ | $ | - | $ | - | No task awards as of current date | |||||||
Periscopes | SPE7MX-20-D-0032 | |||||||||||||
U.S. Prime Contractor(19) XM10 Aiming Circles | Subcontract | FFPQ | $ | 2.3 | $ | 2.3 | Mar 2021- Oct 2023 | |||||||
PO 63659 |
Market Opportunity — U.S. Military
During the twelve months ended September 27, 2020, approximately 89% of our business was in support of U.S. military products. The chart below was derived from public government spending sources and depicts total U.S. military spending from 2011 through 2020 and estimated spending through 2025. The purpose of including this chart is to provide the reader with historical trend data and projected U.S. military defense and procurement spending over time. For fiscal year 2020, the total projected military spending is $689.6 billion, an overall increase of 5.4% over 2019 spending. However, the military spending in the chart below depicts increased spending through 2025 of 10.5% from the current projected fiscal year 2020 level. The largest projected increases of 5.8% and 2.0% to occur in the 2021 and 2022 fiscal years, respectively.
Military spending was negatively impacted by the Budget Control Act of 2011 (BCA 2011), which was passed in August 2011. The BCA 2011 mandated a $917.0 billion reduction in discretionary spending over the next decade, and $1.2 trillion in automatic spending cuts over a nine-year period to be split between defense and non-defense programs beginning in January 2013. During the years 2015-2019 Congress enacted additional legislative budget measures which eased the strict spending caps set forth in sequestration of the BCA 2011 through the 2021 fiscal budget year.
On February 9, 2018, Congress enacted the Bipartisan Budget Act of 2018 (BBA 2018), a budget stop gap resolution which lifted the sequestration limits on military spending by $165 billion through fiscal year 2019. On August 2, 2019, the Bipartisan Budget Act of 2019 (BBA 2019) was signed into law. The BBA 2019 raises the budget caps for both defense and nondefense for FY 2020 and FY 2021, the final two years of the BCA 2011 discretionary cap period. The 2019 bill increases the defense base budget by $171 billion over the BCA 2011 and sets limits on the Overseas Contingency Operations (OCO) Emergency Funding of $141 billion over the two-year period. Under the current law, there are no caps on defense and nondefense discretionary spending for FY 2022 and beyond.
The 2021 NDAA authorizes $740.5 billion for the fiscal year 2021 funding levels. The current bill includes $636 million for base military spending, $69 million for military Overseas Contingency Operations (OCO), and an additional $35 million for national security within the Department of Energy, the $705 million earmarked for Department of Defense military spending is below the 2021 budgeted amount of $729.3 in the chart below. As of the filing date, the 2021 NDAA has passed through Congress but not has yet been signed by the president.
Source: Government Publishing Office, U.S. Budget Historical Tables, FY 2021, Table 3.2 Outlays by function and sub function, 1962-2025.
The table below depicts the U.S. Department of Defense budget request for fiscal year 2021 for major ground system programs. The total fiscal year 2021 budget request for major ground system programs is decreased by 16.5% from the fiscal year 2020 levels and by 17.1% from the fiscal year 2019 levels. Although it is difficult to directly tie the budget request to specific components provided by Optex Systems, we provide periscopes, collimator assemblies, vision blocks and laser interface filters to the U.S. armed forces on almost all of the ground system platforms categorized below.
FY 2021 | ||||||||||||||||||||||
Major Weapon System Summary | Base | OCO | Total | |||||||||||||||||||
($ in Millions) | FY 2019 | FY 2020 | Budget | Budget | Request | |||||||||||||||||
Ground Systems - Joint Service | ||||||||||||||||||||||
JLTV | Joint Light Tactical Vehicle | $ | 1,901.8 | $ | 1,621.2 | $ | 1,364.0 | $ | 8.0 | $ | 1,372.0 | |||||||||||
Ground Systems - USA | ||||||||||||||||||||||
M-1 | Abrams Tank Modification/Upgrades | 2,646.0 | 2,218.9 | 1,508.8 | — | 1,508.8 | ||||||||||||||||
AMPV | Armored Multi-Purpose Vehicle | 787.8 | 528.6 | 289.6 | — | 289.6 | ||||||||||||||||
PIM | Paladin Integrated Management | 561.6 | 752.7 | 863.1 | — | 863.1 | ||||||||||||||||
FMTV | Family of Medium Tactical Vehicles | 127.2 | 140.3 | 122.1 | — | 122.1 | ||||||||||||||||
FHTV | Family Of Heavy Tactical Vehicles | 324.1 | 386.3 | 184.1 | 21.7 | 205.8 | ||||||||||||||||
GMV | Ground Mobility Vehicle | 44.0 | 40.0 | 37.9 | — | 37.9 | ||||||||||||||||
Stryker | Stryker | 661.5 | 1,189.1 | 1,116.1 | — | 1,116.1 | ||||||||||||||||
Ground Systems - USMC | ||||||||||||||||||||||
ACV | Amphibious Combat Vehicle | 230.8 | 351.0 | 520.7 | — | 520.7 | ||||||||||||||||
Total Ground System Vehicles | $ | 7,284.8 | $ | 7,228.1 | $ | 6,006.4 | $ | 29.7 | $ | 6,036.1 |
Source: Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer, “Program Acquisition Cost by Weapon System, United States Department of Defense, Fiscal Year 2021 Budget Request”, February 2020.
The 2021 Department of Defense (DoD) Budget indicates an overall decrease in ground system vehicle program spending in the 2021 appropriation budget year. There is typically a twelve to twenty-four-month delay between U.S. defense budget requests and program delivery orders related to our products from government agencies and our prime defense customers. In addition, DoD budget requests are often changed throughout the congressional NDAA Budgeting and Budget appropriations process. The DoD budget requests exclude any foreign military sales as they are funded separately from the annual NDAA budgets. We are carefully watching the projected trends in both DoD military spending and FMS as defense allocation priorities change, as well as challenges which are presented from the current pandemic, global recession, and changes in political climate to ascertain any potential impact to the company’s future revenue.
Market Opportunity — Foreign Military
Our products directly support FMS combat vehicles globally, including Canada, the Kingdom of Saudi Arabia, Kuwait, Morocco, Egypt, South America, and Israel. We have increased efforts to promote our proven military products, as well as newly improved product solutions directly to foreign military representatives and domestic defense contractors supporting the FMS initiatives.
In addition, we recently partnered with G&H for the supply of acrylic-based sighting system technology to meet European Customer requirements for a total package single-technology source supply. Some foreign customers desire the reduced weight and cost savings provided by acrylic based periscopes when compared directly to glass-based periscopes. Our partnership will allow us to deliver this technology through ITAR licenses directly to them or their customers. G&H designs and manufactures periscopes and sighting systems for armored fighting vehicles under the Kent Periscopes brand. With a strong footprint in Europe and Asia, G&H supplies glass-based products for both periscope external viewing and system sensor-based imaging by commanders, drivers, and gunners.
We are currently under contract with the Israeli Ministry of Defense (IMOD) to refurbish a small quantity of their Night Vision Rifle Scopes. If this initial quantity meets their requirements, we expect substantial follow on orders to refurbish a major portion of their current inventory.
We are also exploring possibilities to adapt some of our products for commercial use in those markets that demonstrate potential for solid revenue growth, both domestically and internationally.
Market Opportunity — Commercial
Our products are currently sold to military and related government markets. We believe there may be opportunities to commercialize various products we presently manufacture to address other markets. Our initial focus will be directed in four product areas.
Customer Base
We serve customers in four primary categories: as prime defense contractor (Defense Logistics Agency (DLA) Land and Maritime, DLA Warren, DLA Aviation, U.S. Army, Navy and Marine Corps), as defense subcontractor (General Dynamics, L-3 Communications, Harris Corporations, BAE, and ADS Inc.), as a military supplier to foreign governments (Israel, Australia, South America and Canada) and also as a commercial optical assembly supplier (Nightforce Optics, Cabela’s, Amazon). During the twelve months ended September 27, 2020, we derived approximately 89% of our gross business revenue from five major customers: U.S. government agencies (50%), three major defense contractors, (19%, 6% and 5%), and one commercial customer (9%). We have approximately 84 discrete contracts for items that are utilized in vehicles, optical product lines and as spare parts. Due to the high percentage of prime and subcontracted U.S. defense revenues, large customer size and the fact that there are multiple contracts with each entity, which are not interdependent, we are of the opinion that this provides us with a fairly well diversified revenue pool.
Marketing Plan
We believe we are well positioned to service both U.S. and foreign military needs by our focus on delivering products that satisfy the following factors important to the U.S. military:
Potential Entrants — Low Risk to us. In order to enter this market, potential competitors must overcome several barriers to entry. The first hurdle is that an entrant would need to prove to the government agency in question the existence of a government approved accounting system for larger contracts. Second, the entrant would need to develop the processes required to produce the product. Third, the entrant would then need to produce the product and then submit successful test requirements (many of which require lengthy government consultation for completion). Finally, in many cases, the customer has an immediate need and therefore cannot wait for this qualification cycle and therefore must issue the contracts to existing suppliers. Given the expense of development and qualification testing, the barrier to entry is high for new competitors.
Buyers — Medium Risk to us. In most cases the buyers (usually government agencies or defense contractors) have two fairly strong suppliers. It is in their best interest to keep at least two, and therefore, in some cases, the contracts are split between suppliers. In the case of larger contracts, the customer can request an open book policy on costs and expects a reasonable margin to have been applied.
Substitutes — Low Risk to us. We have both new vehicle contracts and replacement part contracts for the exact same product. Three combat vehicles have a long history of service in the Army. The first M-1 Abrams Tank entered service with the Army in 1980; the M-2/M-3 Bradley Fighting Vehicle in 1981; and the Stryker Combat Vehicle in 2001. Under current Army modernization plans, the Army envisions all three vehicles in service with Active and National Guard forces beyond FY2028. Optex Systems provides periscopes and optical sighting systems in support of all three vehicle platforms. Since the early 2010’s, the U.S. Army has been upgrading its outdated Bradley design with the Operation Desert Storm-Situational Awareness model and since 2012, upgrading the underbelly armor to improve mine and improvised explosive device resistance. Since it was first fielded in 1980, the Abrams tank has undergone near-continuous upgrades and improvements. The Abrams is the principal battle tank of the United States Army and Marine Corps, and the armies of Egypt, Kuwait, Saudi Arabia, Iraq, and since 2007, Australia. On average, there has been a new improvement package every seven years. The Army is currently upgrading the Abrams with a System Enhancement Package Version 3 (SEPv3), with additional upgrades in development. Additionally, the US Army has announced contracts to produce 742 Stryker DVH vehicles, redesigned (dual v-hulled vehicles) to be more resistant to land mines, as retrofits and as new production vehicles. The Abrams, Bradley and Striker vehicles are the only production tanks currently in production by the government. This, in conjunction with the 30-year life span, supports their continued use through 2040.
Suppliers — Low to Medium Risk to Optex Systems Holdings. The suppliers of standard processes (e.g., casting, machining and plating) need to be very competitive to gain and/or maintain contracts. Those suppliers of products that use top secret clearance processes are slightly better off; however, there continues to be multiple avenues of supply and therefore only moderate power.
Consistent with our marketing plan and business model, the AOC acquisition strengthened our overall position by decreasing the bargaining power of their suppliers through the backwards integration of a key supplier and created additional barriers of entry of potential competitors. Overall, the customer base and the competition have seen the acquisition as creating a stronger company.
The second model is a two by two matrix for products and customers.
This product/customer matrix sets forth our four basic approaches:
Operations Plan
Our operations plan can be broken down into three distinct areas: material management, manufacturing space planning and efficiencies associated with economies of scale.
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Materials Management
The largest portion of our costs is materials. We have completed the following activities in order to demonstrate continuous improvement:
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Future continuous improvement opportunities include installation and training of shop floor control module within the ERP system and organizational efficiencies of common procurement techniques among buyers.
Manufacturing Space Planning
We currently lease 93,967 square feet of manufacturing space (see “Location and Facility”). Our current facilities are sufficient to meet our immediate production needs without excess capacity. As our processes are primarily labor driven, we are able to easily adapt to changes in customer demand by adjusting headcounts, overtime schedules and shifts in line with production needs. In the event additional floor space is required to accommodate new contracts, Optex has the option to lease adjacent floor space at the current negotiated lease cost per square foot. Consistent with the space planning, we will drive economies of scale to reduce support costs on a percentage of sales basis. These cost reductions can then be either passed through directly to the bottom line or used for business investment.
Our manufacturing process is driven by the use of six sigma techniques and process standardization. Initial activities in this area have been the successful six sigma projects in several production areas which have led to improved output and customer approval on the aesthetics of the work environment. In addition, we use many tools including 5S programs, six sigma processes, and define, measure, analyze, improve, control (DMAIC) problem solving techniques to identify bottlenecks within the process flow, reduce cost and improve product yields. Successful results can then be replicated across the production floor and drive operational improvements.
Economies of Scale
Plant efficiencies fluctuate as a function of program longevity, complexity and overall production volume. Our internal processes are primarily direct labor intensive and can be more easily adapted to meet fluctuations in customer demand; however, our material purchases, subcontracted operations and manufacturing support costs are extremely sensitive to changes in volume. As our volume increases, our support labor, material and scrap costs decline as a percentage of revenue as we are able to obtain better material pricing, and scrap, start up and support labor (fixed) costs and they are spread across a higher volume base. On the contrary, as production volumes decline, our labor and material costs per unit of production generally increase. Additional factors that contribute to economies of scale relate to the longevity of the program. Long running, less complex programs (e.g., periscopes) do not experience as significant of an impact on labor costs as production volumes change, as the associated workforce is generally less skilled and can be ramped quickly as headcounts shift. Our more complex thin laser filter coatings, Howitzer and thermal day/night programs are more significantly impacted by volume changes as they require a more highly-skilled workforce and ramp time is longer as the training is more complex. We continually monitor customer demand over a rolling twelve-month window and in order to anticipate any changes in necessary manpower and material which allows us to capitalize on any benefits associated with increased volume and minimize any negative impact associated with potential declines in product quantities.
Intellectual Property
We utilize several highly specialized and unique processes in the manufacture of our products. While we believe that these trade secrets have value, it is probable that our future success will depend primarily on the innovation, technical expertise, manufacturing and marketing abilities of our personnel. We cannot assure you that we will be able to maintain the confidentiality of our trade secrets or that our non-disclosure agreements will provide meaningful protection of our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or other disclosure. The confidentiality agreements that are designed to protect our trade secrets could be breached, and we might not have adequate remedies for the breach. Additionally, our trade secrets and proprietary know-how might otherwise become known or be independently discovered by others. We possess three utility patents and two design patents.
Our competitors, many of which have substantially greater resources, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or interfere with our ability to make and sell some of our products. Although we believe that our products do not infringe on the patents or other proprietary rights of third parties, we cannot assure you that third parties will not assert infringement claims against us or that such claims will not be successful.
On June 18, 2019 we were issued U.S. Patent No. 10,324,298 titled “Offset Image Wedge with Dual Capability and Alignment Technique”. The invention relates to an offset image wedge for use on a bore-sighted rifle mounted directly onto the scope via a clamp mounting device. The wedge allows for a dual image which can be aligned in the field and provides the user with a choice of either a bore-sighted image or an offset image without removing the wedge.
On July 11, 2017, we were issued U.S. Patent No. D791,852 S, for our Red Tail Digital Spotting Scope. We have a retail sales relationship with Cabela’s Inc. and Amazon, to distribute these scopes. They are currently the only digital spotting scope offered by Cabela’s. Our Red Tail Digital Spotting Scopes also received a favorable review from Trigger Magazine in 2017.
In May 2015, we announced the issuance to us of U.S. Patent No. 13,792,297 titled “ICWS Periscope”. This invention improves previously accepted levels of periscope performance that, in turn, improve soldier’s safety.
In December 2013, Optex Systems, Inc. was issued U.S. Patent No. 23,357,802 titled “Multiple Spectral Single Image Sighting System Using Single Objective Lens Set.” The technology platform, designed for our DDAN program, is applicable to all ground combat vehicles used by the US and foreign militaries. This invention presents a single image to both day and night sensors using precision optics, which in turn allows the user to individually observe day, night, or day and night simultaneously. In addition, it has proven to be especially useful in light transition points experienced at dusk and dawn. We are in production and currently delivering sighting systems with this advanced technology, a significant upgrade in the goal of supporting our customers as they modernize the worldwide inventory of aging armored vehicles. This technology is applicable to many sighting systems, and it has already been designed for implementation on the Light Armored Vehicles, the Armored Security Vehicle, the Amphibious Assault Vehicle, and the M60 Main Battle Tank. Digital Day and Night technology has advanced the capabilities of these installed weapon systems and is the first in a series of patents we have applied for to protect our Intellectual Property portfolio in support of the warfighters who use these systems.
In May 2012, we purchased a perpetual, non-exclusive license, with a single up-front license fee of $200,000 to use Patent 7,880,792 “Optical and Infrared Periscope with Display Monitor” owned by Synergy International Optronics, LLC. We believe the purchase of the license agreement may allow us to extend and expand our market potential for the M113APC vehicle type which has the highest number of commonly used armored vehicles in the world. The current estimated active M113 APC worldwide inventory is over 80,000 units. This licensing of this patent allows us to develop additional products for this vehicle type, including the M17 Day/Thermal and M17 Day/Night periscopes. We are actively marketing the new periscopes internationally and completed our first international shipment utilizing this technology in March 2014. We continue to prototype these products and demonstrate them to potential customers.
Competition
The markets for our products are competitive. We compete primarily on the basis of our ability to design and engineer products to meet performance specifications set by our customers. Our customers include military and government end users as well as prime contractors that purchase component parts or subassemblies, which they incorporate into their end products. Product pricing, quality, customer support, experience, reputation and financial stability are also important competitive factors.
There are a limited number of competitors in each of the markets for the various types of products that we design, manufacture and sell. At this time, we consider our primary competitors for the Optex, Richardson site to be Kent Periscopes and Synergy International Optronics, LLC. The Applied Optics Center thin film and laser coatings products compete primarily with Materion-Barr, Artemis and Alluxa.
Our competitors are often well entrenched, particularly in the defense markets. Some of these competitors have substantially greater resources than we do. While we believe that the quality of our technologies and product offerings provides us with a competitive advantage over certain manufacturers, some of our competitors have significantly more financial and other resources than we do to spend on the research and development of their technologies and for funding the construction and operation of commercial scale plants.
We expect our competitors to continue to improve the design and performance of their products. We cannot assure investors that our competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features, or that new technology or processes will not emerge that render our products less competitive or obsolete. Increased competitive pressure could lead to lower prices for our products, thereby adversely affecting our business, financial condition and results of operations. Also, competitive pressures may force us to implement new technologies at a substantial cost, and we may not be able to successfully develop or expend the financial resources necessary to acquire new technology. We cannot assure you that we will be able to compete successfully in the future.
Employees and Human Capital
We had 102 full time equivalent employees as of September 27, 2020 and 98 employees as of December 10, 2020, which include a small temporary work force to handle peak loads as needed. We are in compliance with local prevailing wage, contractor licensing and insurance regulations, and have good relations with our employees, who are not currently unionized. We use outside consultants for various services. We have not experienced any work stoppages and are not a party to a collective bargaining agreement. Management considers labor relations to be good.
We are dedicated to preserving operational excellence and remaining an employer of choice. We provide and maintain a work environment that is designed to attract, develop and retain top talent through offering our employees an engaging work experience that contributes to their career development. We recognize that our success is based on the collective talents and dedication of those we employ, and we are highly invested in their success. We value our employees and believe that employee loyalty and enthusiasm are key elements of our operating performance.
Leases
We are headquartered in Richardson, TX and lease 93,967 combined square feet of facilities between Richardson, Texas and Dallas, Texas. We operate with a single shift, and capacity could be expanded by adding a second shift. Our proprietary processes and methodologies provide barriers to entry for other competing suppliers. In many cases, we are the sole source provider or one of only two providers of a product. We have capabilities which include machining, bonding, painting, tracking, engraving and assembly and can perform both optical and environmental testing in-house.
We renewed the lease on our 49,100 square foot, Richardson, Texas facility, effective as of December 10, 2013, with a lease expiration of March 31, 2021. Our Applied Optics Center, is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. The Applied Optics Center lease effective as of October 1, 2016, expires on October 31, 2021. There are two renewal options available to the tenant, and each renewal term is five years in duration.
Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this annual report, before purchasing shares of our common stock. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. The risks described below are not the only risks we will face. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment. The risks and uncertainties described below are not exclusive and are intended to reflect the material risks that are specific to us, material risks related to our industry and material risks related to companies that undertake a public offering or seek to maintain a class of securities that is registered or traded on any exchange or over-the-counter market.
Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this annual report, before purchasing shares of our common stock. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. The risks described below are not the only risks we will face. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment. The risks and uncertainties described below are not exclusive and are intended to reflect the material risks that are specific to us, material risks related to our industry and material risks related to companies that undertake a public offering or seek to maintain a class of securities that is registered or traded on any exchange or over-the-counter market.
Risks Related to our Business
We expect that we may need to raise additional capital in the future beyond any cash flow from our existing business; additional funds may not be available on terms that are acceptable to us, or at all.
We anticipate we may have to raise additional capital in the future to service our debt and to finance our future working capital needs. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all. Future equity or debt financings may be difficult to obtain. If we are not able to obtain additional capital as may be required, our business, financial condition and results of operations could be materially and adversely affected.
We anticipate that our capital requirements will depend on many factors, including:
Even if available, financings may involve significant costs and expenses, such as legal and accounting fees, diversion of management’s time and efforts, and substantial transaction costs. If adequate funds are not available on acceptable terms, or at all, we may be unable to finance our operations, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures.
Changes in current economic conditions may adversely affect our ability to continue operations.
Changes in current economic conditions may cause a decline in business, consumer and defense spending and capital market performance, which could adversely affect our business and financial performance. Our ability to raise funds, which could be required for business continuity or expansion of our operations, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial market volatility and economic recession.
Our ability to fulfill our backlog may have an effect on our long term ability to procure contracts and fulfill current contracts.
Our ability to fulfill our backlog may be limited by our ability to devote sufficient financial and human capital resources and limited by available material supplies. If we do not fulfill our backlog in a timely manner, we may experience delays in product delivery which would postpone receipt of revenue from those delayed deliveries. Additionally, if we are consistently unable to fulfill our backlog, this may be a disincentive to customers to award large contracts to us in the future until they are comfortable that we can effectively manage our backlog.
Our historical operations depend on government contracts and subcontracts. We face risks related to contracting with the federal government, including federal budget issues and fixed price contracts.
Future general political and economic conditions, which cannot be accurately predicted, may directly and indirectly affect the quantity and allocation of expenditures by federal agencies. Even the timing of incremental funding commitments to existing, but partially funded, contracts can be affected by these factors. Therefore, cutbacks or re-allocations in the federal budget could have a material adverse impact on our results of operations. Obtaining government contracts may also involve long purchase and payment cycles, competitive bidding, qualification requirements, delays or changes in funding, budgetary constraints, political agendas, extensive specification development, price negotiations and milestone requirements. In addition, our government contracts are primarily fixed price contracts, which may prevent us from recovering costs incurred in excess of budgeted costs. Fixed price contracts require us to estimate the total project cost based on preliminary projections of the project’s requirements. The financial viability of any given project depends in large part on our ability to estimate such costs accurately and complete the project on a timely basis. Some of those contracts are for products that are new to our business and are thus subject to unanticipated impacts to manufacturing costs. Given the current economic conditions, it is also possible that even if our estimates are reasonable at the time made, that prices of materials are subject to unanticipated adverse fluctuation. In the event our actual costs exceed fixed contractual costs of our product contracts, we will not be able to recover the excess costs which could have a material adverse effect on our business and results of operations. We examine these contracts on a regular basis and accrue for anticipated losses on these contracts, if necessary. As of September 27, 2020, there was zero in accrued loss provisions for loss contracts or cost overruns.
Approximately 86% of our contracts contain termination clauses for convenience. In the event these clauses should be invoked by our customer, future revenues against these contracts could be affected, however these clauses allow for a full recovery of any incurred contract costs plus a reasonable fee up through and as a result of the contract termination. We are currently unaware of any pending terminations on our existing contracts.
In some cases, contract awards may be issued that are subject to renegotiation at a date (up to 180 days) subsequent to the initial award date. Generally, these subsequent negotiations have had an immaterial impact (zero to 5%) on the contract price of the affected contracts. Currently, none of our awarded contracts are subject to renegotiation.
We have sought to minimize the adverse impact from the slower pace of U.S. military orders on our results of operations by seeking to obtain foreign military orders as well as new commercial business. We do not expect these markets to completely mitigate the negative impact of lower U.S. defense spending.
If we fail to scale our operations appropriately in response to growth and changes in demand, we may be unable to meet competitive challenges or exploit potential market opportunities, and our business could be materially and adversely affected.
Our past growth has placed, and any future growth in our historical business is expected to continue to place, a significant strain on our management personnel, infrastructure and resources. To implement our current business and product plans, we will need to continue to expand, train, manage and motivate our workforce, and expand our operational and financial systems and our manufacturing and service capabilities. All of these endeavors will require substantial management effort and additional capital. If we are unable to effectively manage our expanding operations, we may be unable to scale our business quickly enough to meet competitive challenges or exploit potential market opportunities, and our current or future business could be materially and adversely affected.
Low unemployment and tight labor markets may adversely affect our labor costs and our ability to hire and retain a sufficient workforce required to meet the current backlog and increased customer demands. If we are not able to maintain a sufficient workforce and attract additional personnel as required, we may not be able to implement our business plan and our results of operations could be materially and adversely affected.
Current increases in defense spending have resulted in significant increases in customer orders and production volumes over the next twelve months during a period of record low unemployment rates and other business industry expansions within our local labor market. We compete with several other large defense contractors as well as homebuilding, industrial manufacturing and warehousing industries within our immediate regional area for both lower and higher skill level manufacturing employees. The limited market of available of full-time workers for hire, including reductions in temporary service employees, combined with increasing competition among other local industries may result in increased production costs associated with higher wages, employee bonuses, overtime premiums and enhanced employee benefits in addition to costs increases associated with employee recruitment, employee turnover, training and labor efficiency reductions. We may be unable to fill the labor positions required to meet our growing customer demands in a timely or cost effective manner which would impede our ability to meet current and increasing production levels in line with our customer expectations and adversely affect our ability to grow revenue or maintain our current margin levels.
We do not have employment agreements with our key personnel, other than our Chief Executive and Financial Officers, and our management has very minimal unencumbered equity ownership in us. If we are not able to retain our key personnel or attract additional key personnel as required, we may not be able to implement our business plan and our results of operations could be materially and adversely affected.
We depend to a large extent on the abilities and continued participation of our executive officers and other key employees. The loss of any key employee could have a material adverse effect on our business. We currently have only two employment agreements, with our Chief Executive Officer which renews on an annual basis and currently expires on December 1, 2021, and our Chief Financial Officer which expires on January 31, 2021, with renewable terms each 18 months thereafter. We do not presently maintain “key man” insurance on any other key employees. Our management also has minimal unencumbered ownership interest in us, thus limiting their direct stake in our outcome. We believe that as our activities increase and change in character, additional, experienced personnel will be required to implement our business plan. Competition for such personnel is intense, and we cannot assure you that they will be available when required, or that we will have the ability to attract and retain them. In addition, due to our small size, we do not presently have depth of staffing in our executive, operational and financial management areas in order to have an effective succession plan should the need arise. Thus, in the event of the loss of one or more of our management employees, our results of operations could be vulnerable to challenges associated with recruiting additional key personnel, if such recruiting efforts are not successful in a timely manner.
Certain of our products are dependent on specialized sources of supply that are potentially subject to disruption which could have a material, adverse impact on our business.
We have selectively single-sourced some of our material components in order to mitigate excess procurement costs associated with significant tooling and startup costs. Furthermore, because of the nature of government contracts, we are often required to purchase selected items from U.S. government approved suppliers, which may further limit our ability to utilize multiple supply sources for these key components.
To the extent any of these single sourced or government approved suppliers may have disruptions in deliveries due to production, quality, or other issues, we may also experience related production delays or unfavorable cost increases associated with retooling and qualifying alternate suppliers. The impact of delays resulting from disruptions in supply for these items could negatively impact our revenue, our reputation with our customers, and our results of operations. In addition, significant price increases from single-source suppliers could have a negative impact on our profitability to the extent that we are unable to recover these cost increases on our fixed price contracts.
Each contract has a specific quantity of material which needs to be purchased, assembled, and shipped. Prior to bidding a contract, we contact potential sources of material and receive qualified quotations for this material. In some cases, the entire volume is given to a single supplier and in other cases; the volume might be split between several suppliers. If a contract has a single source supplier and that supplier fails to meet their obligations (e.g., quality, delivery), then we would find an alternate supplier and bring this information back to the final customer. Contractual deliverables would then be re-negotiated (e.g., specifications, delivery, price. As of December 6, 2020, approximately 4% of our material requirements are single-sourced across 12 suppliers representing approximately 31% of our active supplier order value. Single-sourced component requirements span across all of our major product lines. The vast majority of these single-sourced components could be provided by another supplier with minimal interruption in schedule (supply delay of 3 months or less) or minimally increased costs. We do not believe these single sourced materials to pose any significant risk to us as other suppliers are capable of satisfying the purchase requirements in a reasonable time period with minimal increases in cost. Of these single sourced components, we have contracts (purchase orders) with firm pricing and delivery schedules in place with each of the suppliers to supply parts in satisfaction of our current contractual needs.
We consider only those specialized single source suppliers where a disruption in the supply chain would result in a period of three months or longer for us to identify and qualify a suitable replacement to present a material financial or schedule risk. In the table below, we identify only those specialized single source suppliers and the product lines supported by those materials utilized by us as of December 6, 2020.
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The defense technology supply industry is subjectInformation with respect to technological change and if we are not able to keep up with our competitors and/or they develop advanced technology as response to our products, we may be at a competitive disadvantage.
The market for our products is generally characterized by technological developments, evolving industry standards, changes in customer requirements, frequent new product introductions and enhancements, short product life cycles and severe price competition. Our competitors could also develop new, more advanced technologies in reaction to our products. Currently accepted industry standards may change. Our success depends substantially on our ability, on a cost-effective and timely basis, to continue to enhance our existing products and to develop and introduce new products that take advantage of technological advances and adhere to evolving industry standards. An unexpected change in one or more of the technologies related to our products, in market demand for products based on a particular technology or of accepted industry standards could materially and adversely affect our business. We may or may not be able to develop new products in a timely and satisfactory manner to address new industry standards and technological changes, or to respond to new product announcements by others. In addition, new products may or may not achieve market acceptance.
Unexpected warranty and product liability claims could adversely affect our business and results of operations.
The possibility of future product failures could cause us to incur substantial expense to repair or replace defective products. We warrant the quality of our products to meet customer requirements and be free of defects for twelve months subsequent to delivery. We establish reserves for warranty claims based on our historical rate of returned shipments against these contracts. There can be no assurance that this reserve will be sufficient if we were to experience an unexpectedly high incidence of problems with our products. Significant increases in the incidence of such claims may adversely affect our sales and our reputation with consumers. Costs associated with warranty and product liability claims could materially affect our financial condition and results of operations.
We rely on the proper function, availability and security of information technology systems to operate our business and a cyber-attack or other breach of these systems could have a material adverse effect on our business, financial condition or results of operations.
We rely on information technology systems to process, transmit, and store electronic information in our day-to-day operations. Similar to other companies, the size and complexity of our information technology systems makes them vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy, or other significant disruption. Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards. Any failure by us to maintain or protect our information technology systems and data integrity, including from cyber-attacks, intrusions or other breaches, could result in the unauthorized access to personally identifiable information, theft of intellectual property or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations. Any of these events may cause us to have difficulty preventing, detecting, and controlling fraud, be subject to legal claims and liability, have regulatory sanctions or penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach or theft of intellectual property, or suffer other adverse consequences, any of which could have a material adverse effect on our business, financial condition or results of operations.
We derive almost all of our revenue from a small number of customers and the loss of any of these customers could have a material adverse effect on our revenues.
For the year ended September 27, 2020, the Company’s consolidated revenues are derived from the U.S. government, 50%, three major defense contractors, 30% (19%, 6% and 5%), one commercial customer, 9%, and all other customers, 11%. Approximately 92% of the total company revenue is generated from domestic customers and 8% is derived from Canada. Procuring new customers and contracts may partially mitigate this risk. In particular, a decision by one of our major defense contract customers, U.S. government agencies, or major commercial customers to cease issuing contracts to us could have a significant material impact on our business and results of operations given that they represent over 89% of our gross business revenue. There can be no assurance that we could replace these customers on a timely basis or at all.
We have approximately 84 discrete contracts with major defense contractors and the U.S. Government (primarily Defense Logistics Agencies (DLA)), and other prime U.S. defense contractors. If they choose to terminate these contracts, we are entitled to fully recover all contractual costs and reasonable profits incurred up to or as a result of the terminated contract.
We only possess five patents and rely primarily on trade secrets to protect our intellectual property.
We utilize several highly specialized and unique processes in the manufacture of our products, for which we rely solely on trade secrets to protect our innovations. We cannot assure you that we will be able to maintain the confidentiality of our trade secrets or that our non-disclosure agreements will provide meaningful protection of our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or other disclosure. The non-disclosure agreements that are designed to protect our trade secrets could be breached, and we might not have adequate remedies for the breach.
It is also possible that our trade secrets will otherwise become known or independently developed by our competitors, many of which have substantially greater resources than us, and these competitors may have applied for or obtained, or may in the future apply for or obtain, patents that will prevent, limit or interfere with our ability to make and sell some of our products. Although based upon our general knowledge (and we have not conducted patent searches), we believe that our products do not infringe on the patents or other proprietary rights of third parties; however, we cannot assure you that third parties will not assert infringement claims against us or that such claims will not be successful.
In the future, we may look to acquire other businesses in our industry and the acquisitions will require us to use substantial resources.
In the future, we may decide to pursue acquisitions of other businesses in our industry. In order to successfully acquire other businesses, we would be forced to spend significant resources for both acquisition and transactional costs, which could divert substantial resources in terms of both financial and personnel capital from our current operations. Additionally, we might assume liabilities of the acquired business, and the repayment of those liabilities could have a material adverse impact on our cash flow. Furthermore, when a new business is integrated into our ongoing business, it is possible that there would be a period of integration and adjustment required which could divert resources from ongoing business operations.
The elimination of monetary liability against our directors, officers and employees under Delaware law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
We provide indemnification to our directors and officers to the extent provided by Delaware law. The foregoing indemnification obligation could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit us and our stockholders.
We may face risks as a result of the ongoing COVID-19 pandemic.
We may be at risk as a result of the current COVID-19 pandemic. Risks that could affect our business include the duration and scope of the COVID-19 pandemic and the impact on the demand for our products; actions by governments, businesses and individuals taken in response to the pandemic; the length of time of the COVID-19 pandemic and the possibility of its reoccurrence; the timing required to develop effective treatments and a vaccine in the event of future outbreaks; the eventual impact of the pandemic and actions taken in response to the pandemic on global and regional economies; and the pace of recovery when the COVID-19 pandemic subsides.
Optex Systems Holdings, Inc. is defined as essential critical infrastructure as a defense contractor under the guidance of the federal, state and local authorities for both our Optex Systems (Richardson, TX), and Applied Optics Center (Dallas, TX) operating segments. As such, the Company continues to remain open during the COVID-19 shelter in place orders and closures. To date, we have experienced minimal production disruption as a result of the pandemic.
During the fiscal year 2020, we have experienced significant reductions in new orders and ending customer backlog that we attribute to a Covid-19 slow-down of contract awards for both U.S. military sales and foreign military sales (FMS). The cycle time from contract bid proposal requests to final contract award has increased by three to six months. We believe many of the delays are process driven as government agencies adapt to new remote work environments, combined with constraints created by travel restrictions, impeding product testing, inspection and overall program management coordination. In addition, the pandemic has caused several program delays throughout the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supplier issues. Due to the significant level of uncertainty surrounding the pandemic and its impact to our customers and the defense supply chain, we are unable to ascertain the impact further delays in contract awards and customer orders may have on our total fiscal year 2021 revenues. We are currently anticipating a reduction of 20-25% in revenue volume during the first six months of fiscal year 2021, as compared to the first six months of fiscal year 2020. Continued delays in customer orders over the next three to six months could negatively impact our total fiscal year 2021 revenue and profitability. We are currently reviewing cost reduction strategies for implementation during the next sixty days to minimize the impact of a sustained delay in customer orders to program revenues beyond the first quarter of fiscal year 2021. We believe we are in a strong position to withstand any significant adverse financial impacts after the recent fiscal year ended September 27, 2020.
Risks Related to Our Stock
We have issued a large number of warrants and options, which if converted or exercised would substantially increase the number of common shares outstanding.
On December 10, 2020, we had 8,519,728 shares of common stock outstanding, and (a) we have 4,125,200 warrants outstanding at an exercise price of $1.50 per share and (b) we have 182,000 granted unvested restricted stock units outstanding. Future sales of our common stock, warrants, options and restricted stock units may also adversely affect our stock price and our ability to raise funds in new offerings.
As a key component of our growth strategy, we have provided and intend to continue offering compensation packages to our management and employees that emphasize equity-based compensation and would thus cause further dilution.
Our stock price is speculative, and there is a risk of litigation.
The trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following:
Fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits. Although no such lawsuits are currently pending against us and we are not aware that any such lawsuit is threatened to be filed in the future, there is no assurance that we will not be sued based on fluctuations in the price of our common stock. Defending against such suits could result in substantial cost and divert management’s attention and resources. In addition, any settlement or adverse determination of such lawsuits could subject us to significant liability.
The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a shareholder’s ability to buy and sell our stock.
FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Future sales of our common stock could depress our stock price.
Sales of a large number of shares of our common stock, or the availability of a large number for sale, could materially adversely affect the per share market price of our common stock and could impair our ability to raise funds in addition offering of our debt or equity securities. In the event that we propose to register shares of common stock under the Securities Act for our own account, certain shareholders are entitled to include their shares in the registration, subject to limitations described in the agreements granting these rights.
Cautionary Note Regarding Forward-Looking Information
This prospectus, in particular the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing herein, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; 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 electrical storage device industry, all of which are subject to various risks and uncertainties.
When used in this prospectus as well as in reports, statements, and information we have filed with the Securities and Exchange Commission, in our press releases, presentations to securities analysts or investors, 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. However, any statements contained in this prospectus that are not statements of historical fact may be deemed to be forward-looking statements. 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.
We are headquartered in Richardson, TX and lease 93,967 combined square feet of facilities including Richardson, Texas and Dallas, Texas. As of December 10, 2020, we had 98 full time equivalent employees. We operate with a single shift, and capacity could be expanded by adding a second shift. Our proprietary processes and methodologies provide barriers to entry for other competing suppliers. In many cases, we are the sole source provider or one of only two providers of a product. We have capabilities which include machining, bonding, painting, tracking, engraving and assembly and can perform both optical and environmental testing in-house.
From time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. There are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
Item 4 Mine Safety Disclosures
None.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market information
Our common stock is currently quoted on the OTCQB Marketplace under the symbol “OPXS” and warrants under the symbol “OPXSW”. Trading in our common stock has historically lacked consistent volume, and the market price has been volatile.
On December 16, 2020, the closing price for our common stock as reported on the OTCQB was $2.00 per share.
Securities outstanding and holders of record
On December 10, 2020, there were approximately 81 shareholders of record for our common stock and 8,795,869 shares of our common stock issued and 8,519,728 common shares outstanding.
Dividends
We have in the past paid dividends but we have no plans to do so in the foreseeable future.
Information respecting equity compensation plans
Summary Equity Compensation2009 Stock Option Plan Information
Optex Systems Holdings adopted its 2009 Stock Option Plan on March 26, 2009. On December 9, 2011, the Board of Directors of Optex Systems Holdings, Inc. authorized an amendment to its Stock Option Plan to increase the number of issuable shares from 6,000 to 50,000 and authorized the grant of 10,000 options to two boardBoard members and a total of 36,070 to Optex Systems Holdings employees including 20,000 options to executive officers. On December 19, 2013, the Board of Directors of Optex Systems Holdings, Inc. authorized an amendment to its Stock Option Plan to increase the number of issuable shares from 50,000 to 75,000 and authorized the grant of 20,000 options to three board members and a grant of 5,000 to an Optex Systems Holdings officer. The options granted in 2011 and 2013 were at exercise prices of $10.00 per share with each grant to vest 25% per year over four years for each year with which the grantee is still employed by or serving as a director of Optex Systems Holdings, Inc. (with all unvested options automatically expiring on the date of termination of employment by or service as a director of Optex Systems Holdings, Inc.) and all unvested options immediately vesting upon a change of control due to a merger or acquisition of the Company.75,000. As of September 29, 2019, there were 25,000 outstanding options which were fully vested. The 25,000 outstanding options were repurchased by the Company in 2020 and cancelled. As of September 27, 2020,October 2, 2022, there were no outstanding options.
If the 2023 Equity Incentive Plan proposal is adopted by the shareholders, the 2009 Stock Option Plan will be canceled and no further awards will be made under such plan. A summary of the 2023 Equity Incentive Plan is contained in “Proposal 3 – The 2023 Equity Incentive Plan Proposal” in this proxy statement.
2016 Restricted Stock Unit Plan
On June 14, 2016, our Compensation Committee approved our 2016 Restricted Stock Unit Plan. This plan provides for issuance of restricted stock units (“RSUs”) for up to 1,000,000 shares of our common stock. Each RSU constitutes a right to receive one share of our 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 our 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 us 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 us 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, our obligations regarding outstanding RSUs shall, on such terms as may be approved by the Compensation Committee prior to such event, immediately vest, be assumed by the surviving or continuing company or cancelled in exchange for property (including cash).
On June 15, 2016, the Company granted 150,000 RSUs to our Chief Executive Officer, Danny Schoening, and 50,000 RSUs to our Chief Financial Officer, Karen Hawkins. The RSUs granted to Mr. Schoening and Ms. Hawkins vest as follows: 34% on January 1, 2017, 33% on January 1, 2018 and 33% on January 1, 2019.
On June 15, 2017, the Company issued 50,000 RSUs to its Applied Optics Center General Manager and new board member, Bill Bates. The RSUs issued to Mr. Bates will vest as follows: 34% on January 1, 2018, 33% on January 1, 2019 and 33% on January 1, 2020.
On November 20, 2018 the board of directors approved the issuance of additional grants of 150,000 and 50,000 RSUs with a January 2, 2019 grant date, to Danny Schoening and Karen Hawkins, respectively, and vesting 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.
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.
On January 5, 2017, the Company issued 45,799 common shares to officers and directors in settlement of 68,000 restricted stock units vested on January 1, 2017. On January 2, 2018, the Company issued 55,902 common shares to officers and directors in settlement of 83,000 restricted stock units vested on January 1, 2018. On January 2, 2019, the Company issued 55,565 common shares to officers and directors in settlement of 82,500 restricted stock units vested on January 1, 2019. On January 7, 2020, the Company issued 59,447 common shares to one director and two officers, in settlement of 84,500 restricted stock units which vested on January 1, 2020. For each vesting period the vested common shares were issued net of shares withheld for employee federal income tax requirements.
As of September 27, 2020,October 2, 2022, there are 182,000were 66,000 outstanding unvested restricted stock units remaining to vest of which 83,000 will vest on January 1, 2021,2023 and 500,000 authorized restricted stock units from the 2016 Restricted Stock Unit Plan remaining to be granted at a future date.
Item 7 Management’s Discussion and Analysis As of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that are set forth in our financial statements elsewhere in this annual report.
This management’s discussion and analysis reflects information known to management as of our fiscal year end, September 29, 2019, and the date of filing. This MD&A is intended to supplement and complement our audited financial statements and notes thereto for the year ended September 29, 2019, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to read our financial statements in conjunction with your reading 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 measures 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. This discussion contains forward-looking statements. Please see “Special cautionary statement concerning forward-looking statements” and “Risk factors” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presentedJanuary 9, 2023, there were not significantly affected by inflation.
Background
Optex Systems, Inc. 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).
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 NAMSA and South American countries and as a subcontractor for several large U.S. defense companies serving foreign governments.zero outstanding unvested restricted stock units remaining.
By way of background,If the Federal Acquisition Regulation2023 Equity Incentive Plan proposal is adopted by the principal set of regulations that governshareholders, the acquisition process of government agencies2016 Restricted Stock Unit Plan will be canceled and contracts with the U.S. government. In general, partsno further RSU awards will be made under such plan. A summary 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 convenience2023 Equity Incentive Plan 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.
In the event a termination for convenience were to occur, Federal Acquisition Regulation clause 52.249-2 provides for full recovery of all contractual costs and profits reasonably occurred up to and as a result of the terminated contract. In the event a termination for default were to occur, we could be liable for any excess cost incurred by the government to acquire supplies from another supplier similar to those terminated from us. We would not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the company as defined by Federal Acquisition Regulation clause 52.249-8.
In addition, some of our contracts allow for government contract financingcontained in the form of contract progress payments pursuant to Federal Acquisition Regulation 52.232-16, “Progress Payments”. As a small business, and subject to certain limitations,“Proposal 3 – The 2023 Equity Incentive Plan Proposal” in this clause provides for government payment of up to 90% of incurred program costs prior to product delivery. To the extent our contracts allow for progress payments, we intend to utilize this benefit, thereby minimizing the working capital impact on Optex Systems Holdings for materials and labor required to complete the contracts.
Reference Part I, Item 1 “Recent Events” of this report for updated information on new orders, board changes, executive and board compensation and stock and warrant repurchases.
Results of Operationsproxy statement.
Segment Information
We have presented the operating results by segment to provide investors with an additional tool to evaluate our operating results and to have a better understanding of the overall performance of each business segment and its ability to perform in subsequent periods. Management of Optex Systems Holdings uses the selected financial measures by segment internally to evaluate its ongoing segment operations and to allocate resources within the organization accordingly. Segments are determined based on differences in products, location, internal reporting and how operational decisions are made. Management has determined that the Optex Systems, Richardson plant, and the Applied Optics Center, Dallas plant, which was acquired on November 3, 2014, are separately managed, organized, and internally reported as separate business segments. The table below provides a summary of selective statement of operations data by operating segment for the years ended September 27, 2020 and September 39, 2019 reconciled to the Audited Consolidated Results of Operations as presented in Item 8, “Financial Statements and Supplementary Data”.
Results of Operations Selected Financial Info by Segment | ||||||||||||||||||||||||||||||||
(Thousands) | ||||||||||||||||||||||||||||||||
Twelve months ended | ||||||||||||||||||||||||||||||||
September 27, 2020 | September 29, 2019 | |||||||||||||||||||||||||||||||
Optex Richardson | Applied Optics Center Dallas | Other (non-allocated costs and eliminations) | Consolidated | Optex Richardson | Applied Optics Center | Other (non-allocated costs and eliminations) | Consolidated | |||||||||||||||||||||||||
Revenue from External Customers | $ | 17,233 | $ | 8,657 | $ | - | $ | 25,890 | $ | 16,219 | $ | 8,311 | $ | - | $ | 24,530 | ||||||||||||||||
Intersegment Revenues | - | 1,689 | (1,689 | ) | - | - | 1,712 | (1,712 | ) | - | ||||||||||||||||||||||
Total Segment Revenue | 17,233 | 10,346 | (1,689 | ) | 25,890 | 16,219 | 10,023 | (1,712 | ) | 24,530 | ||||||||||||||||||||||
Total Cost of Sales | 13,517 | 7,974 | (1,689 | ) | 19,802 | 12,499 | 7,490 | (1,712 | ) | 18,277 | ||||||||||||||||||||||
Gross Margin | 3,716 | 2,372 | - | 6,088 | 3,720 | 2,533 | - | 6,253 | ||||||||||||||||||||||||
Gross Margin % | 21.6 | % | 22.9 | % | - | 23.5 | % | 22.9 | % | 25.3 | % | - | 25.5 | % | ||||||||||||||||||
General and Administrative Expense | 2,439 | 569 | 197 | 3,205 | 2,385 | 558 | 113 | 3,056 | ||||||||||||||||||||||||
Segment Allocated G&A Expense | (673 | ) | 673 | - | - | (684 | ) | 684 | - | - | ||||||||||||||||||||||
Net General & Administrative Expense | 1,766 | 1,242 | 197 | 3,205 | 1,701 | 1,242 | 113 | 3,056 | ||||||||||||||||||||||||
Operating Income | 1,950 | 1,130 | (197 | ) | 2,883 | 2,019 | 1,291 | (113 | ) | 3,197 | ||||||||||||||||||||||
Operating Income % | 11.3 | % | 10.9 | % | - | 11.1 | % | 12.4 | % | 12.9 | % | - | 13.0 | % | ||||||||||||||||||
(Loss) Gain on Change in Fair Value of Warrants | - | - | (508 | ) | (508 | ) | - | - | 1,344 | 1,344 | ||||||||||||||||||||||
Interest Expense | - | - | (19 | ) | (19 | ) | - | - | (23 | ) | (23 | ) | ||||||||||||||||||||
Income before taxes | $ | 1,950 | $ | 1,130 | $ | (724 | ) | $ | 2,356 | $ | 2,019 | $ | 1,291 | $ | 1,208 | $ | 4,518 | |||||||||||||||
Income before taxes % | 11.3 | % | 10.9 | % | - | 9.1 | % | 12.4 | % | 12.9 | % | - | 18.4 | % |
Our total external sales revenues increased by $1.4 million in 2020 over the 2019 revenue levels. The Optex Systems Richardson segment realized a $1.0 million increase and the Applied Optics Center segment realized an increase of $0.4 million in external revenue over the prior year period. Intersegment revenues remained consistent between the 2020 and 2019 years at $1.7 million. Intersegment revenues relate primarily to coated filters provided by the Applied Optics Center to Optex Systems in support of the Optex Systems periscope line.
Gross margin decreased $0.2 million and the gross margin percentage decreased by 2.0 points from 25.5% in 2019 to 23.5% in 2020. The Optex Systems gross margin remained flat at $1.7 million for the 2020 and 2019 twelve-month period on increased revenue and the gross margin percentage decreased to 21.6% in 2020 as compared to a gross margin percentage of 22.9% in 2019. The erosion in the gross margin percentage between years is primarily driven by higher manufacturing expenses combined with changes in product mix between the years. The Applied Optics Center gross margin decreased by $0.2 million and the gross margin percent decreased by 2.4 points from 25.3% in 2019 to 22.9% in 2020. The erosion in the gross margin percentage between years is primarily driven by higher manufacturing expenses combined with changes in product mix between the years.
During the years ended 2020 and 2019, the Applied Optics Center absorbed ($0.7) million of fixed general and administrative costs incurred by Optex Systems for support services. These expenses cover accounting, executive, human resources, information technology, board fees and other corporate expenses paid by Optex Systems and shared across both operating segments.
Operating income decreased by $0.3 million, in 2020 to $2.9 million, as compared to the prior year operating income of $3.2 million. The decrease in operating income is primarily attributable to lower gross margins of $0.2 million at the Applied Optics Center segment, combined with higher general and administrative costs of $0.1 million at the Optex Systems segment in 2020 as compared to 2019.
Income before taxes decreased from the prior year by $2.1 million, to $2.4 million in 2020 from a prior year income before taxes of $4.5 million. The decrease in income before taxes year over year is primarily due to decreased operating income of $0.3 million from the prior year, combined with a decrease in income for non-cash related changes to the fair value of warrants of $1.8 million to a loss of ($0.5) million in 2020 from a prior year gain of $1.3 million in 2019.
Backlog
Backlog as of September 27, 2020 was $16.3 million as compared to a backlog of $24.6 million as of September 29, 2019, representing a decrease of 33.7%. The following table depicts the current expected delivery by quarter of all contracts awarded as of September 27, 2020.
(Millions) | ||||||||||||||||||||||||||||||||||||||||
Product Line | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | 2021 Delivery | 2022+ Delivery | Total Backlog 9/27/2020 | Total Backlog 9/29/2019 | Variance | % Chg | ||||||||||||||||||||||||||||||
Periscopes | $ | 1.8 | $ | 0.9 | $ | 1.1 | $ | 0.7 | $ | 4.5 | $ | 0.8 | $ | 5.3 | $ | 10.3 | $ | (5.0 | ) | (48.5) | % | |||||||||||||||||||
Sighting Systems | 0.8 | 0.7 | 0.6 | 0.1 | 2.2 | 0.7 | 2.9 | 4.1 | (1.2 | ) | (29.3) | % | ||||||||||||||||||||||||||||
Other | 0.1 | 1.1 | 0.6 | 0.5 | 2.4 | 2.6 | 5.0 | 3.9 | 1.1 | 28.2 | % | |||||||||||||||||||||||||||||
Optex Systems - Richardson | 2.7 | 2.7 | 2.3 | 1.3 | 9.1 | 4.1 | 13.2 | 18.3 | (5.1 | ) | (27.9) | % | ||||||||||||||||||||||||||||
Applied Optics Center - Dallas | 1.5 | 0.7 | 0.1 | 0.3 | 2.6 | 0.5 | 3.1 | 6.3 | (3.2 | ) | (50.8) | % | ||||||||||||||||||||||||||||
Total Backlog | $ | 4.2 | $ | 3.4 | $ | 2.4 | $ | 1.6 | $ | 11.7 | $ | 4.6 | $ | 16.3 | $ | 24.6 | $ | (8.3 | ) | (33.7) | % |
During fiscal year 2020, Optex Systems Holdings received new orders totaling $17.6 million, a (31.8%) decrease, as compared to new orders of $25.8 million during the prior year. The 2020 orders consist of $6.2 million in support of our periscope product line, $5.4 million attributable to the Applied Optics Center and $1.0 million attributable to sighting systems and support, and $5.0 million in other products which includes new business of $2.3 million for optical contract assemblies for Howitzer Aiming Circles. Approximately 20.8% or $3.7 million of the orders received in fiscal year 2020 were delivered within the 2020 fiscal year, with $13.9 million of backlog deliverable in 2021 and beyond.
During the fiscal year 2020, we have experienced significant reductions in new orders and ending customer backlog across all but one of our product lines. We attribute the lower orders to a combination of factors including a Covid-19 driven slow-down of contract awards for both U.S. military sales and foreign military sales (FMS), combined with some shifting in defense spending budget allocations in US military sales and FMS away from Army ground system vehicles toward other military agency applications. Due to the pandemic, we have experienced a significant slowdown in the U.S. government procurement process increasing the cycle time from contract bid proposal requests to final contract award by three to six months. We believe many of the delays are process driven as government agencies adapt to new remote work environments, combined with constraints created by travel restrictions, impeding product testing, inspection and overall program management coordination. In addition, the pandemic has caused several program delays throughout the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supplier issues. Due to the significant level of uncertainty surrounding the pandemic and its impact to our customers and the defense supply chain, we are unable to ascertain the impact further delays in contract awards and customer orders may have on our total fiscal year 2021 revenues. We are currently anticipating a reduction of 20-25% in revenue volume during the first six months of fiscal year 2021, as compared to the first six months of fiscal year 2020. Continued delays in customer orders over the next three to six months could negatively impact our total fiscal year 2021 revenue and profitability. We are currently reviewing cost reduction strategies for implementation during the next sixty days to minimize the impact of a sustained delay in customer orders to program revenues beyond the first quarter of fiscal year 2021.
Optex Systems - Richardson:
Backlog for our periscope product line has decreased 48.5% or $5 million to $5.3 million, from our 2019 fiscal year end level of $10.3 million. Our total periscope contract awards for fiscal 2020 totaled $6.2 million as compared to $10.4 million in the fiscal year 2019, a decrease of $4.2, or 40.4% million from the prior year. Periscope orders declined by 82.9% during the second half of fiscal year 2020, subsequent to the onset of the pandemic, as compared to orders booked during the first half of fiscal year 2020 through the fiscal period ending in March 2020. Fiscal year 2020 second have orders are below orders received during the same period in fiscal year 2019 by 80.7%. We attribute the reduction in orders and backlog primarily due to contracting award and program delay issues created by the pandemic.
Sighting Systems backlog decreased by $1.2 million or 29.3% in the last twelve months from $4.1 million in 2019 to $2.9 million as of the end of 2020. The decrease in backlog is primarily attributable shipments against existing sighting system contracts awarded during the prior years. During 2020, we booked $1.0 million in new orders, a decrease of $1.7 million from the prior year orders of $2.7 million.
Our backlog in other product groups increased by $1.1 million or 28.2% from $3.9 million in 2019 to $5.0 million in 2020. During 2020, we booked new orders of $5.4 million as compared to the prior year orders of $3.1 million. New orders booked in 2020 include new customer business for a $2.0 Million order from a U. S. prime contractor for optical subassemblies for shipments starting in 2021.
The Optex Systems Richardson segment, currently has nine open US Government IDIQ type military contracts with substantial unspent funding which covers government base year and option year requirement periods through October 2025, in addition to several outstanding significant pricing proposals pending award over the next ninety days.
Applied Optics Center – DallasEquity Compensation Plan Table
The Applied Optics Center backlog decreased by $3.2 million, following table provides information about our common stock that may be issued upon the exercise, vesting and/or 50.8%, for the year ended September 27, 2020 from $6.3 million in 2019 to $3.1 million in 2020. New orders for the Applied Optics Center during the 2020 year were $5.4 millionsettlement of securities outstanding under all our existing equity compensation plans as compared to the 2019 orders of $8.1 million, a decline of $2.7 million or 33.3%. We attribute the reduction in orders and backlog primarily due to contracting award and program delay issues created by the pandemic.October 2, 2022:
The Applied Optics segment, currently has three open US Government IDIQ type military contracts with substantial unspent funding which covers government base year and option year requirement periods through February 2023.
Plan category | (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted-average exercise price of outstanding options, warrants and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
Equity compensation plans approved by security holders | - | NA | NA | |||||||||
Equity compensation plans not approved by security holders | - | - | 500,000 | * | ||||||||
Total | - | - | 500,000 | * |
Optex Systems Holdings continues to pursue new international and commercial opportunities in addition to maintaining its current footprint with U.S. military vehicle manufactures, with existing as well as new product lines. We are also reviewing potential products, outside our traditional product lines, which could be manufactured using our current production facilities in order to capitalize on our existing capacity. Further, we continue to look for strategic businesses to acquire that will strengthen our existing product line, expand our operations, and enter new markets.
Twelve month period ended September 27, 2020 compared to the twelve month period ended September 29, 2019
Revenues:
The table below details the revenue changes by segment and product line for the year ended September 27, 2020 as compared to the year ended September 29, 2019.
Twelve months ended | ||||||||||||||||
(Millions) | ||||||||||||||||
Product Line | September 27, 2020 | September 29, 2019 | Variance | % Chg | ||||||||||||
Periscopes | $ | 11.3 | $ | 9.9 | $ | 1.4 | 14.1 | |||||||||
Sighting Systems | 2.2 | 1.3 | 0.9 | 69.2 | ||||||||||||
Other | 3.7 | 5.0 | (1.3 | ) | (26.0 | ) | ||||||||||
Optical Systems – Richardson | 17.2 | 16.2 | 1.0 | 6.2 | ||||||||||||
Applied Optics Center – Dallas | 8.7 | 8.3 | 0.4 | 4.8 | ||||||||||||
Total Revenue | $ | 25.9 | $ | 24.5 | $ | 1.4 | 5.7 |
Our total revenues increased by $1.4 million, or 5.7%, in 2020 over the 2019 revenue levels. The Optex Systems Richardson segment realized a $1.0 million, or 6.2%, increase in revenue and the Applied Optics Center segment realized an increase of $0.4 million, or 4.8%, in revenue over the prior year period.
Revenues increased by 1.4 million or 14.1% on our periscope line during the twelve months ended September 27, 2020 as compared to the twelve months ended September 29, 2019 based on increased customer demand between the respective periods. The higher revenue was primarily driven by deliveries of Improved Commander Weapon Sights (ICWS) for orders received in 2019.
* | If the 2023 Equity Incentive Plan proposal is adopted by the shareholders, our existing plans will be canceled and no further awards will be made under such plans. |
Revenues on sighting systems increased by $0.9 million, or 69.2% from the prior year period due to shipments of Commander Weapon Sighting Systems against existing prior year contracts. Based on our existing backlog, we anticipate revenue for sighting systems in the next twelve months to approximate the 2020 levels.
Revenue on other product lines decreased by $1.3 million, or 26.0%, compared to revenues in the prior year due to lower customer demand for mirror, cell, beam splitter and other spare assemblies over the prior year levels.
The Applied Optics Center external revenue increased by $0.4 million, or 4.8%, during the 2020 fiscal year as compared to the prior year period. The revenue increase is primarily due to increased demand for laser filter unit anti reflective devices (ARD), day windows and commercial optical assemblies, offset by lower customer demand on laser interface filters.
Due to the significant level of uncertainty surrounding the pandemic and its impact to our customers and the defense supply chain, we are unable to ascertain the impact further delays in contract awards and customer orders may have on our total fiscal year 2021 consolidated revenues across reporting segments. Due to delays in customer orders, we are currently anticipating a reduction of 20-25% in revenue volume during the first six months of fiscal year 2021, as compared to the first six months of fiscal year 2020. Continued delays in contract awards over the next three to six months could negatively impact our total fiscal year 2021 revenue and profitability. We are currently reviewing cost reduction strategies for implementation during the next sixty days to minimize the impact of a sustained delay in customer orders to program revenues beyond the first quarter of fiscal year 2021.
Gross Margin. The gross margin during the period ended September 27, 2020 was 23.5% of revenue as compared to a gross margin of 25.5% of revenue for the period ended September 29, 2019. Cost of sales increased by $1.5 million to $19.8 million for the fiscal year ended 2020 compared to $18.3 million for the fiscal year ended 2019 on higher revenue. The gross margin decreased by $0.2 million to $6.1 million in 2020 as compared to $6.3 million in 2019. We attribute the erosion in gross margin to changes in product mix and increased manufacturing spending between the respective years.
G&A Expenses. During the fiscal years ended September 27, 2020 and September 39, 2019, we recorded operating expenses of $3.2 million and $3.1 million. General and administrative cost increases of $0.1 million during the current fiscal year are primarily attributable to increased board fees and stock compensation during the period.
Operating Income. During the period ended September 27, 2020, we recorded operating income of $2.9 million as compared to operating income of $3.2 million during the period ended September 29 2019. The $0.3 million decrease in operating income in the current year over the prior year is primarily due to the decreased gross margin of $0.2 million combined with increased general and administrative spending of $0.1 million in 2020 as compared to 2019.
Net income applicable to common shareholders. During the year ended September 27, 2020, we recorded net income applicable to common shareholders of $1.2 million as compared to net income applicable to common shareholders of $3.8 million during the year ended September 29, 2019. The decrease net income of $2.6 million is primarily attributable to a decreased operating income of $0.3 million and changes in the fair value of warrants of $1.9 million, a change in income taxes of $1.7 million, offset by changes in dividends distributed and deemed dividends of ($1.3) million as compared to the year ended 2019.
Non GAAP Adjusted EBITDA
We use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the performance of our business as “net income” includes the significant impact of noncash valuation gains and losses on warrant liabilities, noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest expenses and federal income taxes. We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because it permits period-over-period comparisons of our ongoing core operations before the excluded items. Adjusted EBITDA is a financial measure not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).
Adjusted EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative measure.
The table below summarizes our twelve-month operating results for periods ended September 27, 2020 and September 29, 2019, in terms of both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both measures allows the reader to have a “complete picture” of our overall performance.
(Thousands) Twelve months ended | ||||||||
September 27, 2020 | September 29, 2019 | |||||||
Net Income — GAAP | $ | 1,825 | $ | 5,668 | ||||
Add: | ||||||||
Loss (Gain) on Change in Fair Value of Warrants | 508 | (1,344 | ) | |||||
Federal Income Tax Expense (Benefit) | 531 | (1,150 | ) | |||||
Depreciation | 248 | 340 | ||||||
Stock Compensation | 197 | 113 | ||||||
Royalty License Amortization | - | 30 | ||||||
Interest Expense | 19 | 23 | ||||||
Adjusted EBITDA - Non GAAP | $ | 3,328 | $ | 3,680 |
Our adjusted EBITDA decreased by $0.4 million to $3.3 million during the twelve months ended September 27, 2020 as compared $3.7 million during the twelve months ended September 29, 2019. The decrease in EBITDA is primarily driven by a decrease in operating profit of $0.3 million and changes in interest, depreciation and amortization of $0.1 million. Operating segment performance is discussed in greater detail throughout the previous sections.
During the year ended September 29, 2019, The Company released $1.8 million against the deferred tax asset valuation allowance which resulted in recognition of a net tax benefit of $1.3 million, as compared to a net tax expense of $0.5 million during the 2020 year. During the year ended September 27, 2020, we recognized a loss on the change in fair value of warrants of $0.5 million as compared to a gain of $1.3 million in the prior year ended September 29, 2019. As this is a non-cash gain driven by the current fair market value of our outstanding warrants and unrelated to our core business operating performance, the gain has been excluded from our adjusted EBITDA calculations presented above. Further discussion regarding the gain on changes in fair value of the warrants and the related warrant liability can be found in Item 1, “Consolidated Financial Statements, Note 12 - Warrant Liabilities”.
Liquidity and Capital Resources
As of September 27, 2020, Optex Systems Holdings had working capital of $14.3 million, as compared to $11.7 million as of September 29, 2019. During the year ended September 27, 2020, the Company generated a net income of $1.8 million as compared to a net income of $5.7 million, and an increase in revenues of $1.4 million, or 5.5%, up to $25.9 million, from $24.5 million, as compared to the prior year ended September 29, 2019.
Backlog as of September 27, 2020 was $16.3 million as compared to a backlog of $24.6 million as of September 29, 2019, representing a decrease of 33.7%. During fiscal year 2020, Optex Systems Holdings received new orders totaling $17.6 million, a (31.8%) decrease, as compared to new orders of $25.8 million during the prior year. During the fiscal year 2020, we have experienced significant reductions in new orders and ending customer backlog that we attribute to a Covid-19 slow-down of contract awards for both U.S. military sales and foreign military sales (FMS). The cycle time from contract bid proposal requests to final contract award has increased by three to six months. We believe many of the delays are process driven as government agencies adapt to new remote work environments, combined with constraints created by travel restrictions, impeding product testing, inspection and overall program management coordination. In addition, the pandemic has caused several program delays throughout the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supplier issues. Due to the significant level of uncertainty surrounding the pandemic and its impact to our customers and the defense supply chain, we are unable to ascertain the impact further delays in contract awards and customer orders may have on our total fiscal year 2021 revenues. We are currently anticipating a reduction of 20-25% in revenue volume during the first six months of fiscal year 2021, as compared to the first six months of fiscal year 2020. Continued delays in customer orders over the next three to six months could negatively impact our total fiscal year 2021 revenue and profitability. We are currently reviewing cost reduction strategies for implementation during the next sixty days to minimize the impact of a sustained delay in customer orders to program revenues beyond the first quarter of fiscal year 2021. We believe we are in a strong position to withstand any significant adverse financial impacts after the recent fiscal year ended September 27, 2020.
The Company has historically funded its operations through operations, convertible notes, common and preferred stock offerings and bank debt. The Company’s ability to generate positive cash flows depends on a variety of factors, including the continued development and successful marketing of the Company’s products. At September 27, 2020, the Company had approximately $4.7 million in cash and an outstanding payable balance of $0.4 million against our working line of credit. The line of credit allows for borrowing up to a maximum of $2.0 million. As of September 27, 2020, our outstanding accounts receivable was $3.0 million. We expect the accounts to be collected during the first quarter of fiscal 2020. The Company expects to generate net income and positive cash flow from operating activities over the next twelve months. Successful transition to attaining and maintaining profitable operations is dependent upon maintaining a level of revenue adequate to support the Company’s cost structure. Management intends to manage operations commensurate with its level of working capital and facilities line of credit during the next twelve months; however, uneven revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program delays associated with the pandemic could create a working capital shortfall. In the event the Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.
On June 8, 2020 the Company announced authorization for a $1 million stock repurchase program. The shares authorized to be repurchased under the new 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 September 27, 2020, there were 105,733 common shares repurchased through the program at a cost of $200 thousand. The shares have been returned to the Treasury.
During the twelve months ended September 27, 2020 the Company declared and paid no dividends. As of September 27, 2020, there are no outstanding declared and unpaid dividends.
Period from September 30, 2019 through September 27, 2020
Cash and Cash Equivalents. As of September 27, 2020, and September 29, 2019, we had cash and cash equivalents of $4.7 and $1.1 million.
Net Cash Provided by Operating Activities. Net cash provided by operating activities during the period beginning September 29, 2019 and ended September 27, 2020 was $3.9 million. The primary source of cash provided by operations was driven by net income of $1.8, decreases in inventory of $1.7 million, deferred tax assets $0.2 million, warrant liabilities of $0.5 million, and other changes in working capital of ($0.3) million.
Net Cash Used by Investing Activities. In the twelve months ended September 27, 2020, cash used in investing activities was $0.2 million for new asset purchases used in support of production.
Net Cash Used by Financing Activities. Net cash used in financing activities was $0.1 million during the twelve months ended September 27, 2020 due to the repurchase of common stock of $0.2 million, offset by borrowings against the line of credit of ($0.1) million. As of September 27, 2020, the outstanding line of credit balance was $0.4 million as compared to $0.3 million as of September 29, 2019.
Critical Accounting Policies
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 $451 thousand for the twelve months ended September 27, 2020 and the twelve months ended September 29, 2019.
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 September 27, 2020, there was $3 thousand of revenue recognized during the period from customer deposit liabilities (deferred contract revenue). During the twelve months ended September 29, 2019 there was $289 thousand of revenue recognized during the period from customer deposit liabilities (deferred contract revenue), and $19 thousand of customer deposits refunded to the customer on order cancellation. As of September 27, 2020 there is $1 thousand in customer deposit liabilities. As of the twelve months ended September 27, 2020, there are no significant deferred contract costs such as sales commissions.
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 September 27, 2020, Optex Systems Inc. has a net carrying value of $1.2 million in deferred tax assets represented by deferred tax assets of $2.2 million and a deferred tax asset valuation allowance of ($1.0) 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 September 27, 2020, and September 29, 2019, 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. In the twelve months ended September 29, 2019, The Company released $1.8 million against the valuation allowance which resulted in the recognition of a tax benefit. During the twelve months ended September 27, 2020, we recognized an additional $0.2 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.
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 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 and which assumes the exercise of a five year renewal option at the Applied Optics Center as of November 1, 2021. As of year ended September 27, 2020, The Company has recognized a $1.4 million in right-of-use-asset and corresponding operating lease liabilities of $1.5 million.
Recent Accounting Pronouncements
Recent Accounting Pronouncements are detailed under Note 3 of Item 8 “Financial Statements and Supplementary Data” of this report.
Cautionary Factors That May Affect Future Results
This Report on Form 10-K and other written reports and oral statements made from time to time by Optex Systems Holdings may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. You can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. You can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address Optex Systems Holdings’ growth strategy, financial results and product and development programs. You must carefully consider any such statement and should understand that many factors could cause actual results to differ from Optex Systems Holdings’ forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.
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 annual report. In this annual report Optex Systems Holdings has identified important factors that could cause actual results to differ from expected or historic results. 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.
Item 8 Financial Statements and Supplementary DataCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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 September 27, 2020 and September 29, 2019, and the related consolidated statements of operations, 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 September 27, 2020 and September 29, 2019, 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.
/s/ Whitley Penn LLP
We have served as the Company’s auditor since 2017.
Fort Worth, Texas
December 17, 2020
Consolidated Balance Sheets
(Thousands, except share and per share data) | ||||||||
September 27, 2020 | September 29, 2019 | |||||||
ASSETS | ||||||||
Cash and Cash Equivalents | $ | 4,700 | $ | 1,068 | ||||
Accounts Receivable, Net | 2,953 | 3,066 | ||||||
Inventory, Net | 8,791 | 10,535 | ||||||
Prepaid Expenses | 229 | 348 | ||||||
Current Assets | 16,673 | 15,017 | ||||||
Property and Equipment, Net | 1,006 | 1,102 | ||||||
Other Assets | ||||||||
Deferred Tax Asset | 1,227 | 1,414 | ||||||
Right-of-use Asset | 1,416 | - | ||||||
Security Deposits | 23 | 23 | ||||||
Other Assets | 2,666 | 1,437 | ||||||
Total Assets | $ | 20,345 | $ | 17,556 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts Payable | $ | 833 | $ | 1,833 | ||||
Operating Lease Liability | 417 | - | ||||||
Accrued Expenses | 1,077 | 1,180 | ||||||
Warrant Liability | 2,544 | - | ||||||
Accrued Warranty Costs | 83 | 46 | ||||||
Credit Facility | - | 250 | ||||||
Customer Advance Deposits | 1 | 3 | ||||||
Current Liabilities | 2,411 | 3,312 | ||||||
Credit Facility - Long Term | 377 | - | ||||||
Operating Lease Liability, net of current portion | 1,037 | - | ||||||
Warrant Liability - Long Term | - | 2,036 | ||||||
Total Liabilities | 6,369 | 5,348 | ||||||
Commitments and Contingencies | ||||||||
Stockholders’ Equity | ||||||||
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,795,869 and 8,436,422 shares issued, and 8,690,136 and 8,436,422 outstanding, respectively) | 9 | 8 | ||||||
Treasury Stock (at cost, 105,733 shares and zero shares held, respectively) | (200 | ) | - | |||||
Additional Paid in capital | 26,276 | 26,134 | ||||||
Accumulated Deficit | (12,109 | ) | (13,934 | ) | ||||
Stockholders’ Equity | 13,976 | 12,208 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 20,345 | $ | 17,556 |
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Operations
(Thousands, except share and per share data) | ||||||||
Twelve months ended | ||||||||
September 27, 2020 | September 29, 2019 | |||||||
Revenue | $ | 25,890 | $ | 24,530 | ||||
Cost of Sales | 19,802 | 18,277 | ||||||
Gross Margin | 6,088 | 6,253 | ||||||
General and Administrative Expense | 3,205 | 3,056 | ||||||
Operating Income | 2,883 | 3,197 | ||||||
(Loss) Gain on Change in Fair Value of Warrants | (508 | ) | 1,344 | |||||
Interest Expense | (19 | ) | (23 | ) | ||||
Other (Expense) Income | (527 | ) | 1,321 | |||||
Income Before Taxes | 2,356 | 4,518 | ||||||
Income Tax Expense (Benefit), net | 531 | (1,150 | ) | |||||
Net Income | $ | 1,825 | $ | 5,668 | ||||
Deemed dividends on participating securities | (598 | ) | (1,868 | ) | ||||
Net income applicable to common shareholders | $ | 1,227 | $ | 3,800 | ||||
Basic income per share | $ | 0.14 | $ | 0.45 | ||||
Weighted Average Common Shares Outstanding - basic | 8,464,572 | 8,388,794 | ||||||
Diluted income per share | $ | 0.14 | $ | 0.45 | ||||
Weighted Average Common Shares Outstanding - diluted | 8,589,919 | 8,492,884 |
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Cash Flows
(Thousands) | ||||||||
Twelve months ended | ||||||||
September 27, 2020 | September 29, 2019 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income | $ | 1,825 | $ | 5,668 | ||||
Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities: | ||||||||
Depreciation and Amortization | 248 | 340 | ||||||
Loss (Gain) on Change in Fair Value of Warrants | 508 | (1,344 | ) | |||||
Stock Compensation Expense | 197 | 113 | ||||||
Deferred Tax | 187 | (1,414 | ) | |||||
(Gain) On Sale of Fixed Assets | - | (7 | ) | |||||
Accounts Receivable | 113 | (608 | ) | |||||
Inventory | 1,744 | (2,896 | ) | |||||
Prepaid Expenses | 119 | (243 | ) | |||||
Accounts Payable and Accrued Expenses | (1,065 | ) | 903 | |||||
Federal Income Taxes Payable | - | (22 | ) | |||||
Accrued Warranty Costs | 37 | (55 | ) | |||||
Prepaid Royalties | - | 30 | ||||||
Customer Advance Deposits | (2 | ) | (305 | ) | ||||
Total Adjustments | 2,086 | (5,508 | ) | |||||
Net Cash provided by Operating Activities | 3,911 | 160 | ||||||
Cash Flows used in Investing Activities | ||||||||
Purchases of Property and Equipment | (152 | ) | (143 | ) | ||||
Proceeds From Sale of Property and Equipment | - | 8 | ||||||
Net Cash used in Investing Activities | (152 | ) | (135 | ) | ||||
Cash Flows used in Financing Activities | ||||||||
Cash Paid for Taxes Withheld On Net Settled Restricted Stock Unit Share Issue | (54 | ) | (37 | ) | ||||
Borrowings from payments (to) Credit Facility | 127 | (50 | ) | |||||
Proceeds from Warrant Exercise | - | 72 | ||||||
Warrant Repurchase | - | (75 | ) | |||||
Stock Repurchase | (200 | ) | - | |||||
Net Cash used in Financing Activities | (127 | ) | (90 | ) | ||||
Net Increase (Decrease) in Cash and Cash Equivalents | 3,632 | (65 | ) | |||||
Cash and Cash Equivalents at Beginning of Year | 1,068 | 1,133 | ||||||
Cash and Cash Equivalents at End of Year | $ | 4,700 | $ | 1,068 | ||||
Supplemental Cash Flow Information: | ||||||||
Non Cash Transactions: | ||||||||
Right-of-Use Asset | $ | 1,811 | $ | - | ||||
Operating Lease Liabilities | (1,894 | ) | - | |||||
Cash Transactions: | ||||||||
Cash Paid for Taxes | 289 | 360 | ||||||
Cash Paid for Interest | 19 | 23 |
The accompanying notes are an integral part of these financial statements.
Consolidated Statement of Stockholders’ Equity
(Thousands, except share data) | ||||||||||||||||||||||||||||
Common Shares Issued | Treasury Shares | Common Stock | Treasury Stock | Additional Paid in Capital | Retained Earnings | Total Stockholders Equity | ||||||||||||||||||||||
Balance at September 30, 2018 | 8,333,353 | - | $ | 8 | $ | - | $ | 25,938 | $ | (19,602 | ) | $ | 6,344 | |||||||||||||||
Stock Compensation Expense | - | - | - | - | 113 | - | 113 | |||||||||||||||||||||
Vested restricted stock units issued net of tax withholding | 55,565 | - | - | - | (37 | ) | - | (37 | ) | |||||||||||||||||||
Exercise of Warrants for Common Shares at $1.50 (1) | 47,504 | - | - | - | 120 | - | 120 | |||||||||||||||||||||
Net income | - | - | - | - | - | 5,668 | 5,668 | |||||||||||||||||||||
Balance at September 29, 2019 | 8,436,422 | - | $ | 8 | $ | - | $ | 26,134 | $ | (13,934 | ) | $ | 12,208 | |||||||||||||||
Stock Compensation Expense | - | - | - | - | 197 | - | 197 | |||||||||||||||||||||
Vested restricted stock units issued net of tax withholding | 59,447 | - | - | - | (54 | ) | - | (54 | ) | |||||||||||||||||||
Restricted Board Shares Issued (2) | 300,000 | - | 1 | (1 | ) | - | - | |||||||||||||||||||||
Common Stock Repurchase (3) | 105,733 | - | (200 | ) | - | - | (200 | ) | ||||||||||||||||||||
Net income | - | - | - | - | - | 1,825 | 1,825 | |||||||||||||||||||||
Balance at September 27, 2020 | 8,795,869 | 105,733 | $ | 9 | $ | (200 | ) | $ | 26,276 | $ | (12,109 | ) | $ | 13,976 |
(1) Exercise of warrants for gross proceeds of $72 thousand and a warrant liability fair market value of $48 thousand as of the exercise date.
(2) 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.
(3) Common shares repurchased in the open market between June 11, 2020 and September 27, 2020 for $200 thousand and held in treasury stock using the cost method.
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 September 27, 2020, the Company operated with 102 full-time equivalent employees.
Note 2 — Accounting Policies
Basis of Presentation
Principles of Consolidation: The consolidated financial statements include the accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex Systems, Inc. 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 2020 ended on September 27, 2020 and included 52 weeks. Fiscal year 2019 ended on September 29, 2019 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. 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 $4.7 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 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%). The Company’s revenues for fiscal year ended September 29, 2019 are derived from sales to U.S. government agencies (60%), one major U.S. defense contractor (22%), one major commercial customer (7%) 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 September 27, 2020, and September 29, 2019, 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 2020 we recognized $1 thousand in bad debt expenses associated with uncollectible accounts. In the fiscal year 2019 we recognized $4 thousand in bad debt expenses associated with uncollectible accounts.
As of September 27, 2019, 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%. As of September 29, 2019, 85% of the accounts receivable balance was comprised of four customers: the U.S. government, 41%, two major defense contractors, 25% and 13%, 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 September 27, 2020, and September 29, 2019 inventory included:
(Thousands) | ||||||||
As of 2020 | As of 2019 | |||||||
Raw Materials | $ | 5,506 | $ | 7,395 | ||||
Work in Process | 3,214 | 3,599 | ||||||
Finished Goods | 638 | 254 | ||||||
Gross Inventory | 9,358 | 11,248 | ||||||
Less: Inventory Reserves | (567 | ) | (713 | ) | ||||
Net Inventory | $ | 8,791 | $ | 10,535 |
In the twelve months ended September 27, 2020 Optex Systems physically disposed of $202 thousand of obsolete and excess inventories against the reserve balance and made other reserve adjustments of ($56) thousand. Net Inventory decreased by $1.7 million in support of deliveries against several long running contracts during the 2020 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 September 27, 2020, and September 29, 2019, the existing warranty reserve balances of $83 thousand and $46 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. The increase in warranty reserves represents an increase in the estimated returns on deliveries in the current year and an increase in the ending backlog of warranty returns awaiting repairs or replacement for quality issues encountered on our Applied Optics Center optical assemblies. The increases in estimated returns and backlog are primarily driven by increased shipments of the optical assemblies as compared to the prior year. 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 September 27, 2020 and September 29, 2019.
Years ended | ||||||||
2020 | 2019 | |||||||
Beginning balance | $ | 46 | $ | 101 | ||||
Incurred costs for warranties satisfied during the period | (39 | ) | (115 | ) | ||||
Warranty Expenses: | ||||||||
Warranties reserved for new product shipped during the period(1) | 106 | 86 | ||||||
Change in estimate for pre-existing warranty liabilities (2) | (30 | ) | (26 | ) | ||||
Warranty Expense | 76 | 60 | ||||||
Ending balance | $ | 83 | $ | 46 |
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 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 and which assumes the exercise of a five year renewal option at the Applied Optics Center as of November 1, 2021. As of period ended September 27, 2020, The Company has recognized a $1.4 million in right-of-use-asset and corresponding operating lease liabilities of $1.5 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 $451 thousand for the twelve months ended September 27, 2020 and the twelve months ended September 29, 2019.
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 September 27, 2020, there was $3 thousand of revenue recognized during the period from customer deposit liabilities (deferred contract revenue). During the twelve months ended September 29, 2019 there was $289 thousand of revenue recognized during the period from customer deposit liabilities (deferred contract revenue), and $19 thousand of customer deposits refunded to the customer on order cancellation. As of September 27, 2020, there is $1 thousand in customer deposit liabilities. As of the twelve months ended 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 September 27, 2020, and September 29, 2019, Optex Systems, Inc. had a balance of $1 thousand and $3 thousand, respectively, in customer advance deposits. Customer deposits as of September 27, 2020 represent advance customer credit card payments for product yet to be delivered.
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 generally, “flowed down” to Optex Systems Holdings as subcontractors on other military business. 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 contracts.
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 September 27, 2020, Optex Systems Inc. has a net carrying value of $1.2 million in deferred tax assets represented by deferred tax assets of $2.2 million and a deferred tax asset valuation allowance of ($1.0) 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 September 27, 2020, and September 29, 2019, 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. In the twelve months ended September 29, 2019, The Company released $1.8 million against the valuation allowance which resulted in the recognition of a tax benefit. During the twelve months ended September 27, 2020, we recognized and additional $0.2 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 has outstanding are convertible preferred stock, stock options and warrants. In computing the dilutive effect of convertible preferred stock, the numerator is adjusted to add back any convertible preferred dividends, and the denominator is increased to assume the conversion of the number of additional common shares. Optex Systems Holdings uses the Treasury Stock Method to compute the dilutive effect of stock options and warrants. Convertible preferred stock, stock options and warrants that are anti-dilutive are excluded from the calculation of diluted earnings per common share.
For the 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 as anti-dilutive. For the twelve months ended September 29, 2019, 216,500 unvested restricted stock units (which converts to 104,090 incremental dilutive shares) were included in the diluted earnings per share calculation as dilutive, and 4,125,200 warrants and 25,000 stock options were excluded as anti-dilutive.
Our outstanding warrants during the twelve months ended September 27, 2020 and September 29, 2019 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 September 27, 2020 and September 29, 2019, there were no declared dividends and allocated undistributed earnings of $0.6 million and $1.9 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. Early adoption is permitted. As such Optex Systems Holdings is required to adopt these provisions as of the fiscal year beginning on September 28, 2020. Entities are permitted to early adopt any removed or modified disclosure upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. We do not anticipate any material impact on our financial statement disclosures as a result of the amendment and are currently assessing the changes in disclosure requirements as applicable for the potential of early 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. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. As such, Optex Systems Holdings is required to adopt these provisions as of the fiscal year beginning on September 28, 2020. We do not expect any 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 and which assumes the exercise of a five year renewal option at the Applied Optics Center as of November 1, 2021. As of year ended September 27, 2020, The Company has recognized a $1.4 million in right-of-use-asset and corresponding operating lease liabilities of $1.5 million. 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 88% of the Optex Systems segment revenue is comprised of domestic military customers, and 12% is comprised of foreign military customers. Optex Systems segment revenue is derived from the U.S. government, 40%, and two major U.S. defense contractors representing 19% and 6%, 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 September 27, 2020, the Richardson facility operated with 65 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 32% and military sales to prime and subcontracted customers represent 68% of the total segment revenue. Approximately 84% of the AOC revenue is derived from external customers and approximately 16% is related to intersegment sales to Optex Systems in support of military contracts. For the twelve months ended September 27, 2020, the AOC segment revenue from the U.S. government, one major commercial customer, and two major defense contractors represent approximately 10%, 9% 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 September 27, 2020, 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.
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 | $ | 1,950 | $ | 1,130 | $ | (724 | ) | $ | 2,356 | |||||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (673 | ) | $ | 673 | $ | - | $ | - | |||||||
Loss on change in fair value of warrants | $ | - | $ | - | $ | 508 | $ | 508 | ||||||||
Stock compensation expense | $ | - | $ | - | $ | 197 | $ | 197 | ||||||||
Warranty expense | $ | - | $ | 76 | $ | - | $ | 76 | ||||||||
Segment Assets | $ | 14,642 | $ | 5,703 | $ | - | $ | 20,345 | ||||||||
Expenditures for segment assets | $ | 102 | $ | 50 | $ | - | $ | 152 |
Reportable Segment Financial Information (thousands) | ||||||||||||||||
Twelve months ended September 29, 2019 | ||||||||||||||||
Optex Systems Richardson | Applied Optics Center Dallas | Other and intersegment eliminations) | Consolidated Total | |||||||||||||
Revenues from external customers | $ | 16,219 | $ | 8,311 | $ | - | $ | 24,530 | ||||||||
Intersegment revenues | - | 1,712 | (1,712 | ) | - | |||||||||||
Total Revenue | $ | 16,219 | $ | 10,023 | $ | (1,712 | ) | $ | 24,530 | |||||||
Interest expense | $ | - | $ | - | $ | 23 | $ | 23 | ||||||||
Depreciation and Amortization | $ | 29 | $ | 311 | $ | - | $ | 340 | ||||||||
Income before taxes | $ | 2,019 | $ | 1,291 | $ | 1,208 | $ | 4,518 | ||||||||
Other significant noncash items: | ||||||||||||||||
Allocated home office expense | $ | (684 | ) | $ | 684 | $ | - | $ | - | |||||||
Gain on change in fair value of warrants | $ | - | $ | - | $ | (1,344 | ) | $ | (1,344 | ) | ||||||
Stock option compensation expense | $ | - | $ | - | $ | 113 | $ | 113 | ||||||||
Royalty expense amortization | $ | 30 | $ | - | $ | - | $ | 30 | ||||||||
Warranty Expense | $ | - | $ | 60 | $ | - | $ | 60 | ||||||||
Segment Assets | $ | 11,570 | $ | 5,986 | $ | - | $ | 17,556 | ||||||||
Expenditures for segment assets | $ | 47 | $ | 96 | $ | - | $ | 143 |
Note 5 — Property and Equipment
A summary of property and equipment at September 27, 2020 and September 29, 2019 is as follows:
(Thousands) | ||||||||||
Estimated Useful Life | Year Ended 2020 | Year Ended 2019 | ||||||||
Property and Equipment | ||||||||||
Furniture and Fixtures | 3-5 yrs | $ | 398 | $ | 378 | |||||
Machinery and Equipment | 5 yrs | 3,782 | 3,650 | |||||||
Leasehold Improvements | 7 yrs | 276 | 276 | |||||||
Less: Accumulated Depreciation | (3,450 | ) | (3,202 | ) | ||||||
Net Property & Equipment | $ | 1,006 | $ | 1,102 | ||||||
Depreciation Expense | $ | 248 | $ | 340 |
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. During the twelve months ended September 29, 2019, Optex Systems Holdings’ purchased $143 thousand in new machinery and equipment. During the twelve months ended September 29, 2019, Optex recorded proceeds on the sale of fixed assets of $8 thousand for the sale of $14 thousand in machinery and equipment with a net book carrying value of $1 thousand generating a gain on sale of $7 thousand.
Note 6 — Accrued Expenses
The components of accrued liabilities for the years ended September 27, 2020 and September 29, 2019 are summarized below:
Thousands | ||||||||
Year Ended | Year Ended | |||||||
September 27, 2020 | September 29, 2019 | |||||||
Deferred Rent Expense | $ | - | $ | 83 | ||||
Accrued Vacation | 469 | 361 | ||||||
Property Taxes | 113 | 113 | ||||||
Operating Expenses | 323 | 476 | ||||||
Payroll & Payroll Related | 172 | 147 | ||||||
Total Accrued Expenses | $ | 1,077 | $ | 1,180 |
Note 7 — Commitments and Contingencies
Rental Payments under Non-cancelable Operating Leases
Optex Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc., Richardson address and the Applied Optics Center Dallas address, as well as certain office equipment under non-cancellable operating leases.
The leased facility under Optex Systems Inc. at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space and expires March 31, 2021. The monthly base rent was $23.0 thousand through June 30, 2019 with annual rental payment inflationary increases between 3.4% and 4.8% occurring April 1, each year. The monthly rent includes approximately $11 thousand for additional Common Area Maintenance (CAM) fees and taxes, to be adjusted annually based on actual expenses incurred by the landlord.
The leased facility under the Applied Optics Center at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet of space at the premises. The current lease term will expire on October 31, 2021, with two renewal options available to the tenant, each with a renewal term duration of five years. The monthly base rent was $20.0 thousand through September 30, 2018 and escalates approximately 3% October 1, each year thereafter through 2021. The lease includes a one-month base rent abatement for October 1 through October 31, 2016 for $19.4 thousand. The monthly rent includes approximately $6.7 thousand for additional CAM, to be adjusted annually based on actual expenses incurred by the landlord. Our obligations to make payments under the lease are secured by a $125,000 standby letter of credit.
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 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 for the term of the equipment lease and both segment facility leases and which assumes the exercise of a five year renewal option at the Applied Optics Center as of November 1, 2021.
As of September 27, 2020, the remaining minimum base lease and estimated common area maintenance (CAM) payments under the non-cancelable office and 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 | |||||||||||||||
2021 Base year lease | 148 | 263 | 18 | 429 | 149 | |||||||||||||||
2022 Base year lease | - | 22 | 5 | 27 | 7 | |||||||||||||||
Total base lease payments | $ | 148 | $ | 285 | $ | 23 | $ | 456 | $ | 156 | ||||||||||
2022-2026 Lease option-assumed exercise(2) | - | 1,312 | - | 1,312 | ||||||||||||||||
Total lease payments | $ | 148 | $ | 1,597 | $ | 23 | $ | 1,768 | ||||||||||||
Imputed interest on lease payments (1) | (3 | ) | (310 | ) | (1 | ) | (314 | ) | ||||||||||||
Total Operating Lease Liability(3) | $ | 145 | $ | 1,287 | $ | 22 | $ | 1,454 | ||||||||||||
Right-of-use Asset | $ | 126 | $ | 1,268 | $ | 22 | $ | 1,416 |
(1) Assumes a discount borrowing rate of 7.5%.
(2) Assumes only one of the two five-year options are exercised. The Company believes it is reasonably certain to exercise the first of the two five-year options but believes the additional five-year option falls outside of the range of reasonable predictability.
(3) Short-term and Long-term portion of Operating Lease Liability is $417 thousand and $1,037 thousand, respectively.
Total expense under both facility lease agreements for the twelve months ended September 27, 2020 was $735 thousand. Total expense under both facility lease agreements as of the twelve months ended September 29, 2019 was $700 thousand.
Total office equipment rentals included in operating expenses was $22 thousand for the twelve months ended September 27, 2020 and $15 thousand for the twelve months ended September 29, 2019.
As of September 29, 2019, there was $83 thousand in unamortized deferred rent included in accrued liabilities which was reclassed to the right of use asset on adoption of ASC842.
Note 8 — Debt Financing
Credit Facility — Avidbank
The Company amended its revolving credit facility with Avidbank pursuant to a Seventh Amendment to Amended and Restated Loan Agreement, dated as of April 5, 2018. The amended revolving maturity date was April 21, 2020. The facility provided for up to $2.2 million in financing against eligible receivables and was subject to meeting certain covenants including an asset coverage ratio test for up to twenty months. The material terms of the amended revolving credit facility were as follows:
In order to meet the security requirement under the lease, we entered into a letter of credit with Avidbank on October 17, 2016 in the amount of $250,000, which expires on October 17, 2019 and is renewable by us for successive one year periods unless the bank notifies us no later than 60 days prior to the end of the initial or any extended term that it shall not renew the letter of credit. Effective as of October 31, 2019 the letter of credit was reduced to $125,000 pursuant to the lease terms.
As of September 29, 2019, the outstanding principal balance on the line of credit was $250 thousand. For the year ended September 29, 2019 the total interest expense against the outstanding line of credit balance was $23 thousand. On April 16, 2020, the Company terminated its facility with Avidbank and entered into a new facility with BBVA USA.
Credit Facility — 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 (“BBVA”) The substantive terms are as follows:
The outstanding balance on the BBVA facility was $377 thousand as of September 27, 2020. For the year ended September 27, 2020, the total interest expense against the outstanding line of credit balance was $19 thousand.
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. As of September 29, 2019, there were 25,000 fully vested stock options outstanding at an exercise price of $10 per share and an expiration date of December 18, 2020. 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 September 27, 2020. As of September 27, 2020, 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 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 June 15, 2016, the Company issued 150,000 RSUs to its Chief Executive Officer, Danny Schoening, and 50,000 RSUs to its Chief Financial Officer, Karen Hawkins. The RSUs issued to Mr. Schoening and Ms. Hawkins vest as follows: 34% on January 1, 2017, 33% on January 1, 2018 and 33% on January 1, 2019. The total market value of the restricted stock units based on the share price of $1.85 as of June 15, 2016 is $372 thousand. The cost of the shares is amortized on a straight-line basis across the vesting periods. These restricted stock units were fully vested as of January 1, 2019.
On June 15, 2017, the Company issued 50,000 RSUs to its Applied Optics Center General Manager and new board member, Bill Bates. Pursuant to the RSU agreements the RSUs issued to Mr. Bates will vest as follows: 34% on January 1, 2018, 33% on January 1, 2019 and 33% on January 1, 2020. The total market value of the restricted stock units based on the share price of $0.95 as of June 15, 2016 is $47.5 thousand. The cost of the shares is amortized on a straight-line basis across the vesting periods. As of September 29, 2019, there were 16,500 unvested restricted stock units remaining from the June 15, 2017 issue which vested on January 1, 2020.
On January 2, 2019, the Company granted 150,000 and 50,000 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 34% in year one, and 33% each year thereafter. The stock price at grant date was $1.32 per share. The Company is amortizing the grant date fair market value of $264 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019.
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.
The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock units granted under the Company’s 2016 Restricted Stock Unit Plan:
Outstanding Unvested RSU’s | Wgt Average Grant Date Fair Value | |||||||
Unvested as of September 30, 2018 | 99,000 | $ | 1.56 | |||||
Granted | 200,000 | $ | 1.32 | |||||
Vested | (82,500 | ) | $ | 1.68 | ||||
Unvested as of September 29, 2019 | 216,500 | $ | 1.29 | |||||
Granted | 50,000 | $ | 2.13 | |||||
Vested | (84,500 | ) | $ | 1.25 | ||||
Unvested as of September 27, 2020 | 182,000 | $ | 1.54 |
On January 7, 2019, the Company issued 55,565 common shares to three directors and officers, net of tax withholding of $37 thousand, in settlement of 82,500 restricted stock units which vested on January 1, 2019.
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.
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 fair 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. As of period ended September 27, 2020, none of the restricted shares had vested.
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 restricted 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 | |||||||||||||||
Twelve months ended | As of year ended | |||||||||||||||
September 27, 2020 | September 29, 2019 | September 27, 2020 | September 29, 2019 | |||||||||||||
Restricted Shares | $ | 79 | $ | — | $ | 446 | $ | — | ||||||||
Restricted Stock Units | 118 | 113 | 188 | 200 | ||||||||||||
Total Stock Compensation | $ | 197 | $ | 113 | $ | 634 | $ | 200 |
The unrecognized compensation expense for restricted shares and restricted stock units is expected to be recognized over a weighted-average period of 4.25 years and 1.67 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 September 29, 2019 and September 30, 2018, 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 September 27, 2020 and September 29, 2019 were $165 thousand and $153 thousand, respectively.
Note 11 — Stockholders Equity
Dividends
There were no dividends declared or paid during the twelve months ended September 27, 2020 and September 29, 2019.
Common stock
During the twelve months ended September 29, 2019, there were 55,565 common shares issued, net of tax withholding, in settlement of 82,500 restricted stock units which vested on January 1, 2019. On June 12, 2019, we issued 47,504 common shares for the exercise of 47,504 warrants at an exercise price of $1.50 per share.
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 29, 2019.
On June 8, 2020 the Company announced authorization for a $1 million stock repurchase program. The shares authorized to be repurchased under the new 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 September 27, 2020, there were 105,733 common shares repurchased through the program at a cost of $200 thousand. The shares have been returned to the Treasury. A summary of the purchases under the plan follows:
Fiscal Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plan | Maximum dollar value that may yet be purchased under the plan | ||||||||||||
May 24, 2020 through June 28, 2020 | 34,243 | $ | 1.84 | 34,243 | $ | 936,857 | ||||||||||
June 29, 2020 through July 26, 2020 | 6,806 | $ | 1.89 | 6,806 | 923,994 | |||||||||||
July 27, 2020 through August 23, 2020 | 10,688 | $ | 1.96 | 10,688 | 903,062 | |||||||||||
August 23, 2020 through September 27, 2020 | 53,996 | $ | 1.90 | 53,996 | 800,397 | |||||||||||
Total shares repurchased as of period ended September 27, 2020 | 105,733 | $ | 1.89 | 105,733 | $ | 800,397 |
Plan announced on June 8, 2020 for purchases up to $1 million at prevailing market prices.
As of September 29, 2019, and September 27, 2020, the total outstanding common shares were 8,436,422 and 8,690,136, respectively. As of and September 27, 2020, there are 105,733 shares held in Treasury Stock. From September 28 through December 10, 2020 the company has repurchased 170,408 shares for $347 thousand dollars.
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 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 (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 will be issued in book-entry form and shall initially be 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 may be adjusted in certain circumstances, including in the event of a stock splits, stock dividend, extraordinary dividend on or recapitalization, reorganization, merger or consolidation.
Under the terms of the warrant agreement, Optex Systems Holdings Inc. has 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 Optex fails to have maintained an effective registration statement covering the shares underlying the warrants, the warrant holder may exercise the warrants on a cashless basis. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive 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 will be 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 will not 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 may increase or decrease the Beneficial Ownership Limitation, provided that in no event shall the Beneficial Ownership Limitation exceed 9.99% and any increase in the Beneficial Ownership Limitation will not be effective until 61 days following notice of such increase from the holder to us.
No fractional shares of common stock will 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. will, upon exercise, round up to the nearest whole number of shares of common stock to be issued to the warrant holder. If multiple warrants are exercised by the holder at the same time, Optex Systems Holdings Inc. will aggregate the number of whole shares issuable upon exercise of all the warrants. There is no established trading market for the warrants. The warrants have been approved for quotation on the OTCQB under ticker symbol “OPXXW”.
In the event of a fundamental transaction (as defined in warrant), then the Company or any successor entity will 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 30, 2018, there were 4,260,785 warrants outstanding. During the twelve months ended September 29, 2019, 47,504 of the warrants were exercised. On June 26, 2019, the Company repurchased 88,081 warrants at $0.85 per warrant for a total transaction cost of $74,869. During the twelve months ended September 27, 2020, there were zero warrants exercised or repurchased. As of September 27, 2020, there were 4,125,200 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 has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are 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 operations.
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:
Issuance date | Period ended | Period ended | Period ended | Period ended | ||||||||||||||||
Valuation Assumptions | August 26, 2016 | October 1, 2017 | September 30, 2018 | September 29, 2019 | September 27, 2020 | |||||||||||||||
Exercise Price(1) | $ | 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 | |||||||||||||||
Stock Price (2) | $ | 0.95 | $ | 0.98 | $ | 1.71 | $ | 1.56 | $ | 1.96 | ||||||||||
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 | |||||||||||||||
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.
(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.
The warrants outstanding and fair values at each of the respective valuation dates are summarized below:
Warrant Liability | Warrants Outstanding | Fair Value per Share | Fair Value (000’s) | |||||||||
Fair Value as of period ended 9/30/2018 | 4,260,785 | $ | 0.82 | $ | 3,500 | |||||||
Reclassification to additional paid in capital upon exercise of warrants(1) | (47,504 | ) | (48 | ) | ||||||||
Warrant buyback and cancellation(2) | (88,081 | ) | (72 | ) | ||||||||
Gain on Change in Fair Value of Warrant Liability | (1,344 | ) | ||||||||||
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 | |||||||||||
Fair Value as of period ended 9/27/2020 | 4,125,200 | $ | 0.62 | $ | 2,544 |
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 September 27, 2020 and September 29, 2019 include the following:
(Thousands) | ||||||||
2020 | 2019 | |||||||
Current income tax expense: | ||||||||
Current year federal income tax | $ | 403 | $ | 279 | ||||
Prior year tax adjustment | (59 | ) | (15 | ) | ||||
344 | 264 | |||||||
Deferred income tax provision (benefit): | ||||||||
Federal | 187 | (1,414 | ) | |||||
Provision for (Benefit from) income taxes, net | $ | 531 | $ | (1,150 | ) |
As of September 27, 2020, Optex Systems Inc. has a net carrying value of $1.2 million in deferred tax assets represented by deferred tax assets of $2.2 million and a deferred tax asset valuation allowance of ($1.0) 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 September 27, 2020, and September 29, 2019, 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. In the twelve months ended December 29, 2019, The Company released $1.8 million against the valuation allowance which resulted in the recognition of a tax benefit. During the twelve months ended September 27, 2020, we recognized an additional $0.05 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.
The income tax provision for Optex Systems as of September 27, 2020 differs from those computed using the statutory federal tax rate in the respective years due to the following permanent differences:
2020 | % | 2019 | % | |||||||||||||
Tax provision (benefit) at statutory federal rate | $ | 495 | 21 | $ | 949 | 21 | ||||||||||
Nondeductible expenses | 108 | 5 | (281 | ) | (6 | ) | ||||||||||
Other | 35 | 1 | 79 | 2 | ||||||||||||
Prior year federal income tax adjustment | (59 | ) | (2 | ) | (15 | ) | - | |||||||||
Change in deferred tax valuation allowance | (48 | ) | (2 | ) | (1,882 | ) | (42 | ) | ||||||||
Provision for (benefit from) income taxes, net | $ | 531 | 23 | $ | (1,150 | ) | (25 | ) |
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:
(Thousands) | ||||||||
Deferred Tax Asset | ||||||||
As of September 27, 2020 | As of September 29, 2019 | |||||||
Stock Compensation | $ | 64 | $ | 88 | ||||
Inventory Reserve | 119 | 150 | ||||||
Unicap | 31 | 39 | ||||||
Deferred Compensation | 39 | 31 | ||||||
Fixed assets | (18 | ) | (13 | ) | ||||
Goodwill Amortization | 299 | 398 | ||||||
Intangible Asset Amortization | 170 | 226 | ||||||
Net Operating Losses | 1,362 | 1,407 | ||||||
Other | 124 | 99 | ||||||
Subtotal | $ | 2,190 | $ | 2,425 | ||||
Valuation allowance | (963 | ) | (1,011 | ) | ||||
Net deferred asset (liability) | $ | 1,227 | $ | 1,414 |
The Company has a net loss carryforward of $6.5 million as of September 27, 2020 as compared to a net loss carryforward of $6.7 million as of September 29, 2019. 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 $2.6 million of the current net operating loss carryforward for a net tax benefit of $0.6 million over the next sixteen years.
As the result of the application of the FASB ASC 740-10, Optex Systems Holdings has no unrecognized tax benefits. By statute, the tax years ended in September 30, 2020, September 29, 2019 and September 30, 2018 are open to examination by the major taxing jurisdictions to which the Optex Systems Holdings is subject.
During the twelve months ended September 30, 2020 the Company paid $289 thousand in income taxes, and has a net tax refund due related to the fiscal year 2020 tax year of ($20) thousand included in prepaid expenses. During the twelve months ended September 29, 2019 the Company paid $360 thousand in income taxes, and had a net tax refund due related to the fiscal year 2019 tax year of ($75) thousand included in prepaid expenses. There were additional tax adjustments of $59 thousand due to changes from the provisional 2019 rates as compared to the federal income tax report associated with research and development tax credits and other adjustments.
Note 14 — Subsequent Events
We entered into an updated employment agreement with Danny Schoening dated October 15, 2020. The term of the agreement commenced as of October 15, 2020 and the current term ends on November 30, 2021. Mr. Schoening’s base salary continues to be $284,645 per annum. Mr. Schoening will be eligible for a performance bonus which is based upon a rolling three-year operating plan adopted by our Board of Directors. The bonus will be tied to operating metrics decided by our board against the three-year plan, and such metrics will be decided annually and tie to the three-year plan. The target bonus equates to 30% of Mr. Schoening’s base salary. Our board will have discretion to alter the performance bonus upward or downward by 20% based on its good faith discretion.
The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by us 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 without cause by us and (iv) termination by Mr. Schoening for good reason (including breach by us 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 then outstanding securities of us or our successor changing ownership or a sale of all or substantially all of our assets, without the surviving entity assuming the obligations under the agreement). For a termination by us for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening shall 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 us without cause or by Mr. Schoening with good reason, Mr. Schoening shall also be paid six months’ base salary in effect.
As of December 10, 2020, there have been a total of 276,141 shares repurchased pursuant to the stock repurchase plan announced on June 8, 2020 for a total of $547 thousand. From September 28, 2020 through December 10, 2020 the company repurchased 170,408 shares for $347 thousand dollars.
On December 15, 2020, the Company’s Board of Directors approved executive bonuses for Danny Schoening, CEO, of $48 thousand to be paid in January, 2021, and Karen Hawkins, CFO, of $37 thousand to be paid in December 2020.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 27, 2020, management performed, with the participation of our Principal Executive Officer and Principal Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Principal Executive Officer and our Principal Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our Principal Executive Officer and our Principal Financial Officer concluded that, as of September 27, 2020, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the year ended September 27, 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted, with the participation of our Principal Executive Officer and our Principal Financial Officer, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of September 27, 2020. Management’s assessment of internal control over financial reporting was conducted using the criteria in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with our management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we have not identified any material weaknesses in our internal control over financial reporting as of September 27, 2020. We have thus concluded that our internal control over financial reporting was effective as of September 27, 2020.
Item 10 Directors, Executive Officers and Corporate Governance
Our board of directors directs the management of the business and affairs of our company as provided in our certificate of incorporation, our by-laws and the General Corporation Law of Delaware. Members of our board of directors keep informed about our business through discussions with senior management, by reviewing analyses and reports sent to them, and by participating in regularly scheduled board and committee meetings.
Our company is led by Danny Schoening, who has served as COO since 2009 and was appointed CEO and Director in 2013, and became Chairman in 2017.
On November 4, 2019, the Board of Directors of Optex Systems Holdings, Inc. (the “Company”) appointed three new directors: Larry Hagenbuch, Dale Lehmann and Rimmy Malhotra, all of whom have been qualified as independent as defined under Nasdaq Listing Rules by the Board. All three new independent directors are compensated in accordance with the Company’s non-employee director compensation policies. Larry Hagenbuch serves as the Audit Committee Chair and Rimmy Malhotra serves as the Compensation Committee Chair. Bill Bates and Karen Hawkins have resigned as directors of the Company in order to enable the Company to have this reconstituted Board comprised of a majority of independent directors. David Kittay also resigned from the Company’s Board and Audit Committee to pursue other business interests.
As of December 10, 2020, our board of directors consists of four directors which includes three independent directors and one non-independent directors as discussed below.
Our board leadership structure is used by other smaller public companies in the United States, and we believe that this leadership structure is effective for us. We believe that our directors provide effective oversight of the risk management function, especially through dialogue between the full board and our management. Our directors serve for a one year term and until their successors are elected and duly qualify.
We do not currently consider diversity in identifying nominees for director. Due to our small size, the priority has been in attracting qualified directors, and issues such as diversity have not yet been considered.
Directors and Executive Officers
The following table sets forth information regarding the members of our board of directors and our executive officers and other significant employees.
The following table sets forth certain information with respect to our directors and executive officers:
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Danny Schoening. Mr. Schoening joined Optex Systems, Inc. (Texas) in January 2008. Upon the acquisition of the assets of Optex Systems, Inc. (Texas) by Optex Systems, Inc. (Delaware), Mr. Schoening became the COO of Optex Systems, Inc. (Delaware) (as of September 28, 2008) and he commenced service with Optex Systems Holdings as its Chief Operating Officer as of the date of the reorganization, March 30, 2009 and was appointed Chief Executive Officer and as a Director in 2013. He has been instrumental in establishing the systems and infrastructure required to continue Optex System’s rapid growth. This activity was rewarded with Optex System’s recent ISO 9001:2000 Certification. From February 2004 to January 2008, Danny was the Vice President of Operations for The Finisar Corporation AOC Division for 4 years where he led a team of up to 200 employees to produce vertical cavity lasers for the data communications industry at production rates of hundreds of thousands of units per week. Prior to Finisar, Danny was the Director of Operations for multiple divisions of Honeywell International. Serving the Automotive, Medical, Aerospace, and Consumer Commercial Markets. During this 17-year period, Danny was recognized with Honeywell’s Lund Award, their highest award for developing employee resources. Danny has a broad experience level in the following technologies: Mechanical Assembly Processes, Micro-Electronic Assembly Processes, Laser Manufacturing, Plastic Molding, Metal Machining, Plating, Thick Film Printing, Surface Mount Technology, Hall Effect Technology and MEMS based Pressure Devices. Danny received a Bachelor’s of Science in Manufacturing Engineering Technology from the University of Nebraska, an MBA from Southern Methodist University, and holds three U.S. patents. The Board of Directors has determined that Mr. Schoening is suited to sit on our Board because of his industry experience and as he is the CEO.
Karen L. Hawkins. On November 19, 2014, Karen Hawkins was appointed as our Chief Financial Officer. Ms. Hawkins had previously served as our Vice President, Finance and Controller, since the date of the reorganization, March 30, 2009 and was the controller of Optex Systems, Inc. (Delaware), effective September 28, 2009. She began her employment with Optex Systems, Inc. (Texas) in April 2007. Ms. Hawkins has over 30 years’ experience in Financial Accounting and Management, primarily focused in the Defense and Transportation Industries. She has a strong background in both Financial & Cost Accounting, with extensive Government Pricing, Financial Analysis, and Internal Auditing experience. Her past history also includes Program Management, Materials Management and Business Development. She brings over 25 years’ direct experience in Government Contracting with a strong knowledge of Cost Accounting Standards Board and Federal Acquisition Regulation. Her previous employment includes General Dynamics — Ordinance and Tactical Division, Garland (formerly known as Intercontinental Manufacturing) for over 13 years from November, 1994 through March, 2007. During her tenure there she served in the roles of Controller (Accounting & IT), Program Manager over a $250M 3-year Army Indefinite Delivery/Indefinite Quantity (Indefinite Delivery/Indefinite Quantity) type contract, as well as Materials Manager with oversight of Purchasing, Production Control & Warehousing functions. Prior to her employment at General Dynamics, Ms. Hawkins served in various finance and accounting positions at Luminator, a Mark IV Industries Co, and Johnson Controls, Battery Division - Garland. Karen received her Bachelor’s Degree in Business Administration in Accounting from Stephen F. Austin State University in Texas in 1986 and became a Certified Public Accountant in 1992.
Larry Hagenbuch joins the Board and has accepted the role of Audit Committee Chair. Larry is currently a Managing Director at Huron Consulting Group. Prior to that, Larry was the Chief Operating Officer and Chief Financial Officer for J. Hilburn, Inc., a custom clothier for men from Dec 2009 to May 2019. He served on the board of directors of Remy International (REMY) from November 2008 until that company’s sale to BorgWarner in November 2015, where he served on the audit and compensation committees. Larry also currently serves on the board of directors for both Arotech (ARTX) and HireQuest (HQI). Larry has served in senior management positions for SunTx Capital Partners, Alix Partners, GE / GE Capital, and American National Can Group, Inc. Larry began his professional career in the United States Navy.
Dale Lehmann joins the Board as an industry expert having over 30 years of management, strategy, product development, delivery and operational experience in the electro-optical industry. Dale was the Director of Business Development & Strategy for General Dynamics Global Imaging Technologies Group from 2014 through 2017. Prior to that, Dale was the Senior Vice President & General Manager of the Infrared Products Group for L-3 Communications/Cincinnati Electronics from 1995 through 2014. Dale currently sits on the Board of Directors for Adimec USA, a provider of application specific imaging solutions.
Rimmy Malhotra joins the Board and has accepted the role of Compensation Committee Chair. Rimmy currently manages The Nicoya Fund, an investment partnership whose partners include, high net worth individuals, entrepreneurs and family offices and has acted in that capacity since 2013. He currently serves as Vice-Chairman of HireQuest, a NASDAQ listed staffing operator. He holds an MBA from The Wharton School in Finance, MA in International Affairs from The University of Pennsylvania and a Bachelor of Science in Computer Science from Johns Hopkins University.
Bill Bates. Mr. Bates has thirty-five years of experience related to optical component and system manufacturing. He is currently the General Manager of the Applied Optics Center in Dallas, Texas where he oversees the Thin-film Coating and Optical Assembly Operations. He has held various positions throughout his thirty-five years of experience within Litton Industries, Northrop Grumman Corporation, and L-3 Communications. He previously served as Vice President and General Manager within the Warrior Systems Division of L-3 Communications. Mr. Bates received a Bachelor of Science of Business Administration from DeVry University and an MBA from the University of Texas at Dallas.
Family Relationships
There are no family relationships among the officers and directors.
Presiding Director
Our Chairman, Danny Schoening, is the presiding director at meetings. In the event that the Chairman is unavailable to serve at a particular meeting, responsibility for the presiding director function will rotate among the directors in attendance.
Corporate Governance
Our board of directors believes that sound governance practices and policies provide an important framework to assist them in fulfilling their duty to stockholders. Our board of directors actively supports management’s adoption and implementation of many “best practices” in the area of corporate governance, including annual review of internal control changes, compensation practices, executive management and auditor retention. In 2019 and 2018, all directors attended a minimum of 75% of the meetings of the board of directors.
Code of Ethics
Our board of directors has adopted a Code of Ethics which has been distributed to all directors, and executive officers, and will be distributed to employees and will be given to new employees at the time of hire. The Financial Code of Ethics contains a number of provisions that apply principally to our Principal Executive Officer, Principal Financial Officer and other key accounting and financial personnel. A copy of our Code of Business Conduct and Ethics can be found under the “Investor Relations” section of our website (www.optexsys.com) under the section for corporate governance. We also intend to disclose any amendments or waivers of our Code on our website.
Board Meetings
We are incorporated under the laws of the State of Delaware. The interests of our stockholders are represented by the board of directors, which oversees our business and management.
The board of directors meets regularly during the year and holds special meetings and acts by unanimous written consent whenever circumstances require. The board held 4 meetings (including special meetings) and took action by unanimous written consent 2 times during our fiscal year ended September 27, 2020.
Board Committees
As of November 4, 2019, Larry Hagenbuch was appointed to the board as an independent director and has accepted the role of Audit Committee Chair and Rimmy Malhotra was appointed to the board as an independent director and has accepted the role of Compensation Committee Chair. Each committee has three independent board members including Dale Lehmann.
Mr. Kittay, resigned as of November 4, 2019 and previously served as our only independent director, and as chair of the Audit and Compensation Committee until November 3, 2019.
Board nominations
Stockholders wishing to bring a nomination for a director candidate before a stockholders meeting must give written notice to our Corporate Secretary, either by personal delivery or by United States mail, postage prepaid. The stockholder’s notice must be received by the Corporate Secretary not later than (a) with respect to an Annual Meeting of Stockholders, 90 days prior to the anniversary date of the immediately preceding annual meeting, and (b) with respect to a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of the meeting is first given to stockholders. The stockholder’s notice must set forth all information relating to each person whom the stockholder proposes to nominate that is required to be disclosed under applicable rules and regulations of the SEC, including the written consent of the person proposed to be nominated to being named in the proxy statement as a nominee and to serving as a director if elected. The stockholder’s notice must also set forth as to the stockholder making the nomination (i) the name and address of the stockholder, (ii) the number of shares held by the stockholder, (iii) a representation that the stockholder is a holder of record of stock of the Optex Systems Holdings, entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person named in the notice, and (iv) a description of all arrangements or understandings between the stockholder and each nominee.
Stockholder Communications with the Board of Directors
Stockholders may communicate directly with the board of directors or any board member by writing to them at Optex Systems Holdings, Inc., 1420 Presidential Drive, Richardson, TX 75081. The outside of the envelope should prominently indicate that the correspondence is intended for the board of directors or for a specific director. The secretary will forward all such written communications to the director to whom it is addressed or, if no director is specified, to the entire board of directors.
Director Attendance at Annual Meetings of Stockholders
Directors are encouraged to attend annual meetings, although such attendance is not required.
Board Independence
Our board of directors has determined that three of our directors would meet the independence requirements of the Nasdaq Capital Market, if such standards applied to the Company. In reaching its conclusions, the board of directors considered all relevant facts and circumstances with respect to any direct or indirect relationships between the Company and each of the directors, including those discussed under the caption “Certain Relationships and Related Transactions” below. Our board of directors determined that any relationships that exist or existed in the past between the Company and each of the independent directors were immaterial on the basis of the information set forth in the above-referenced sections.
Director Compensation
See table below under “Executive Compensation — Director Compensation.”
Item 11 Executive Compensation
The board of directors administers our option compensation plan. Our Principal Executive Officer and other members of management regularly discuss our compensation issues with the Board of Directors. Subject to Board review, modification and approval, Danny Schoening typically makes recommendations respecting bonuses and equity incentive awards for the other members of the executive management team. The Board establishes all bonus and equity incentive awards for officers and directors in consultation with other members of the management team.
Summary Compensation Table
The following table sets forth, for the years indicated, all compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by our principal executive officer, principal financial officer and all other executive officers who received or are entitled to receive remuneration in excess of $100,000 during the stated periods. These officers are referred to herein as the “named executive officers.” Except as provided below, none of our executive officers received annual compensation in excess of $100,000 during the last two fiscal years.
Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) (2) | Option Awards ($) (1) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
2020 | $ | 284,645 | $ | 74,719 | $ | 110,670 | $ | - | $ | - | $ | 470,034 | ||||||||||||||||
Danny Schoening, | 2019 | 279,504 | 76,216 | 73,740 | - | - | 429,460 | |||||||||||||||||||||
CEO & Board Chairman | 2018 | 262,417 | 152,432 | 93,000 | 4,273 | - | 512,122 | |||||||||||||||||||||
2020 | $ | 205,425 | $ | 53,924 | $ | 36,890 | $ | - | $ | - | $ | 296,239 | ||||||||||||||||
Karen Hawkins | 2019 | 201,537 | 55,691 | 24,580 | - | - | 281,808 | |||||||||||||||||||||
CFO & Board Director | 2018 | 188,055 | 55,691 | 31,000 | 2,137 | - | 276,883 | |||||||||||||||||||||
2020 | $ | 150,834 | $ | 22,236 | $ | 35,805 | $ | - | $ | - | $ | 208,875 | ||||||||||||||||
Bill Bates | 2019 | 148,269 | 28,561 | 15,675 | $ | - | - | 192,505 | ||||||||||||||||||||
AOC GM & Board Director | 2018 | 140,220 | 28,044 | 19,210 | - | - | 187,474 | |||||||||||||||||||||
Stanley A. Hirschman, | 2018 | $ | - | $ | - | $ | - | $ | 2,137 | $ | - | $ | 2,137 | |||||||||||||||
President, resigned (3) |
Option Grants in Last Fiscal Year
There were no Option Grants during the twelve months ended September 27, 2020 or September 29, 2019.
Employment Agreements - Danny Schoening
We entered into an employment agreement with Danny Schoening dated December 1, 2008. The term of the agreement commenced as of December 1, 2008 and the current term has automatically renewed through December 1, 2020. The term of the agreement shall be automatically extended for successive 18-month periods, unless we shall provide a written notice of termination at least ninety (90) days, or Mr. Schoening shall provide a written notice of termination at least 90 days, prior to the end of the initial term or any extended term, as applicable.
On each subsequent renewal date of the commencement of employment, Schoening’s base salary shall be reviewed by the Board and may be increased to such rate as the Board, in its sole discretion, may hereafter from time to time determine. During the term of the agreement, Schoening shall be entitled to receive bonuses of up to 30% of his base salary per year at the discretion of our Board of Directors pursuant to performance objectives to be determined by the Board of Directors. Any bonuses shall be payable in cash and shall be paid within ninety (90) days of any year anniversary of the date of the agreement.
The employment agreement events of termination consist of: (i) death of Mr. Schoening; (ii) termination by us 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 without cause by us and (iv) termination by Mr. Schoening for good reason (including breach by us 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 then outstanding securities of us or our successor changing ownership or a sale of all or substantially all of our assets, without the surviving entity assuming the obligations under the agreement). For a termination by us for cause or upon death of Mr. Schoening, Mr. Schoening shall be paid salary and bonus earned through the date of termination. For a termination by us without cause or by Mr. Schoening with good reason, Mr. Schoening shall also be paid six months’ base salary in effect and all granted stock options shall remain exercisable for a period of two years after such termination, with all unvested stock options immediately vesting. The agreement contains a standard non-solicitation and non-compete agreement that extends for one year subsequent to termination thereof.
We entered into an updated employment agreement with Danny Schoening dated October 15, 2020. The term of the agreement commenced as of October 15, 2020 and the current term ends on November 30, 2021. Mr. Schoening’s base salary continues to be $284,645 per annum. Mr. Schoening will be eligible for a performance bonus which is based upon a rolling three-year operating plan adopted by our Board of Directors. The bonus will be tied to operating metrics decided by our board against the three-year plan, and such metrics will be decided annually and tie to the three-year plan. The target bonus equates to 30% of Mr. Schoening’s base salary. Our board will have discretion to alter the performance bonus upward or downward by 20% based on its good faith discretion.
The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by us 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 without cause by us and (iv) termination by Mr. Schoening for good reason (including breach by us 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 then outstanding securities of us or our successor changing ownership or a sale of all or substantially all of our assets, without the surviving entity assuming the obligations under the agreement). For a termination by us for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening shall 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 us without cause or by Mr. Schoening with good reason, Mr. Schoening shall also be paid six months’ base salary in effect.
Karen Hawkins
On August 4, 2016, our Board of Directors approved an employment agreement for Karen Hawkins, Chief Financial Officer, dated as of August 1, 2016. This agreement has the following salient terms:
We do not have any other employment agreements with our executive officers and directors.
Equity Compensation Plan Information
We currently have an option compensation plan covering the issuance of both incentive and non-statutory options, determined at the time of grant, for the purchase of up to 75,000 shares, which was increased from 50,000 shares on December 19, 2013. The purpose of the Plan is to assist us in attracting and retaining highly competent employees and to act as an incentive in motivating selected officers and other employees of us and our subsidiaries, and directors and consultants of us and our subsidiaries, to achieve long-term corporate objectives. On December 19, 2013, the Board of Directors authorized the grant of 20,000 options to three board members and a grant of 5,000 to an officer. There are 75,000, shares of common stock reserved for issuance under this Plan.
As of September 29, 2019, there were 25,000 fully vested stock options outstanding at an exercise price of $10 per share and an expiration date of December 18, 2020. During the twelve months ended September 27, 2020, all 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 September 27, 2020. As of September 27, 2020, 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 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 June 15, 2016, the Company issued 150,000 RSUs to its Chief Executive Officer, Danny Schoening, and 50,000 RSUs to its Chief Financial Officer, Karen Hawkins. The RSUs issued to Mr. Schoening and Ms. Hawkins vest as follows: 34% on January 1, 2017, 33% on January 1, 2018 and 33% on January 1, 2019. The total market value of the restricted stock units based on the shares price of $1.85 as of June 15, 2016 is $372 thousand. The cost of the shares is amortized on a straight line basis across the vesting periods.
On January 5, 2017, Optex Systems Holdings issued 45,799 common shares related to the vesting of the 68,000 restricted stock units on January 1, 2017. The shares issued were net of 22,201 common shares withheld for employee federal income tax requirements.
On June 15, 2017, the Company issued 50,000 RSUs to its Applied Optics Center General Manager and new board member, Bill Bates. Pursuant to the RSU agreements the RSUs issued to Mr. Bates will vest as follows: 34% on January 1, 2018, 33% on January 1, 2019 and 33% on January 1, 2020. The total market value of the restricted stock units based on the shares price of $0.95 as of June 15, 2016 is $47.5 thousand. The cost of the shares is amortized on a straight line basis across the vesting periods.
On January 2, 2018 the Company issued 55,902 common shares related to the vesting of 83,000 restricted stock units on January 1, 2018. The shares issued were net of 27,098 common shares withheld for employee federal income tax requirements.
On November 20, 2018 the Company’s board of directors approved the issuance of 150,000 and 50,000 restricted stock units to Danny Schoening and Karen Hawkins, respectively, with a January 2, 2019 grant date, vesting 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 total market value of the restricted stock units based on the shares price of $1.32 as of January 2, 2019 is $264 thousand.
On January 7, 2019, the Company issued 55,565 common shares to three directors and officers, net of tax withholding of $37 thousand, in settlement of 82,500 restricted stock units which vested on January 1, 2019.
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.
As of September 27, 2020, there are 182,000 outstanding unvested restricted stock units remaining to vest, of which 83,000 will vest as of January 1, 2020 and the remaining 99,000 will vest on January 1, 2021 and January 1, 2022 and January 1, 2023.
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 $1.75 as of April 30, 2020. The Company will amortize the fair market value to stock compensation expense on a straight-line basis across the five-year vesting period beginning on April 30, 2020. As of period ended September 27, 2020, none of the restricted shares had vested.
Consulting and Vendor Equity Compensation
There was no equity compensation to consultants or vendors during the years ended September 27, 2020 or September 29, 2019.
Nonqualified deferred compensation
We had no non-qualified deferred compensation plans during year ended September 27, 2020.
Post-Termination Compensation
We have not entered into change in control agreements with any of our named executive officers or other members of the executive management team other than the provision with respect to Mr. Schoening and Ms. Hawkins described above. No awards of equity incentives under our 2009 Stock Option Plan provide for immediate vesting upon a change in control. However, our Board of Directors has the full and exclusive power to interpret the plans, including the power to accelerate the vesting of outstanding, unvested awards. A “change in control” is generally defined as (1) the acquisition by any person of 66% or more of the combined voting power of our outstanding securities or (2) the occurrence of a transaction requiring stockholder approval and involving the sale of all or substantially all of our assets or the merger of us with or into another corporation.
Director Compensation
The following table provides information regarding compensation paid to directors for services rendered during the year ended September 27, 2020.
Fees Earned or | ||||
Name | Paid in Cash ($)(1) | |||
Rimmy Malhotra | $ | 30,667 | ||
Larry Hagenbuch | 30,667 | |||
Dale Lehmann | 30,667 | |||
Danny Schoening | - |
The members of our board of directors are actively involved in various aspects of our business ranging from relatively narrow board oversight functions to providing hands-on guidance to our executives and scientific staff with respect to matters within their personal experience and expertise. We believe that the active involvement of all directors in our principal business and policy decisions increases our board of directors’ understanding of our needs and improves the overall quality of our management decisions.
With the exception of Danny Schoening, our directors are compensated separately for service as independent members of our board of directors.
On November 14, 2019, the Board of Directors reviewed the independent director compensation and concluded to leave the pay as is currently in place for former independent directors, currently set at $5.5 thousand per quarter served. The board determined to revisit the independent board compensation during the first calendar quarter of 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 $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.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On December 10, 2020, we had 8,519,728 shares of common stock outstanding, 4,125,200 warrants, and 182,000 granted and unvested restricted stock units. The following table sets forth certain information with respect to the beneficial ownership of our securities as of December 10, 2020, for (i) each of our directors and executive officers; (ii) all of our directors and executive officers as a group (not noting our three new directors who have not yet been issued any stock or options which have vested); and (iii) each person who we know beneficially owns more than 5% of our common stock.
Beneficial ownership data in the table has been calculated based on Commission rules that require us to identify all securities that are exercisable or convertible into shares of our common stock within 60 days of December 10, 2020 and treat the underlying stock as outstanding for the purpose of computing the percentage of ownership of the holder.
Except as indicated by the footnotes following the table, and subject to applicable community property laws, each person identified in the table possesses sole voting and investment power with respect to all capital stock held by that person. The address of each named executive officer and director, unless indicated otherwise by footnote, is c/o our corporate headquarters.
Except as otherwise set forth below, the address of each of the persons listed below is our address.
Title of Class | Name of Beneficial Owner | Number of Shares | Percentage of Outstanding Shares | |||||||
5% Holders | Gate City Capital Management LLC (1) | 1,417,518 | 16.5 | % | ||||||
Ephraim Fields (2) | 1,179,174 | 13.7 | % | |||||||
Directors and Officers: | Danny Schoening (3) | 854,006 | 9.9 | % | ||||||
Karen Hawkins (4) | 244,536 | 2.8 | % | |||||||
Bill Bates (5) | 51,171 | 0.6 | % | |||||||
Directors and officers as a group (3 Individuals) (6) | 1,149,713 | 13.4 | % |
Item 13 Certain Relationships and Related Transactions, and Director Independence
None
Transactions with Executive Management
See the “Executive Compensation” section for a discussion of the material elements of compensation awarded to, earned by or paid to our named executive officers. Other than as stated in the “Executive Compensation” section, we have not entered into any transactions with executive management. There are no transactions disclosable under Item 404 of Regulation S-K.
Director Independence
As of the date of filing of this Annual Report,January 9, 2023, the Company has threefour independent directors, as such term is defined under NASDAQ standards and one non independent director. One independent director is not standing for re-election at the Annual Meeting.
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THE ELECTION OF DIRECTORS
General
Four directors are to be elected at this Annual Meeting to serve until the 2023 annual meeting of shareholders or until, for each director, a successor has been elected and qualified. Unless otherwise instructed, the person or persons named in the accompanying proxy intend(s) to vote the shares represented by the proxy for the election of the nominees listed below. Although it is not contemplated that the nominees will decline or be unable to serve as directors, in such event, proxies will be voted by the proxy holder(s) for such other persons as may be designated by the Board.
The following table sets forth the nominees for the Board of Directors. See the “Management” Section for biographical information for each of the nominees.
Nominee for Director
Name | Age | Position | ||
Danny R. Schoening | 58 | Chairman and Director, Chief Executive Officer, Chief Operating Officer | ||
Dale E. Lehmann | 64 | Director, Nominating Committee Chair | ||
R. Rimmy Malhotra | 46 | Director, Compensation Committee Chair | ||
Dayton Judd | 51 | Director, Audit Committee Chair |
Vote Required
The election of the directors requires a plurality (the four nominees receiving the most “FOR” votes) of the votes cast on the proposal.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES IN PROPOSAL 1.
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THE REVERSE SPLIT PROPOSAL
General
Upon recommendation of the Board and in connection with a proposed listing of the Company’s common stock on the NASDAQ Capital Market (the “NASDAQ Uplisting”), shareholders of the Company are being asked to approve and vote on the authorization (the “Action”) of an amendment (the “Amendment”) to the Company’s certificate of incorporation, as amended, for the purposes of effecting a reverse stock split (the “Reverse Split”) of the common stock at a ratio of 1-for-2, and to authorize the Board to determine, in its discretion, to proceed with or abandon the Reverse Split, and the timing of the Amendment so long as any Reverse Split occurs by December 31, 2023.
At any time after the effective date of the Action, the Board will determine whether to proceed with the Reverse Split. The total number of authorized shares of common stock and preferred stock, and the par value of such shares of stock, will remain unchanged. If the Board decides to proceed with the Reverse Split, it will file with the Delaware Secretary of State, by December 31, 2023, an amendment to the Company’s certificate of incorporation, substantially in the form attached hereto as ANNEX A.
In deciding whether to proceed with the Reverse Split, the Board will be guided by the best interests of the Company and its shareholders, and will consider the following factors, among others, at the time of its decision:
(i) | the market price of the common stock in light of: | ||
a. | the Company’s ability to satisfy the initial stock price listing requirement of NASDAQ; | ||
b. | the Board’s considerations with respect to “penny stock” status; | ||
(ii) | the number of shares that will be outstanding after the Reverse Split; | ||
(iii) | the liquidity of the common stock in the market; | ||
(iv) | shareholders’ equity at the time of the Reverse Split; and | ||
(v) | the shares of common stock available for issuance in the future. |
The Board maintains the right to elect not to proceed with or abandon the Reverse Split if it determines, in its sole discretion, that it is not necessary or advisable in connection with the NASDAQ Uplisting and that the Reverse Split is otherwise not in the best interests of the Company and its shareholders. If the Board elects to proceed with the Reverse Split, it must effect the Reverse Split by December 31, 2023.
Effects of Reverse Split
Immediately following the effectiveness, if any, of the Reverse Split, current holders of common stock will hold one half of the number of shares of common stock held prior to the Reverse Split, subject to the treatment of fractional shares as described below. Therefore, following the Reverse Split, a shareholder owning 300 shares of common stock prior to the Reverse Split would hold 150 shares.
Except for any changes as a result of the treatment of fractional shares, each shareholder will hold the same percentage of common stock outstanding immediately after the Reverse Split as such shareholder held immediately prior to the Reverse Split.
The Amendment will not change the terms of the common stock. After the Reverse Split, the shares of common stock will have the same voting rights and rights to dividends and distributions and will be identical in all other respects to the common stock, now authorized. Each shareholder’s percentage ownership of the new common stock will not be altered except for the effect of eliminating fractional shares. The par value of the common stock will not change and the outstanding common stock will remain fully paid and non-assessable. The Reverse Split is not intended as, and will not have the effect of, a “going private transaction” covered by Rule 13e-3 under the Exchange Act. Following the Reverse Split, we will continue to have the same number of shareholders and we will still be subject to the periodic reporting requirements of the Exchange Act.
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The Company currently has no outstanding shares of preferred stock, with all previously issued Series A shares, Series B shares and Series C shares having been converted or redeemed.
Purposes of the Reverse Split
The Board believes that the Amendment will improve the Company’s chances of meeting the initial stock price listing requirement of NASDAQ and therefore the chances of an initial listing on NASDAQ. Short of listing on NASDAQ, the Reverse Split may improve the Company’s chances of not having its common stock designated a “penny stock.”
Following the approval of this Action, the Board will effect a Reverse Split only upon the Board’s determination that a Reverse Split would be necessary or advisable in connection with the NASDAQ Uplisting or otherwise in the best interests of the Company and its shareholders at that time. If the Board were to effect a Reverse Split, the Board would set the timing for such a split. No further action on the part of shareholders will be required to either implement or abandon the Reverse Split. If the Board determines to implement the Reverse Split, we would communicate to the public, at or prior to the effective date of the Reverse Split, additional details regarding the Reverse Split.
Risks Associated with the Reverse Split
Shareholders should note that the effect of the Reverse Split upon the market price for our common stock cannot be accurately predicted. In particular, we cannot assure you that prices for shares of our common stock after the Reverse Split will be 2 times the prices for shares of our common stock immediately prior to the Reverse Split. The market price of our common stock may also be affected by other factors which may be unrelated to the Reverse Split or the number of shares outstanding.
Furthermore, even if the market price of our common stock does rise following the Reverse Split, we cannot assure you that the market price of our common stock immediately after the proposed Reverse Split will be maintained for any period of time. Even if an increased per-share price can be maintained, the Reverse Split may not achieve the desired results that have been outlined above. Moreover, because some investors may view the Reverse Split negatively, we cannot assure you that the Reverse Split will not adversely impact the market price of our common stock. Accordingly, our total market capitalization after the Reverse Split may be lower than the market capitalization before the Reverse Split.
It is possible that, even if we will meet all applicable NASDAQ requirements for an initial listing, we may not be able to continue to satisfy the additional criteria for continued listing of our common stock on NASDAQ. To continue to have our common stock eligible for listing on NASDAQ, we would also need to satisfy additional criteria under at least one of the three continued listing standards. We cannot assure you that we will be successful in continuing to meet all requisite continued listing criteria.
If the Reverse Split is implemented, some shareholders may consequently own less than 100 shares of common stock. A purchase or sale of less than 100 shares (an “odd lot” transaction) may result in incrementally higher trading costs through certain brokers, particularly “full service” brokers. Therefore, those shareholders who own less than 100 shares following the Reverse Split may be required to pay higher transaction costs if they sell their shares in the Company.
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Anti-Takeover Effects of a Reverse Split
Release No. 34-15230 of the Staff of the Securities and Exchange Commission requires disclosure and discussion of the effects of any action, including the proposals discussed herein, that may be used as an anti-takeover mechanism. The Amendment will result in a relative increase in the number of authorized but unissued shares of our common stock vis-à-vis the outstanding shares of our common stock and, could, under certain circumstances, have an anti-takeover effect, although this is not the purpose or intent of our Board. An increase in the relative number of authorized number of shares of common stock could have other effects on our shareholders, depending upon the exact nature and circumstances of any actual issuances of authorized but unissued shares. An increase in our outstanding shares could potentially deter takeovers, including takeovers that our Board has determined are not in the best interest of our shareholders, in that additional shares could be issued (within the limits imposed by applicable law) in one or more transactions that could make a change in control or takeover more difficult. For example, we could issue additional shares so as to dilute the stock ownership or voting rights of persons seeking to obtain control without our agreement. Similarly, the issuance of additional shares to certain persons allied with our management could have the effect of making it more difficult to remove our current management by diluting the stock ownership or voting rights of persons seeking to cause such removal. The Reverse Split therefore may have the effect of discouraging unsolicited takeover attempts. By potentially discouraging initiation of any such unsolicited takeover attempts, the Reverse Split may limit the opportunity for our shareholders to dispose of their shares at the higher price generally available in takeover attempts or that may be available under a merger proposal. However, the Board is not aware of any attempt to take control of our business and the Board has not considered the Reverse Split to be tool to be utilized as a type of anti-takeover device.
Common Stock
If the Board proceeds with the Reverse Split, after the effective date of the Reverse Split, each shareholder will own fewer shares of our stock than prior to the Reverse Split.
The number of authorized shares of capital stock (i.e., common stock and preferred stock), and the par value of such shares, will remain unchanged. A Reverse Split would therefore result in an increase in the number of authorized and unissued shares of our common stock. Because our shareholders have no preemptive rights to purchase or subscribe for any of our unissued common stock, the future issuance of additional shares of common stock will reduce our current shareholders’ percentage ownership interest in the total outstanding shares of common stock. In the absence of a proportionate increase in our future earnings and book value, an increase in the number of our outstanding shares of common stock would dilute our projected future earnings per share, if any, and book value per share of all our outstanding shares of common stock. If these factors were reflected in the price per share of our common stock, the potential realizable value of a shareholder’s investment could be adversely affected. An issuance of additional shares could therefore have an adverse effect on the potential realizable value of a shareholder’s investment. As of the date of this filing, the Company does not have any definitive plans, proposals or arrangements to issue any of the newly available authorized shares for any purpose.
Any additional shares of common stock that would become available for issuance following the Reverse Split could also be used by the Company’s management to delay or prevent a change in control. The Board is not aware of any pending takeover or other transactions that would result in a change in control of the Company, and the proposal was not adopted in response to any such proposals.
As of the Record Date, there are no outstanding securities exercisable for common stock, so no adjustment to their exercise price will be required as a result of the Reverse Split. If any such securities are issued after the Record Date and remain outstanding at the effective date of the Reverse Split, they would be adjusted as a result of the Reverse Split. In particular, the number of shares issuable upon the exercise of an option would be reduced, and the exercise price per share, if applicable, would be increased, in accordance with the terms of the option.
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The below charts outline the capital structure as described above and prior to and immediately following a possible Reverse Split. The number of shares disclosed in the column “Number of shares of xx Stock before Reverse Split” reflects the number of shares as of January 9, 2023. The number of shares disclosed in the column “Number of shares of xx Stock after Reverse Split” gives further effect to the Reverse Split but does not give effect to any other changes, including any issuance of securities (including under the 2023 Equity Incentive Plan, if adopted) after January 9, 2023. In addition, the number of shares after the Reverse Split shown in the charts below do not take into account the effect of rounding up at the level of each individual holder, and the actual number of shares after the Reverse Split may therefore be higher than shown below.
Number of shares of Common Stock before Reverse Split | Number of shares of Common Stock after Reverse Split | |||||||
Authorized | 2,000,000,000 | 2,000,000,000 | ||||||
Issued and Outstanding | 6,763,070 | 3,381,535 | ||||||
Reserved for Issuance | 0 | 0 | ||||||
Authorized but Unissued | 1,993,236,930 | 1,996,618,465 |
Number of shares of Preferred Stock before Reverse Split | Number of shares of Preferred Stock after Reverse Split | |||||||
Authorized* | 5,000 | 5,000 | ||||||
Issued and Outstanding* | 0 | 0 | ||||||
Reserved for Issuance | 0 | 0 | ||||||
Authorized but Unissued* | 2,563 | 2,563 |
* The Company currently has no outstanding shares of preferred stock, with all previously issued Series A shares, Series B shares and Series C shares having been converted or redeemed. The Company is authorized to issue up to 5,000 shares of preferred stock in one or more class or series. An aggregate of 2,437 shares of preferred stock were previously designated as Series A shares, Series B shares or Series C shares, so only 2,563 shares of authorized preferred stock remain available for issuance in a new class or series.
Exchange of Shares
Upon the effectiveness of the Reverse Split, two shares of our common stock will automatically be changed into one share of common stock.
All holders of our common stock who hold their shares electronically in book-entry form with our transfer agent will be processed on or immediately after the date on which the Reverse Split becomes effective. No action needs to be taken by such shareholders to receive such post-Reverse Split shares.
Holders of our common stock in certificated form will be required to exchange their certificates representing shares of common stock held prior to the Reverse Split for new certificates representing shares of new common stock. Therefore, it is necessary for such holders to surrender their stock certificates to our transfer agent with a request for a replacement certificate and the appropriate stock transfer fee.
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Banks, brokers or other nominees will be instructed to effect the Reverse Split for their beneficial holders holding our common stock in “street name.” We expect that such holders’ banks, brokers or other nominees will post the new shares in such holders’ accounts shortly after the date on which the Reverse Split becomes effective. However, these banks, brokers or other nominees may have different procedures for processing the Reverse Split. If a shareholder holds shares of our common stock with a bank, broker or other nominee and has any questions in this regard, the shareholder is encouraged to contact their bank, broker or other nominee.
Fractional Shares
No fractional shares of our common stock will be issued as a result of the Reverse Split. In the event the proposed Reverse Split leaves a shareholder with a fraction of a share, the number of shares due to the shareholder will be rounded up to the nearest whole number of shares. For example, if the proposed Reverse Split leaves an individual shareholder with one and one half shares, the shareholder will be issued, post proposed Reverse Split, two whole shares. If an individual shareholder would own less than one share, the shareholder will be issued, post proposed Reverse Split, one whole share.
No Dissenters Rights
In connection with the approval of the Reverse Split, shareholders of the Company will not have a right to dissent and obtain payment for their shares under the Delaware General Corporation Law, the Certificate or the bylaws.
Tax Consequences to Common Shareholders
The following discussion sets forth the material United States federal income tax consequences that management believes will apply with respect to the Company and the shareholders of the Company who are United States holders at the effective time of the Reverse Split. This discussion does not address the tax consequences of transactions effectuated prior to or after the Reverse Split, including, without limitation, the tax consequences of the exercise of options, warrants or similar rights to purchase stock. For this purpose, a United States holder is a shareholder that is: (i) a citizen or resident of the United States, (ii) a domestic corporation, (iii) an estate whose income is subject to United States federal income tax regardless of its source, or (iv) a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust. This discussion does not describe all of the tax consequences that may be relevant to a holder in light of its particular circumstances or to holders subject to special rules (such as dealers in securities, financial institutions, insurance companies, tax-exempt organizations, foreign individuals and entities and persons who acquired their common stock as compensation). In addition, this summary is limited to shareholders who hold their common stock as capital assets. This discussion also does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction. Accordingly, each shareholder is strongly urged to consult with a tax adviser to determine the particular federal, state, local or foreign income or other tax consequences to such shareholder related to the Reverse Split.
The Company intends for the transaction to qualify as a “reorganization” within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and the remainder of this discussion assumes it will so qualify. However, the Company has not sought and will not seek any ruling from the Internal Revenue Service regarding any matters relating to the transaction, and as a result, there can be no assurance that the Internal Revenue Service will not assert, or that a court would not sustain, a contrary position, in which case the consequences of the transaction could be materially different from those described herein.
Provided that the Reverse Split qualifies as a “reorganization,” and except for adjustments that may result from the rounding up of any post-Reverse Split fractional shares, no gain or loss should be recognized by a shareholder upon its exchange of pre-Reverse Split shares for post-Reverse Split shares. The aggregate tax basis of the post-Reverse Split shares received in the Reverse Split should be the same as the shareholder’s aggregate tax basis in the pre-Reverse Split shares. The shareholder’s holding period for the post-Reverse Split shares should include the period during which the shareholder held the pre-Reverse Split shares surrendered in the Reverse Split. As discussed above, no fractional shares of Common Stock will be issued as a result of the Reverse Split. Instead, if the Reverse Split leaves a shareholder with fractional shares, the number of shares due to the holder will be rounded up. The United States federal income tax consequences of the receipt of such additional fraction of a share of common stock are not clear, and each shareholder is strongly urged to consult with their own tax adviser.
Vote Required
The approval of the Action requires that holders of a majority of the outstanding stock entitled to vote on the proposal vote “FOR” the proposal.
Board Recommendation
THE BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 2.
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THE 2023 EQUITY INCENTIVE PLAN PROPOSAL
The Company’s shareholders are being asked to approve the Company’s 2023 Equity Incentive Plan (the “2023 Plan”), which was adopted by the Board on January 6, 2023, subject to shareholder approval at the Annual Meeting.
Under the terms of the 2023 Plan, it will become effective on the date of our Annual Meeting, assuming this Proposal 3 is approved by our shareholders. If this Proposal 3 is approved by our shareholders, (i) the Company’s 2009 Stock Option Plan will be canceled and the Company will make no further awards under such plan, and (ii) the Company’s 2016 Restricted Stock Unit Plan will be canceled and the Company will make no further awards under such plan. No awards are currently outstanding under either of such plans.
When preparing the 2023 Plan for adoption by the Board, management carefully analyzed the Company’s needs with respect to (a) the attraction and retention of outstanding people as officers, directors, employees, consultants, and advisors, and (b) increase in shareholder value. Management believes that the 2023 Plan provides participants incentives to increase shareholder value by offering the opportunity to acquire shares of the Company’s common stock or receive monetary payments based on the value of such common stock on the potentially favorable terms that the 2023 Plan provides. The Company believes that the establishment of the 2023 Plan will, among other things, strengthen employee loyalty and commitment to the Company, and that it is in the best interest of the Company and its shareholders.
The following summary of the material terms of the 2023 Plan is qualified in its entirety by reference to the full text of the 2023 Plan, which is attached to this proxy statement as ANNEX B. Shareholders are encouraged to review the 2023 Plan in its entirety.
Summary of the 2023 Plan
ELIGIBILITY. Participants in the 2023 Plan will be our officers and other employees, or individuals engaged to become officers or employees, or consultants or advisors who provide services to us, or non-employee directors whom the Compensation Committee has designated to receive an award under the 2023 Plan.
ADMINISTRATION. The 2023 Plan is administered by the Compensation Committee, which must be composed solely of not less than two directors, each a “non-employee director” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended. Except as described below, the Compensation Committee administers the 2023 Plan, with the authority to:
● | interpret the 2023 Plan; | |
● | make, change and rescind rules, regulations and policies relating to the 2023 Plan; | |
● | make changes to or reconcile any inconsistency in any award or agreement covering an award; | |
● | make any modification, amendment, cancellation or waiver permitted by the 2023 Plan; and | |
● | make all other determinations necessary or advisable for the administration of the 2023 Plan. |
To the extent permitted by law, the Board can delegate to another committee of the Board or to one or more of our officers the authority and responsibility of the Compensation Committee. For actions related to individuals subject to the provisions of Section 16 of the Securities Exchange Act, the Board can delegate that authority and responsibility only to another committee of the Board consisting entirely of non-employee directors.
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AVAILABLE SHARES. The 2023 Plan reserves 600,000 shares of our common stock for issuance. The number of shares reserved for issuance will be reduced by, and only by, (i) the number of shares delivered in payment or settlement of awards, (ii) the number of shares withheld as payment of the exercise price of any options or stock appreciation rights in lieu of cash and (iii) the number of shares withheld pursuant to Section 12(a) of the 2023 Plan. These numbers may be adjusted to prevent dilution as described below. In general, if an award lapses, expires, terminates or is canceled without the issuance of shares or a cash payment, then these shares may be reused for new awards under the 2023 Plan. For the sake of clarity, the number of shares described in Sections 6(a)(i) through 6(a)(iii) of the 2023 Plan shall not again be used for new awards under the 2023 Plan, nor shall shares purchased by the Company on the open market using the proceeds from option or SAR exercises be used for awards under the 2023 Plan. The 2023 Plan limits the maximum number of shares that may be issued pursuant to the exercise of incentive stock options to 600,000 shares. This number may be adjusted to prevent dilution as described below.
AWARDS UNDER THE 2023 PLAN. The 2023 Plan permits the grant of stock options, which may be either “incentive stock options” meeting the requirements of Section 422 of the Internal Revenue Code (which we refer to as “ISOs”) or “non-qualified stock options” that do not meet the requirements of Section 422 of the Internal Revenue Code; performance shares; performance units; restricted stock; restricted stock units; and stock appreciation rights. The Compensation Committee can determine the kinds of awards to be granted, including the awards to be granted to each participant; the number of shares of our common stock with respect to which an award is granted; and any terms of any award. The Compensation Committee can grant awards under the 2023 Plan either alone or in addition to any other award (or any other award granted under another of our plans). It also can grant tandem awards.
STOCK OPTIONS. The Compensation Committee establishes the exercise price of each stock option, which may not be less than the fair market value of the shares subject to the stock option as determined on the grant date. A stock option will be exercisable on the terms the Compensation Committee specifies, except that a stock option must terminate no later than ten years after the grant date. In all other respects, unless the Compensation Committee determines otherwise, the terms of any ISO must comply with the provisions of Section 422 of the Internal Revenue Code. The aggregate fair market value of the stock for which an ISO is exercisable by a participant for the first time during any calendar year under the 2023 Plan and any other plans of the Company or its subsidiaries may not exceed $100,000, as determined in accordance with Section 422(d) of the Internal Revenue Code. To the extent this limitation is exceeded, such incentive stock option shall automatically be treated as a nonqualified stock option.
RESTRICTED STOCK, RESTRICTED STOCK UNITS, PERFORMANCE SHARES AND PERFORMANCE UNITS. Under the 2023 Plan, each award of restricted stock, restricted stock units, performance shares or performance units may be subject to such terms, in accordance with the 2023 Plan, as the Compensation Committee deems appropriate.
Restricted stock are shares of common stock that are subject to a risk of forfeiture and/or restrictions on transfer which may lapse upon the completion of a period of service, as determined by the Compensation Committee. They must have a restriction period of at least one year.
Restricted stock units represent the right to receive monetary units with a designated dollar value or monetary units the value of which is equal to the fair market value of one or more shares of common stock, that are subject to a risk of forfeiture and/or restrictions on transfer, which may lapse upon the completion of a period of service, as determined by the Compensation Committee. They must have a restriction period of at least one year. No shares of common stock are issued at the time a restricted stock unit is granted and a participant does not have any voting rights with respect to his or her restricted stock units. The Compensation Committee may determine to pay or settle restricted stock units in cash, in shares, or in a combination of cash and shares.
Performance shares represent the right to receive shares of common stock to the extent the Company or the participant achieves certain performance goals that the Compensation Committee establishes over a period of time the Compensation Committee designates, consisting of one or more full fiscal years of the Company.
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Performance units represent the right to receive monetary units with a designated dollar value or monetary units the value of which is equal to the fair market value of one or more shares of common stock, to the extent the Company or participant achieves certain performance goals that the Compensation Committee establishes over a period of time the Compensation Committee designates, consisting of one or more full fiscal years of the Company. No shares of common stock are issued at the time performance shares or performance units are granted, and a participant does not have any voting rights with respect to his or her performance shares or performance units. The Compensation Committee may determine to pay or settle performance units in cash, in shares, or in a combination of cash and shares.
Performance shares and performance units may have such conditions as the Compensation Committee determines appropriate, including a condition that one or more performance goals be achieved for the participant to realize all or a portion of the benefit provided under the award, subject to the Compensation Committee’s ability to provide that all or a portion of the performance goals subject to an award are deemed achieved upon a participant’s death, disability or retirement.
For purposes of the 2023 Plan, performance goals are generally goals that relate to achievement of certain financial or operational results by the Company or any of its subsidiaries or other business units, including results with respect to revenue; cash flow; net cash provided by operating activities; net cash provided by operating activities less net cash used in investing activities; cost of goods sold; ratio of debt to debt plus equity; profit before tax; gross profit; net profit; net sales; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization, adjusted as determined by the Compensation Committee; fair market value of shares of common stock; basic earnings per share; diluted earnings per share; return on shareholder equity; inventory turns (average inventory divided by cost of sales); return on average total capital employed; return on net assets employed before interest and taxes; economic value added; return on year-end equity; and such other goals as the Compensation Committee may establish in its discretion.
STOCK APPRECIATION RIGHTS. The Compensation Committee may grant stock appreciation rights in tandem with an option or alone and unrelated to an option. Tandem stock appreciation rights shall expire no later than the expiration of the related option, and must have the same date of grant as the underlying option. The exercise of a stock appreciation right will entitle the grantee to receive a payment in an amount determined by multiplying the excess of the fair market value of a share of common stock over the exercise price of the award by the number of shares of common stock with respect to which the award is exercised, provided that the Compensation Committee at the time of grant may provide that the benefit payable on exercise may not exceed a percentage of the fair market value of a share of common stock on the date of grant, as specified by the Compensation Committee. The exercise price for each stock appreciation right may not be less than the fair market value of the shares subject to the stock appreciation right as determined on the grant date.
The value of the payment with respect to a tandem stock appreciation right may be no more than 100% of the difference between the exercise price of the underlying option and the fair market value of the shares subject to the underlying option at the time the tandem stock appreciation right is exercised. Payment upon exercise of a stock appreciation right may be in cash, shares of common stock or a combination of cash and shares of common stock.
AWARD AGREEMENTS. No award granted under the 2023 Plan will be effective unless and until either (i) the Company and the participant execute a written agreement that sets forth the terms and provisions applicable to the award, or (ii) the Company issues a written statement to a participant describing the terms and provisions of the award.
OTHER TERMS. Any award granted under the 2023 Plan may also be subject to other provisions (whether or not applicable to an award awarded to any other participant) as the Compensation Committee determines appropriate, including, without limitation, and subject to applicable tax rules, provisions to defer the delivery of shares or recognition of taxable income relating to awards or cash payments derived from the awards (provided that such a deferral will not result in an increase in the number of shares issuable under the 2023 Plan); purchase shares under stock options in installments; pay for stock options using cash or other shares or other securities of the Company; and restrict resale or other disposition. Notwithstanding anything to the contrary in the 2023 Plan, the current payment of dividends or dividend equivalents on unvested awards is prohibited under the 2023 Plan. For the sake of clarity, unvested awards can accrue dividends and dividend equivalents with payment deferred until the underlying shares vest or are settled, as applicable.
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ADJUSTMENTS. If a stock dividend, stock split, reverse stock split, spin-off, recapitalization, extraordinary dividend, or other equity restructuring (as defined in Financial Accounting Standards Board Accounting Standards Codification 718, “Stock Compensation”) occurs that affects the shares, the Compensation Committee shall, in such manner as it deems equitable, adjust any or all of the number and type of shares subject to the 2023 Plan and which may, after the event, be made the subject of awards; the number and type of shares subject to outstanding awards; and the grant, purchase or exercise price with respect to any award. Such adjustment shall be made by the Compensation Committee in a manner it deems equitable in order to prevent the enlargement or dilution of the benefits or potential benefits intended to be granted under the 2023 Plan. If our shareholders adopt Proposal 2 and if our Board decides to proceed with the reverse stock split, we expect that the Compensation Committee will make such adjustments as permitted under the 2023 Plan.
Further, in the event of any merger, consolidation, combination, share exchange, acquisition of property or stock, reorganization, dissolution, or other similar corporate transaction or event, whether or not constituting a change of control (as defined in the 2023 Plan and reproduced below), the Compensation Committee may, in its discretion and on such terms and conditions as it determines, provide for or cause awards to be assumed by the surviving corporation or its parent, continued by us (if we are a surviving corporation), cancelled in exchange for a payment of cash, substituted or exchanged for stock, other securities, or other property, or any combination of the foregoing. All outstanding awards shall be subject to the terms of any agreement governing any such merger, consolidation, combination, share exchange, acquisition of property or stock, reorganization, dissolution or other transaction or event. If an award is cancelled in whole or in part in exchange for a cash payment, the amount of such payment shall be determined by the Compensation Committee, but if such transaction or event constitutes a change of control, then the payment must be at least as favorable to the holder as the greatest amount the holder could have received for such award under the change of control provisions of the 2023 Plan described below. The Compensation Committee may, in connection with any merger, consolidation, combination, share exchange, acquisition of property or stock, reorganization, dissolution or other similar corporate transaction or event, and without affecting the number of shares otherwise reserved or available under the 2023 Plan, authorize the issuance or assumption of awards upon terms it deems appropriate.
CHANGE OF CONTROL. Except to the extent the Compensation Committee provides a result more favorable to holders of awards, in the event of a change of control:
● each holder of a stock option shall have the right (a) at any time after the change of control to exercise the stock option in full whether or not it was exercisable before the change of control; and (b) by sending us written notice within 60 days after the change of control, to receive in exchange for the stock option cash equal to the excess of the change of control price (as defined in the 2023 Plan) of the shares covered by the stock option over the exercise price of such option; provided that this right does not exist with respect to any portion of an option that was forfeited or cancelled upon a participant’s termination of employment or service prior to the date of the change of control;
● each holder of restricted stock and/or restricted stock unit(s) that are not vested before a change of control will vest on the date of the change of control, and each holder of such restricted stock and/or restricted stock unit(s) may receive, by sending us written notice within 60 days after the change of control, in exchange for the restricted stock and/or restricted stock unit(s), cash equal to the change of control price of such restricted stock and/or restricted stock unit(s) on the date of surrender;
● each holder of a performance share and/or performance unit for which the performance period has not expired may receive, by sending us written notice within 60 days after the change of control, in exchange for the performance share and/or performance unit, cash equal to the value of the performance share and/or performance unit (as determined in accordance with the 2023 Plan) multiplied by a percentage based on the number of months elapsed from the beginning of the performance period to the date of the change of control divided by the number of months in the performance period;
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● each holder of a performance share and/or performance unit that has been earned but not yet paid will receive cash equal to the value of the performance share and/or performance unit (as determined in accordance with the 2023 Plan); and
● each holder of a stock appreciation right shall have the right (a) at any time after the change of control to exercise the stock appreciation right in full whether or not it was exercisable before the change of control; and (b) by sending us written notice within 60 days after the change of control, to receive in exchange for the stock appreciation right cash equal to the excess of the change of control price of the shares covered by the stock appreciation right over the exercise price of such stock appreciation right; provided that this right does not exist with respect to any portion of a stock appreciation right that was forfeited or cancelled upon a participant’s termination of employment or service prior to the date of the change of control.
For these purposes, the value of a performance share is equal to, and the value of a performance unit the value of which is equal to the fair market value of one or more shares, is based on the change of control price.
“Change of control” is defined to mean the occurrence of any one of the following events:
● any “person” (as defined in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) of the Exchange Act, but not including (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) an entity owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock in the Company) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities that are beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing fifty percent (50%) or more of either the then outstanding shares of Company’s common stock or the combined voting power of the Company’s then outstanding voting securities; or
● the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date of the Company’s 2023 annual meeting of shareholders, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least one-half (1/2) of the directors then still in office who either were directors on the date of the Company’s 2023 annual meeting of shareholders, or whose appointment, election or nomination for election was previously so approved; or
● consummation of a merger or consolidation of the Company with any other corporation or approval of the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent) at least fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity or any parent outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person is or becomes the beneficial owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing fifty percent (50%) or more of either the then outstanding shares of Company’s common stock or the combined voting power of the Company’s then outstanding voting securities;
● the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or the Company consummates the sale or disposition of all or substantially all of the Company’s assets (in one transaction or a series of related transactions within any period of twenty-four (24) consecutive months), other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least fifty percent (50%) of the combined voting power of the voting securities of which are owned by persons in substantially the same proportions as their ownership of the Company immediately prior to such sale; or
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● consummation of a sale or disposition of all or substantially all of the assets or equity of an affiliate or division of the Company, if the Compensation Committee determines, in its sole discretion, that the economic effect of such sale or disposition on the employees of such affiliate or division, as the case may be, is tantamount to a change of control set forth in (i)-(iv) above, provided, however, that in such case, a change of control shall only be deemed to occur with respect to such employees, and not with respect to any other participants.
Nevertheless, no “change of control” is deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.
TRANSFERABILITY. Awards granted under the 2023 Plan are not transferable other than by will, the law of descent and distribution, or, except in the case of ISOs, as otherwise allowed by the Compensation Committee. Additionally, the Compensation Committee may allow a participant or nonemployee Director to designate a beneficiary to exercise the award after the participant’s or nonemployee Director’s death.
AMENDMENT AND TERMINATION OF THE 2023 PLAN. The 2023 Plan will terminate, and no award may be granted more than, ten years after the date our shareholders approve the 2023 Plan, unless the Board earlier terminates the 2023 Plan as described below. The Board may amend, alter, suspend, discontinue or terminate the 2023 Plan at any time, except that shareholders must approve any amendment of the 2023 Plan if (a) such approval is required by applicable securities or tax law or the listing requirements of NASDAQ, if our common stock is then traded on NASDAQ, or of any other principal securities exchange or market on which our common stock is then traded; or (b) the amendment increases the number of shares reserved for issuance (subject to the adjustment provisions provided in the 2023 Plan described above), shortens the restriction periods for restricted stock, or amends the repricing provisions described below.
REPRICING. Subject to the adjustment provisions provided in the 2023 Plan described above, the Compensation Committee may not decrease the exercise price for any outstanding stock option or stock appreciation right granted under the 2023 Plan after the grant date, allow a participant to surrender an outstanding stock option or stock appreciation right granted under the 2023 Plan for a new stock option or stock appreciation right, as applicable, with a lower exercise price, or allow a participant to surrender an outstanding option or stock appreciation right for cash when the exercise price of the option or stock appreciation right, as applicable, equals or exceeds the fair market value of the shares subject to the option or stock appreciation right.
AMENDMENT, MODIFICATION OR CANCELLATION OF AWARDS. Subject to the requirements of the 2023 Plan and its restrictions on repricing:
● the Compensation Committee may (x) accelerate the vesting of any award (including the lapsing of any restriction period); (y) remove conditions for vesting (or lapsing of any restriction period); or (z) provide that all or a portion of the performance goals subject to an award are deemed achieved, upon a change of control or the participant’s death, disability, retirement, layoff, termination, separation from service in connection with a change of control, or other separation from service, where the Compensation Committee determines that such treatment is appropriate and in the Company’s best interests; and
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● so long as any amendment or modification does not increase the number of shares issuable under the 2023 Plan (except as permitted by the adjustment provisions described above), the Compensation Committee may otherwise modify, amend or cancel any award or waive any restrictions or conditions applicable to any award. No such modification, amendment or cancellation shall be made which would adversely affect the rights of a participant under any outstanding award without that person’s consent. The Compensation Committee does not need the consent of a participant (or other interested party) to modify, amend or cancel an award if (a) the Compensation Committee determines that such action is necessary or appropriate in order for the Company, the 2023 Plan or any award to satisfy or conform to any applicable law, rule, regulation or other legal requirement, to any listing standard or other requirement of a national securities exchange, or to any accounting standard or requirement, (b) such action is permitted by another provision of the 2023 Plan, such as the adjustment provisions described above, or (c) the Compensation Committee determines that such action is not reasonably likely to significantly diminish the benefits provided under the affected award, or that any such diminishment has been adequately compensated.
WITHHOLDING. We may withhold the amount of any tax attributable to any amount payable or shares deliverable under the 2023 Plan after giving notice to the person entitled to receive such amount or shares, and can defer making payment or delivery if any such tax may be pending. The Compensation Committee may permit a participant to pay any withholding taxes based on (1) the exercise of a non-qualified stock option or stock appreciation right; (2) a disqualifying disposition of shares received upon the exercise of an ISO; or (3) the lapse of restrictions on restricted stock, restricted stock units, performance shares or performance units, by (a) having us withhold shares otherwise issuable under the award; (b) tendering back shares received in connection with such award; or (c) delivering other previously owned shares, in each case having a fair market value equal to the amount to be withheld.
NON-EXCLUSIVITY. The adoption of the 2023 Plan will not preclude the Company from maintaining or adopting any additional stock option, restricted stock, SAR, performance share, performance unit, bonus, incentive or other compensation plans or arrangements for any of its officers, directors, employees or other service providers.
RECOUPMENT/CLAWBACK. All awards under the 2023 Plan (including any proceeds, gains or other economic benefit actually or constructively received by a participant upon any receipt or exercise of any award or upon the receipt or resale of any shares of common stock underlying the award) are subject to the provisions of any claw-back policy implemented by the Company, including, without limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, to the extent set forth in such claw-back policy and/or in the applicable award agreement.
NEW PLAN BENEFITS. As of the date of this proxy statement, the Company has not yet made a restricted share grant to Mr. Judd, who joined the Board on October 19, 2022. The Company expects to make a grant to Mr. Judd consistent with those made to its other independent directors. If the 2023 Plan is approved by the Company’s shareholders, the Company expects such grant to be made pursuant to the 2023 Plan. Beyond this expectation, the Company cannot currently determine the awards that may be granted under the 2023 Plan in the future to officers or other persons. The Compensation Committee will make such determinations from time to time as described above.
FEDERAL INCOME TAX CONSEQUENCES. The following summarizes certain general federal income tax consequences relating to the 2023 Plan under current tax law and is intended for the information of our shareholders considering how to vote with respect to this proposal, and not as tax guidance to participants in the 2023 Plan. This discussion of federal income tax consequences does not purport to be a complete discussion of all of the potential tax effects of the 2023 Plan. This discussion is based on the federal income tax laws currently in effect, which are subject to change, possibly with retroactive effect, or to differing interpretations by the Internal Revenue Service or a court, which could alter the tax consequences described herein. In addition, this discussion does not address the U.S. federal estate and gift tax, state and local tax, foreign tax, or other tax consequences that may be relevant to a person depending on the person’s particular circumstances. We strongly urge participants to consult their own tax advisors regarding the federal, estate and gift, state, local, foreign, and other tax consequences of participating in the 2023 Plan.
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STOCK OPTIONS. The grant of a stock option under the 2023 Plan will create no income tax consequences to us or the participant. A participant who is granted a non-qualified stock option will generally recognize ordinary compensation income at the time of exercise in an amount equal to the excess of the fair market value of the common stock at such time over the exercise price. We will generally be entitled to a deduction in the same amount and at the same time as ordinary compensation income is recognized by the participant. Upon the participant’s subsequent disposition of the shares received with respect to such stock option, the participant will recognize a capital gain or loss (long-term or short-term, depending on the holding period) to the extent the amount realized from the sale differs from the tax basis of the shares sold, i.e., the exercise price plus the amount of ordinary compensation income recognized on the exercise date. Under certain circumstances involving a change of control, we may not be entitled to a deduction with respect to stock options granted to certain executive officers. In general, an employee will recognize no income or gain as a result of exercise of an ISO (except that the alternative minimum tax may apply), if the option is exercised during employment or within the specified period of time thereafter (generally 3 months, or one year if termination is due to death or permanent and total disability). Except as described below, the employee will recognize a long-term capital gain or loss on the disposition of the common stock acquired pursuant to the exercise of an ISO and we will not be allowed a deduction. If the employee fails to hold the shares of common stock acquired pursuant to the exercise of an ISO for at least two years from the grant date of the ISO and one year from the exercise date, then the employee will recognize ordinary compensation income at the time of the disposition equal to the excess of the fair market value of the shares at the time of exercise over the exercise price (or, if less, the excess of the amount realized on the sale over the exercise price). We will generally be entitled to a corresponding tax deduction for this amount. The balance of the gain or loss will be short-term or long-term capital gain or loss, depending on the length of time the employee has held the shares after the exercise date.
RESTRICTED STOCK. Generally, a participant will not recognize income and we will not be entitled to a deduction at the time an award of restricted stock is made under the 2023 Plan, unless the participant makes the election described below. A participant who has not made such an election will recognize ordinary compensation income at the time the restrictions on the stock lapse in an amount equal to the fair market value of the restricted stock at such time (less the amount, if any, the participant paid for such restricted stock). We will generally be entitled to a corresponding deduction in the same amount and at the same time as the participant recognizes income. Under certain circumstances involving a change of control, we may not be entitled to a deduction with respect to restricted stock granted to certain executive officers. Any otherwise taxable disposition of the restricted stock after the time the restrictions lapse will result in a capital gain or loss to the extent the amount realized from the sale differs from the tax basis, i.e., the fair market value of the common stock on the date the restrictions lapse. If the election is not made, dividends paid in cash and received by a participant prior to or at the time the restrictions lapse will constitute ordinary compensation income to the participant in the year paid and we will generally be entitled to a corresponding deduction for such dividends. Any dividends paid in stock will be treated as an award of additional restricted stock subject to the tax treatment described herein. A participant may, within 30 days after the date of the award of restricted stock, elect to recognize ordinary compensation income as of the date of the award in an amount equal to the fair market value of such restricted stock on the date of the award (less the amount, if any, the participant paid for such restricted stock). If the participant makes such an election, we will generally be entitled to a corresponding deduction in the same amount and at the same time as the participant recognizes income. If the participant makes the election, any cash dividends the participant receives with respect to the restricted stock will be treated as dividend income to the participant in the year of payment, to the extent of the Company’s earnings and profit, and will not be deductible by us. Any otherwise taxable disposition of the restricted stock (other than by forfeiture) will result in a capital gain or loss. If the participant who has made an election subsequently forfeits the restricted stock, the participant will not be entitled to deduct any loss, except a capital loss to the extent of the amount paid for the restricted stock, if any. In addition, we would then be required to include as ordinary income the amount of any deduction we originally claimed with respect to such shares.
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RESTRICTED STOCK UNITS. In general, taxable income is not recognized by a participant upon the grant of a restricted stock unit, and the Company will not be entitled to a tax deduction at that time. The participant will generally recognize compensation taxable as ordinary income (and subject to income tax withholding), however, at the time of the settlement of the restricted stock unit, equal to the fair market value of any shares delivered and the amount of cash paid by the Company. The Company will generally be entitled to a corresponding deduction in the same amount and at the same time as income is recognized by the participant.
STOCK APPRECIATION RIGHTS. The grant of a stock appreciation right under the 2023 Plan will create no income tax consequences to us or the participant. A participant who is granted a stock appreciation right will generally recognize ordinary compensation income at the time of exercise in an amount equal to the amount of any cash and the fair market value of any shares of common stock received. We will generally be entitled to a deduction in the same amount and at the same time as ordinary compensation income is recognized by the participant. Under certain circumstances involving a change of control, we may not be entitled to a deduction with respect to stock appreciation rights granted to certain executive officers.
PERFORMANCE UNITS AND PERFORMANCE SHARES. With respect to stock awards, performance units and performance shares that may be settled either in cash or in shares of common stock, the participant will recognize ordinary compensation income equal to the amount of any cash and the fair market value of the shares of common stock received. If, however, the participant receives shares of restricted stock in settlement, then the participant may defer recognition of income in accordance with the rules applicable to such restricted stock, as described above. We will generally be entitled to a deduction in the same amount and at the same time as income is recognized by the participant.
162(m) LIMIT ON COMPENSATION. Section 162(m) of the Internal Revenue Code limits the deduction we can take for compensation paid to our CEO and certain other executive officers to $1 million per year per individual.
DEFERRED COMPENSATION RULES. An award under the 2023 Plan may be a deferral of compensation that is subject to Section 409A of the Internal Revenue Code. Special requirements apply to awards that are so subject. The 2023 Plan was designed with the intent that all awards will either be exempt from Section 409A of the Internal Revenue Code or comply with the requirements of Section 409A of the Internal Revenue Code, but there is no guarantee that the 2023 Plan will be exempt or compliant with the requirements of that section. If an award that is subject to Section 409A of the Internal Revenue Code fails to satisfy the requirements of that section, then, upon vesting, the participant will be subject to immediate taxation of the deferred amount, a 20% penalty, and an interest charge. Section 409A of the Internal Revenue Code does not impose any penalties on the Company.
Registration with the SEC
The Company intends to file a Registration Statement on Form S-8 relating to the issuance of shares under the 2023 Plan with the SEC pursuant to the Securities Act of 1933, as amended, as soon as practicable after approval of the 2023 Plan by the Company’s shareholders.
Vote Required
The approval of the 2023 Plan requires that holders of a majority of the stock represented in person or by proxy and entitled to vote on the proposal vote “FOR” the proposal.
Board Recommendation
THE BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 3.
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RATIFICATION OF THE APPOINTMENT OF WHITLEY PENN LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2023
The Audit Committee has appointed Whitley Penn LLP (“Whitley Penn”) as our independent registered public accounting firm for the fiscal year ending October 1, 2023 and the Board has directed that the selection of Whitley Penn be submitted to a vote of shareholders at the Annual Meeting for ratification.
The shareholder vote is not binding on the Audit Committee. If the appointment of Whitley Penn is not ratified, the Audit Committee will evaluate the basis for the shareholders’ vote when determining whether to continue the firm’s engagement, but may ultimately determine to continue the engagement of the firm or another audit firm without re-submitting the matter to shareholders. Even if the appointment of Whitley Penn is ratified, the Audit Committee may in its sole discretion terminate the engagement of the firm and direct the appointment of another independent auditor at any time during the year if it determines that such an appointment would be in the best interests of our Company and our shareholders.
Representatives of Whitley Penn are expected to attend the Annual Meeting, where they will be available to respond to appropriate questions and, if they desire, to make a statement.
Principal Accountant Fees and Services
The following table sets forth the fees paid to date for audit services rendered during fiscal years ended September 27, 2020October 2, 2022 and September 29, 2019,October 3, 2021, respectively.
Fee Category | 2020 | 2019 | 2022 | 2021 | ||||||||||||
Audit Fees (1) | $ | 89,802 | $ | 75,650 | $ | 134,593 | $ | 101,786 | ||||||||
Audit-Related Fees-registration statement consents (2) | - | 5,000 | ||||||||||||||
Tax Fees | 7,613 | 7,300 | 9,450 | 8,500 |
(1) | Audit Fees are fees for professional services performed for the audit of our annual consolidated financial statements and review of consolidated financial statements included in our 10-Q filings for the fiscal years ended | |
Vote Required
The ratification of the appointment of Whitley Penn LLP as the Company’s independent registered public accounting firm for the fiscal year ending October 1, 2023 requires that holders of a majority of the stock represented in person or by proxy and entitled to vote on the proposal vote “FOR” the proposal.
Board Recommendation
THE BOARD RECOMMENDS A VOTE “FOR” PROPOSAL 4.
Item 15 ExhibitsPROPOSAL 5 - OTHER MATTERS
Exhibits
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The Board knows of no matter to be brought before the Annual Meeting other than the matters identified in this proxy statement. However, with respect to any other matter that properly comes before the Annual Meeting, the proxy holder(s) will vote as recommended by the Board or, if no recommendation is given, in his or their own discretion.
Item 16. Form 10-K SummarySHAREHOLDER PROPOSALS FOR THE 2024 MEETING
None.Our bylaws provide that, for matters to be properly brought before an annual meeting, business must be either (i) specified in the notice of annual meeting (or any supplement or amendment thereto) given by or at the direction of the Board of Directors, (ii) otherwise brought before the annual meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the annual meeting by a shareholder.
Shareholder proposals intended for inclusion in our proxy statement relating to the next annual meeting in 2024 pursuant to Rule 14a-8 must be received by us no later than September 20, 2023. If the date of next year’s annual meeting is moved by more than 30 days before or after the anniversary date of this year’s Annual Meeting, then the deadline for inclusion of a shareholder proposal in our proxy materials is instead a reasonable time before we begin to print and send our proxy materials for that meeting. Any such proposal must comply with Rule 14a-8 of Regulation 14A of the proxy rules of the SEC.
Notice to us of a shareholder proposal submitted otherwise than pursuant to Rule 14a-8 also will be considered untimely if received at our principal executive offices other than during the time period set forth below and will not be placed on the agenda for the meeting. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to our Secretary. While the Company’s bylaws do not currently contain an advance notice provision, to be considered timely, a shareholder’s notice must be delivered to the Secretary at our principal executive offices not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than seventy (70) days after such anniversary date, notice by the shareholder must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by us.
Notice to us of a proxy solicitation in support of director nominees other than the Company’s nominees in accordance with Rule 14a-19 for the Company’s next annual meeting must be postmarked or transmitted electronically to us at our principal executive office no later than December 18, 2023, except that, if the date of next year’s annual meeting is moved by more than 30 days before or after the anniversary date of this year’s Annual Meeting, then notice must be provided by the later of 60 calendar days prior to the date of next year’s annual meeting or the 10th calendar day following the day on which public announcement of the date of next year’s annual meeting is first made by us.
PursuantUpon written request to the requirementsSecretary, Optex Systems Holdings, Inc. at 1420 Presidential Drive, Richardson, TX 75081, we will provide without charge to each person requesting a copy of Section 13 or 15(d) ofour 2022 Annual Report, including the Securities Exchange Act of 1934, the registrant has duly causedfinancial statements filed therewith. We will furnish a requesting shareholder with any exhibit not contained therein upon specific request. In addition, this report to be signedProxy Statement, as well as our 2022 Annual Report, are available on its behalf by the undersigned, thereunto duly authorized.our Internet website at www.optexsys.com
BY ORDER OF THE BOARD OF DIRECTORS | ||
Pursuant to the requirements of the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Danny Schoening | ||||
Danny Schoening | ||||
Chairman of the Board of Directors |
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CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION, As AMENDED,
OF
OPTEX SYSTEMS HOLDINGS, INC.
OPTEX SYSTEMS HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), DOES HEREBY CERTIFY AS FOLLOWS:
FIRST: The Certificate of Incorporation of the Corporation, as amended (the “Certificate of Incorporation”) was initially filed with the Secretary of State of the State of Delaware on April 11, 2006.
SECOND: That the Board of Directors of the Corporation, by unanimous written consent, adopted the following amendment to the Certificate of Incorporation:
The Article numbered “FOURTH” of the Certificate of Incorporation is hereby amended by adding the following paragraph at the end thereof:
“Upon the filing and effectiveness (the “Effective Time”) pursuant to the General Corporation Law of the State of Delaware of this Certificate of Amendment to the Certificate of Incorporation of the Corporation, each two (2) shares of common stock, par value $0.001 per share (the “Common Stock”) issued and outstanding immediately prior to the Effective Time shall, automatically and without any action on the part of the respective holders thereof, be combined and converted into one (1) share of Common Stock (the “Reverse Split”). No fractional shares shall be issued in connection with the Reverse Split. In the event the Reverse Split leaves a shareholder with a fraction of a share, the number of shares due to such shareholder will be rounded up to the nearest whole number of shares. The Reverse Split shall occur whether or not the certificates representing such shares of Common Stock are surrendered to the Corporation or its transfer agent. The number of authorized shares of Common Stock and preferred stock, par value $0.001 per share, and the par value of each share shall remain unaffected by the Reverse Split.”
THIRD: That the aforesaid amendments have been consented to, authorized, and duly adopted, by the Board of Directors of the Corporation by written consent and voted on by the majority of shareholders of the Corporation.
IN WITNESS WHEREOF, OPTEX SYSTEMS HOLDINGS INC. has caused this Certificate of Amendment to the Certificate of Incorporation to be duly executed in its name and on its behalf by its Chief Executive Officer this _______ day of ____________,_____.
OPTEX SYSTEMS HOLDINGS, INC. | |||||
By: | |||||
Danny Schoening | |||||
Chief Executive Officer | |||||
OPTEX SYSTEMS HOLDINGS, INC.
2023 equity incentive PLAN
1. Purpose. The Optex Systems Holdings, Inc. 2023 Equity Incentive Plan has two complementary purposes: (a) to attract and retain outstanding people as officers, directors, employees, consultants and advisors, and (b) to increase shareholder value. The Plan will provide participants incentives to increase shareholder value by offering the opportunity to acquire shares of the Company’s common stock or receive monetary payments based on the value of such common stock on the potentially favorable terms that this Plan provides.
2. Definitions. Capitalized terms used in this Plan have the following meanings:
(a) “Affiliates” means any corporation, partnership, joint venture, or other entity during any period in which the Company owns, directly or indirectly, at least twenty percent (20%) of the equity, voting or profits interest, and any other business venture that the Committee designates in which the Company has a significant interest, as the Committee determines in its discretion.
(b) “Award” means a grant of Options, Performance Shares, Performance Units, Restricted Stock, Restricted Stock Units, SARs or other incentive award under this Plan.
(c) “Award Agreement” shall have the meaning set forth in Section 14(c) of this Plan.
(d) “Board” means the Board of Directors of the Company.
(e) “Change of Control” means the occurrence of any one of the following events:
(i) any “Person” (as such term is defined in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that the term “Person” shall not include (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) an entity owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock in the Company) becomes the “Beneficial Owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities that are beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing fifty percent (50%) or more of either the then outstanding shares of Common Stock of the Company or the combined voting power of the Company’s then outstanding voting securities; or
(ii) the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on the date of the Company’s 2023 annual meeting of shareholders, constitute the Board and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of Directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least one-half (1/2) of the Directors then still in office who either were Directors on the date of the Company’s 2023 annual meeting of shareholders, or whose appointment, election or nomination for election was previously so approved; or
(iii) consummation of a merger or consolidation of the Company with any other corporation or approval of the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing fifty percent (50%) or more of either the then outstanding shares of Common Stock of the Company or the combined voting power of the Company’s then outstanding voting securities;
(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or the Company consummates the sale or disposition of all or substantially all of the Company’s assets (in one transaction or a series of related transactions within any period of twenty-four (24) consecutive months), other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least fifty percent (50%) of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale; or
(v) consummation of a sale or disposition of all or substantially all of the assets or equity of an Affiliate or of a division of the Company, if the Committee determines, in its sole discretion, that the economic effect of such sale or disposition on the employees of such Affiliate or division, as the case may be, is tantamount to a Change of Control set forth in (d)(i)-(iv), provided, however, that in such case, a Change of Control shall only be deemed to occur with respect to such employees, and not with respect to any other Participants.
Notwithstanding the foregoing, no “Change of Control” shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.
(f) “Change of Control Price” means the highest of the following: (i) the Fair Market Value of the Shares, as determined on the date of the Change of Control; (ii) the highest price per Share paid in the Change of Control transaction; or (iii) the Fair Market Value of the Shares, calculated on the date of surrender of the relevant Award in accordance with Section 13(d) of this Plan, but this clause (iii) shall not apply if in the Change of Control transaction, or pursuant to an agreement to which the Company is a party governing the Change of Control transaction, all of the Shares are purchased for and/or converted into the right to receive a current payment of cash and no other securities or other property.
(g) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a specific provision of the Code includes any successor provision and the regulations promulgated under such provision.
(h) “Committee” means the Compensation Committee of the Board (or such successor committee with the same or similar authority), which must be composed solely of not less than two Directors, each of whom must qualify as a “non-employee director” within the meaning of Rule 16b-3.
(i) “Common Stock” means the common stock of the Company, subject to adjustment as provided in Section 13.
(j) “Company” means Optex Systems Holdings, Inc., a Delaware corporation, or any successor thereto.
(k) “Consultant” means any consultant or advisor engaged to provide services to the Company or any Affiliate who qualifies as a consultant under the applicable rules of the Securities and Exchange Commission for registration of shares on a Form S-8 Registration Statement.
(l) “Director” means a member of the Board, and “Non-Employee Director” means a member of the Board who is not also an employee of the Company or its Affiliates.
(n) “Effective Date” means the date the Company’s shareholders approve this Plan.
(o) “Exchange Act” means the Securities Exchange Act of 1934, as amended. Any reference to a specific provision of the Exchange Act includes any successor provision and the regulations and rules promulgated under such provision.
(p) “Fair Market Value” means, per Share on a particular date, the last sales price on such date on the national securities exchange on which the Common Stock is then traded, as reported by such exchange, or if no sales of Common Stock occur on the date in question, on the last preceding date on which there was a sale on such exchange. If the Shares are not listed on a national securities exchange, but are traded in an over-the-counter market, the last sales price (or, if there is no last sales price reported, the average of the closing bid and asked prices) for the Shares on the particular date, or on the last preceding date on which there was a sale of Shares on that market, will be used. If the Shares are neither listed on a national securities exchange nor traded in an over-the-counter market, the price determined by the Committee, in its discretion, but consistent with the requirements of the Code and other applicable law, will be used.
(q) “Option” means the right to purchase Shares at a stated price. “Options” may either be “incentive stock options” which meet the requirements of Section 422 of the Code, or “nonqualified stock options” which do not meet the requirements of Section 422 of the Code.
(r) “Participant” means (i) an officer or other employee of the Company or its Affiliates, or an individual that the Company or an Affiliate has engaged to become an officer or employee, or a Consultant, whom the Committee designates to receive an Award under this Plan, and (ii) a Non-Employee Director whom the Committee designates to receive an Award under this Plan.
(s) “Performance Goals” means any goals the Committee establishes that relate to one or more of the following with respect to the Company or any one or more subsidiaries or other business units: revenue; cash flow; net cash provided by operating activities; net cash provided by operating activities less net cash used in investing activities; cost of goods sold; ratio of debt to debt plus equity; profit before tax; gross profit; net profit; net sales; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization, adjusted as determined by the Committee; Fair Market Value of Shares; basic earnings per share; diluted earnings per share; return on shareholder equity; inventory turns (average inventory divided by cost of sales); return on average total capital employed; return on net assets employed before interest and taxes; economic value added; return on year-end equity; and such other goals as the Committee may establish in its discretion.
(t) “Performance Shares” means the right to receive Shares to the extent the Company or Participant achieves certain Performance Goals that the Committee establishes over a period of time the Committee designates consisting of one or more full fiscal years of the Company.
(u) “Performance Units” means the right to receive monetary units with a designated dollar value or monetary units the value of which is equal to the Fair Market Value of one or more Shares, to the extent the Company or Participant achieves certain Performance Goals that the Committee establishes over a period of time the Committee designates consisting of one or more full fiscal years of the Company.
(v) “Plan” means this Optex Systems Holdings, Inc. 2023 Equity Incentive Plan, as amended from time to time.
(w) “Restricted Stock” means Shares that are subject to a risk of forfeiture and/or restrictions on transfer, which may lapse upon the completion of a period of service, as determined by the Committee.
(x) “Restricted Stock Units” means the right to receive monetary units with a designated dollar value or monetary units the value of which is equal to the Fair Market Value of one or more Shares, that are subject to a risk of forfeiture and/or restrictions on transfer, which may lapse upon the completion of a period of service, as determined by the Committee.
(y) “SAR” means the right to receive cash or Shares with a value equal to the increase in the Fair Market Value of one or more Shares.
(z) “Section 16 Participants” means Participants who are subject to the provisions of Section 16 of the Exchange Act.
(aa) “Share” means a share of Common Stock.
(bb) “Subsidiary” means any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the chain) owns stock possessing more than fifty percent (50%) of the total combined voting power of all classes of stock in one of the other corporations in the chain.
(cc) The term “Ten Percent Shareholder” shall mean an individual who owns stock possessing more than ten percent (10%) of the combined voting power of all classes of stock of the Company or of its parent or subsidiary corporations within the meaning of Section 422 of the Code.
3. Administration.
(a) Committee Administration. The Committee has full authority to administer this Plan, including the authority to (i) interpret the provisions of this Plan, (ii) prescribe, amend and rescind rules, regulations and policies relating to this Plan, (iii) correct any defect, supply any omission, or reconcile any inconsistency in any Award or agreement covering an Award in the manner and to the extent it deems desirable to carry this Plan or such Award into effect, (iv) make any modification, amendment, cancellation or waiver permitted by Section 11(c) of this Plan, and (v) make all other determinations necessary or advisable for the administration of this Plan. All Committee designations, determinations, interpretations and other decisions must be approved in the manner provided by the Company’s bylaws, the Committee’s charter (if any) and applicable corporate law. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions made under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time, and are final and binding on any person with an interest therein.
(b) Delegation to Other Committees or Officers. To the extent applicable law permits, the Board may delegate to another committee of the Board or to one or more officers of the Company any or all of the authority and responsibility of the Committee, except that no such delegation to officers is permitted with respect to individuals who are Section 16 Participants at the time any such delegated authority or responsibility is exercised. The Board also may delegate to another committee of the Board consisting entirely of Non-Employee Directors any or all of the authority and responsibility of the Committee with respect to individuals who are Section 16 Participants. If the Board has made such a delegation, then all references to the Committee in this Plan include such other committee or one or more officers to the extent of such delegation.
(c) No Liability. No member of the Committee, and no committee or officer to whom a delegation under subsection (b) has been made, will be liable for any act done, or determination made, by the individual in good faith with respect to the Plan or any Award. The Company will indemnify and hold harmless such individual to the maximum extent that the law and the Company’s bylaws permit.
4. Eligibility. The Committee may designate from time to time the Participants to receive Awards under this Plan. The Committee’s designation of a Participant in any year will not require them to designate such person to receive an Award in any other year. The Committee may consider such factors as it deems pertinent in selecting a Participant and in determining the types and amounts of Awards. In making such selection and determination, factors the Committee may consider include, but are not limited to: (a) the Company’s financial condition; (b) anticipated profits for the current or future years; (c) the Participant’s contributions or expected contributions to the profitability and development of the Company or any Affiliate; and (d) other compensation provided to the Participant. Non-Employee Directors may receive Awards under Section 5(b) of this Plan, and are not eligible to receive any other Awards.
5. Grants of Awards.
Subject to the terms of this Plan, the Committee has full power and authority to: (i) determine the type or types of Awards to be granted to each Participant; (ii) determine the number of Shares with respect to which an Award is granted to a Participant, if applicable; and (iii) determine any terms and conditions of any Award granted to a Participant. Awards under this Plan may be granted either alone or in addition to, in tandem with, or in substitution for any other Award (or any other award granted under another plan of the Company or any Affiliate). Tandem Awards may be granted either at the same time as, or at different times from, the grant of the other Awards (or awards) to which they relate. The Committee’s determinations need not be the same for each grant or for each Participant.
6. Shares Reserved under this Plan.
(a) Plan Reserve. Subject to subsection (c), an aggregate of 600,000 Shares are reserved for issuance under this Plan. The number of Shares reserved for issuance under this Plan shall be reduced by, and only by, (i) the number of Shares delivered in payment or settlement of Awards, (ii) the number of Shares withheld as payment of the exercise price of any Options or SARs in lieu of cash and (iii) the number of Shares withheld pursuant to Section 12(a) of this Plan. The limitations of this subsection are subject to adjustments as provided in Section 13 of this Plan.
(b) Replenishment of Shares Under this Plan. If an Award lapses, expires, terminates or is cancelled without the issuance of Shares or payment of cash under the Award, then the Shares subject to or reserved for such Award may again be used for new Awards under this Plan. For the sake of clarity, the number of Shares described in Sections 6(a)(i) through 6(a)(iii) of this Plan shall not again be used for new Awards under this Plan, nor shall Shares purchased by the Company on the open market using the proceeds from Option or SAR exercises be used for Awards under this Plan.
(c) Incentive Stock Option Limitation. Notwithstanding anything to the contrary, but subject to adjustments as provided in Section 13 of this Plan, the maximum aggregate number of Shares that may be issued under this Plan pursuant to the exercise of incentive stock options shall be 600,000 Shares.
7. Options.
(a) Eligibility. The Committee may grant Options to any Participant it selects. The Committee must specify whether the Option is an incentive stock option or a nonqualified stock option, but only employees of the Company or a Subsidiary may receive grants of incentive stock options.
(b) Exercise Price. For each Option, the Committee will establish the exercise price, which may not be less than the Fair Market Value of the Shares subject to the Option as determined on the date of grant. Notwithstanding anything herein to the contrary, if an incentive stock option is granted to any Participant who, at the time of grant, is a Ten Percent Shareholder, the exercise price of such Option shall not be less than 110% of the Fair Market Value of the Shares subject to the Option as determined on the date of grant and the term of such Option shall not extend beyond five years from the date of grant.
(c) Terms and Conditions of Options. An Option will be exercisable at such times and subject to such conditions as the Committee specifies, except that the Option must terminate no later than 10 years after the date of grant. In all other respects, the terms of any incentive stock option should comply with the provisions of Section 422 of the Code except to the extent the Committee determines otherwise. The aggregate Fair Market Value of the stock for which an incentive stock option is exercisable by a Participant for the first time during any calendar year under the Plan and any other plans of the Company or its subsidiaries may not exceed $100,000, as determined in accordance with Section 422(d) of the Code. To the extent this limitation is exceeded, such incentive stock option shall automatically be treated as a nonqualified stock option. This limit shall be applied by taking Options into account in the order in which they were granted.
8. Stock Appreciation Rights.
(a) Eligibility. The Committee may grant SARs to any Participant it selects. The Committee may grant SARs in tandem with an Option or alone and unrelated to an Option. Tandem SARs shall expire no later than the expiration of the underlying Option, and must have the same date of grant as the underlying Option.
(b) Exercise of Tandem SARs. Tandem SARs may be exercised:
(i) with respect to all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option;
(ii) only with respect to the Shares for which its related Option is then exercisable; and
(iii) only when the Fair Market Value of the Shares subject to the Option exceeds the exercise price of the Option.
The value of the payment with respect to the tandem SAR may be no more than 100% of the difference between the exercise price of the underlying Option (which, as set forth in Section 7(b) of this Plan, may not be less than the Fair Market Value of the Shares subject to the Option as determined on the date of grant) and the Fair Market Value of the Shares subject to the underlying Option at the time the tandem SAR is exercised.
(c) Payment of SAR Benefit. Upon exercise of an SAR, the Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:
(i) the excess of the Fair Market Value of a Share on the date of exercise over the SAR exercise price; by
(ii) the number of Shares with respect to which the SAR is exercised;
provided that the Committee at the time of the grant may provide that the benefit payable on exercise of a SAR shall not exceed such percentage of the Fair Market Value of a Share on the date of grant as the Committee shall specify. For each SAR, the Committee will establish the SAR exercise price, which may not be less than the Fair Market Value of the Shares subject to the SAR as determined on the date of grant. As determined by the Committee, the payment upon exercise of an SAR may be in cash, in Shares that have an aggregate Fair Market Value (as of the date of exercise of the SAR) equal to the amount of the payment, or in some combination thereof.
9. Performance and Restricted Awards.
(a) Eligibility for Performance and Restricted Awards. The Committee may grant awards of Performance Shares, Performance Units, Restricted Stock or Restricted Stock Units to Participants the Committee selects.
(b) Terms and Conditions.
(i) Each award of Performance Shares or Performance Units may be subject to such terms and conditions as the Committee determines appropriate; however, subject to Sections 11(c) and 13 of this Plan, an award of Performance Shares and/or Performance Units must be subject to a condition that one or more Performance Goals be achieved for the Participant to realize all or a portion of the benefit provided under the Award, with the corresponding performance period consisting of one or more full fiscal years of the Company. No shares of Common Stock shall be issued at the time Performance Shares or Performance Units are granted. A Participant shall not have any voting rights with respect to any Performance Shares or Performance Units granted hereunder. The Committee may determine to pay or settle Performance Units in cash, in Shares, or in a combination of cash and Shares.
(ii) Each award of Restricted Stock and Restricted Stock Units may be subject to such terms and conditions as the Committee determines appropriate; however, subject to Sections 11(c) and 13 of this Plan, an award of Restricted Stock and/or Restricted Stock Units must have a restriction period of at least one year. No shares of Common Stock shall be issued at the time a Restricted Stock Unit is granted. A Participant shall not have any voting rights with respect to any Restricted Stock Units granted hereunder. The Committee may determine to pay or settle Restricted Stock Units in cash, in Shares, or in a combination of cash and Shares.
10. Transferability. Each Award granted under this Plan is not transferable other than by will or the laws of descent and distribution, except that a Participant may, if and only to the extent the Committee allows and in a manner the Committee specifies: (a) designate in writing a beneficiary to exercise the Award after the Participant’s death; or (b) transfer any award. The Committee is not obligated to approve or otherwise permit any Award to be transferred. In no event shall an incentive stock option be transferable by the individual to whom it was granted other than by will or the laws of descent and distribution, and an incentive stock option is exercisable, during such individual’s lifetime, only by such individual.
11. Effectiveness, Termination and Amendment of Plan; Amendment, Modification or Cancellation of Awards.
(a) Effectiveness and Term of Plan. This Plan will be effective as of the Effective Date. This Plan will terminate, and no Award may be granted more than, ten (10) years after the Effective Date, unless the Board earlier terminates this Plan pursuant to subsection (b).
(b) Termination and Amendment. The Board may amend, alter, suspend, discontinue or terminate this Plan at any time, subject to the following limitations:
(i) shareholders must approve any amendment of this Plan if required by: (A) the rules and/or regulations promulgated under Section 16 of the Exchange Act (for this Plan to remain qualified under Rule 16b-3); (B) the Code or any rules promulgated thereunder (to allow for incentive stock options to be granted under this Plan); or (C) the listing requirements of NASDAQ, if the Shares are then traded on NASDAQ, or any other principal securities exchange or market on which the Shares are then traded (to maintain the listing or quotation of the Shares on that exchange); and
(ii) shareholders must approve any of the following Plan amendments: (A) an amendment to increase any number of Shares specified in Section 6(a) of this Plan (except as permitted by Section 13 of this Plan); (B) an amendment to shorten the restriction periods specified in Section 9(b) of this Plan; or (C) an amendment to the provisions of Section 11(e) of this Plan.
(c) Amendment, Modification or Cancellation of Awards. Except as provided in subsection (e) and subject to the requirements of this Plan:
(i) the Committee may (x) accelerate the vesting of any Award (including the lapsing of any restriction period); (y) remove conditions for vesting (or lapsing of any restriction period); or (z) provide that all or a portion of the Performance Goals subject to an Award are deemed achieved, upon a Change of Control or the Participant’s death, disability, retirement, layoff, termination, separation from service in connection with a Change of Control, or other separation from service, where the Committee determines that such treatment is appropriate and in the Company’s best interests; and
(ii) the Committee may otherwise modify, amend or cancel any Award or waive any restrictions or conditions applicable to any Award or the exercise of the Award, so long as any such action does not increase the number of Shares issuable under this Plan (except as permitted by Section 13 of this Plan); provided, however, that any such action shall not adversely affect without such Participant’s consent the rights of a Participant under any Award previously granted to such Participant; provided further, that the Committee shall have the right to modify, amend or cancel any outstanding Award or adopt other forms, policies and procedures applicable to outstanding Awards (including amendments, policies and procedures with retroactive effect) without the consent of any Participant (or other interested party) if (x) the Committee determines that such action is necessary or appropriate in order for the Company, this Plan or the Award to satisfy or conform to any applicable law, rule, regulation or other legal requirement, to any listing standard or other requirement of a national securities exchange, or to any accounting standard or requirement, (y) such action is permitted by another provision of this Plan, or (z) the Committee determines that such action is not reasonably likely to significantly diminish the benefits provided under such Award, or that any such diminishment has been adequately compensated, in each case even if such action reduces, restricts or eliminates rights granted under the Plan, an Award or Award Agreement prior to the modification, amendment or cancellation.
(d) Survival of Committee Authority and Awards. Notwithstanding the foregoing, the authority of the Committee to administer this Plan and modify, amend or cancel an Award, and the authority of the Board to amend the Plan, shall extend beyond the date of this Plan’s termination so long as any Award remains outstanding. In addition, termination of this Plan will not affect the rights of Participants with respect to Awards previously granted to them, and all unexpired Awards will continue in force and effect after termination of this Plan except as they may lapse or be terminated by their own terms and conditions or the terms of this Plan.
(e) Repricing Prohibited. Notwithstanding anything in this Plan to the contrary, and except for the adjustments provided in Section 13 of this Plan, neither the Committee nor any other person may decrease the exercise price for any outstanding Option or SAR granted under this Plan after the date of grant, allow a Participant to surrender an outstanding Option or SAR granted under this Plan to the Company as consideration for the grant of a new Option or SAR, as applicable, with a lower exercise price, or allow a Participant to surrender an outstanding Option or SAR for cash when the exercise price of the Option or SAR, as applicable, equals or exceeds the Fair Market Value of the Shares subject to the Option or SAR.
(f) Foreign Participation. To assure the viability of Awards granted to Participants employed in foreign countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. The Committee may approve such supplements to, or amendments, restatements or alternative versions of this Plan as it determines is necessary or appropriate for such purposes. Any such supplement, amendment, restatement or alternative versions that the Committee approves for purposes of using this Plan in a foreign country will not affect the terms of this Plan for any other country. In addition, all such supplements, amendments, restatements or alternative versions must comply with the provisions of Section 11(b)(ii) of this Plan.
12. Taxes.
(a) Withholding. The Company is entitled to withhold the amount of any tax attributable to any amount payable or Shares deliverable under this Plan after giving the person entitled to receive such amount or Shares notice as far in advance as reasonably practicable, and the Company may defer making payment or delivery if any such tax may be pending unless and until indemnified to its satisfaction. The Committee may permit a Participant to pay all or a portion of the federal, state and local withholding taxes arising in connection with (a) the exercise of a nonqualified stock option or SAR, (b) a disqualifying disposition of Shares received upon the exercise of an incentive stock option, or (c) the lapse of restrictions on Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units, by electing to (i) have the Company withhold Shares otherwise issuable under the Award, (ii) tender back Shares received in connection with such Award or (iii) deliver other previously owned Shares, in each case having a Fair Market Value equal to the amount to be withheld. However, the amount to be withheld may not exceed the total maximum federal, state and local tax withholding obligations associated with the transaction. The election must be made on or before the date as of which the amount of tax to be withheld is determined and otherwise as the Committee requires. The Fair Market Value of fractional Shares remaining after payment of the withholding taxes may be paid to the Participant in cash.
(b) Section 409A of the Code. It is the intention of the Company that the Options, SARs and Restricted Stock granted under this Plan will be exempt from the requirements of Section 409A of the Code, and the other Awards granted under the Plan will be exempt from, or will comply with the requirements of, Section 409A of the Code, and the Plan and the terms and conditions of all Awards and Award Agreements shall be interpreted, construed and administered consistent with such intent. The Committee shall have the right to amend the Plan and any outstanding Awards or Award Agreements or adopt other forms, policies and procedures applicable to the Plan, Awards and Award Agreements (including amendments, policies and procedures with retroactive effect) without Participant consent as may be necessary or appropriate to comply with the requirements of Section 409A of the Code or an exemption thereto, even if the amendment reduces, restricts or eliminates rights granted under the Plan, an Award or Award Agreement prior to the amendment. Although the Company intends to administer the Plan, Awards and Award Agreements in compliance with Section 409A of the Code or an exemption thereto, the Company does not warrant that the terms of any Award or Award Agreement or the Company’s administration thereof will be exempt from, or will comply with the requirements of, Section 409A of the Code. The Company shall not be liable to any Participant or any other person for any tax, interest, or penalties that the person may incur as a result of an Award or Award Agreement or the Company’s administration thereof not satisfying any of the requirements of Section 409A of the Code.
13. Adjustment Provisions; Change of Control.
(a) Adjustment of Shares. In the event that, at any time or from time to time, a stock dividend, stock split, reverse stock split, spin-off, recapitalization, extraordinary dividend, or other equity restructuring (as defined in Financial Accounting Standards Board Accounting Standards Codification 718, “Stock Compensation”) occurs that affects the Shares, the Committee shall, in such manner as it deems equitable, adjust any or all of (i) the number and type of Shares subject to this Plan (including the number and type of Shares that may be granted as Restricted Stock or issued pursuant to Options, SARs, Restricted Stock Units, Performance Shares or Performance Units that may be granted to a Participant) and which may after the event be made the subject of Awards under this Plan, (ii) the number and type of Shares subject to outstanding Awards, and (iii) the grant, purchase, or exercise price with respect to any Award. Such adjustment shall be made by the Committee in a manner it deems equitable in order to prevent the enlargement or dilution of the benefits or potential benefits intended to be granted under this Plan. Further, the number of Shares subject to any Award payable or denominated in Shares must always be a whole number, and upon any such adjustment the Shares subject to any Award shall be rounded down to the nearest whole Share. It is intended that, to the greatest extent possible, any adjustments contemplated by this Section 13(a) be made in a manner that satisfies applicable legal, tax (including, without limitation and as applicable in the circumstances, Section 424 and 409A of the Code), and accounting (so as to not trigger any charge to earnings with respect to such adjustment) requirements.
(b) Mergers and Other Corporation Transactions. In the event of any merger, consolidation, combination, share exchange, acquisition of property or stock, reorganization, dissolution, or other similar corporate transaction or event, whether or not constituting a Change of Control, the Committee may (without the consent of any Participant or other holder of an Award), in its discretion, provide for or cause Awards to be assumed by the surviving corporation or its parent, continued by the Company (if the Company is a surviving corporation), cancelled in exchange for a payment of cash, substituted or exchanged for stock, other securities, or other property, or any combination of the foregoing. Such action shall be effective at such time and in such manner as the Committee specifies based upon, to the extent relevant under the circumstances, the distribution or consideration payable to holders of the Shares upon or in respect of such event. Further, all outstanding Awards shall be subject to the terms of any agreement governing any such merger, consolidation, combination, share exchange, acquisition of property or stock, reorganization, dissolution or other transaction or event. If an Award is cancelled in whole or in part in exchange for a cash payment, the amount of such payment shall be determined by the Committee, but if such transaction or event constitutes a Change of Control, then such payment shall be at least as favorable to the holder as the greatest amount the holder could have received in respect of such Award under subsection (d).
(c) Issuance or Assumption. Notwithstanding any other provision of this Plan, and without affecting the number of Shares otherwise reserved or available under this Plan, in connection with any merger, consolidation, combination, share exchange, acquisition of property or stock, reorganization, dissolution, or other similar corporate transaction or event, the Committee may authorize the issuance or assumption of awards upon such terms and conditions as it may deem appropriate.
(d) Change of Control. Except to the extent the Committee provides a result more favorable to holders of Awards (pursuant to Section 11(c) of this Plan or otherwise), in the event of a Change of Control:
(i) each holder of an Option (A) shall have the right at any time thereafter to exercise the Option in full whether or not the Option was theretofore exercisable; and (B) shall have the right, exercisable by written notice to the Company within 60 days after the Change of Control, to receive, in exchange for the surrender of the Option, an amount of cash equal to the excess of the Change of Control Price of the Shares covered by the Option that is so surrendered over the exercise price of such Option; provided that the foregoing shall not apply with respect to any portion of an Option that was forfeited or cancelled upon a Participant’s termination of employment or service prior to the date of the Change of Control;
(ii) each holder of an SAR (A) shall have the right at any time thereafter to exercise the SAR in full whether or not the SAR was theretofore exercisable; and (B) shall have the right, exercisable by written notice to the Company within 60 days after the Change of Control, to receive, in exchange for the surrender of the SAR, an amount of cash equal to the excess of the Change of Control Price of the Shares covered by the SAR that is so surrendered over the exercise price of such SAR; provided that the foregoing shall not apply with respect to any portion of an SAR that was forfeited or cancelled upon a Participant’s termination of employment or service prior to the date of the Change of Control;
(iii) Restricted Stock and/or Restricted Stock Units that are not then vested shall vest upon the date of the Change of Control and each holder of such Restricted Stock and/or Restricted Stock Units shall have the right, exercisable by written notice to the Company within 60 days after the Change of Control, to receive, in exchange for the surrender of such Restricted Stock and/or Restricted Stock Units, an amount of cash equal to the Change of Control Price of such Restricted Stock and/or Restricted Stock Units;
(iv) each holder of a Performance Share and/or Performance Unit for which the performance period has not expired shall have the right, exercisable by written notice to the Company within 60 days after the Change of Control, to receive, in exchange for the surrender of the Performance Share and/or Performance Unit, an amount of cash equal to the product of the value of the Performance Share and/or Performance Unit and a fraction the numerator of which is the number of whole months which have elapsed from the beginning of the performance period to the date of the Change of Control and the denominator of which is the number of whole months in the performance period; and
(v) each holder of a Performance Share and/or Performance Unit that has been earned but not yet paid shall receive an amount of cash equal to the value of the Performance Share and/or Performance Unit.
For purposes of this Section 13, the “value” of a Performance Share shall be equal to, and the “value” of a Performance Unit the value of which is equal to the Fair Market Value of one or more Shares shall be based on, the Change of Control Price.
14. Miscellaneous.
(a) Other Terms and Conditions. The grant of any Award under this Plan may also be subject to other provisions (whether or not applicable to the Award awarded to any other Participant) as the Committee determines appropriate, including, without limitation, provisions for:
(i) if and to the extent permitted Section 409A of the Code, one or more means to enable Participants to defer the delivery of Shares or recognition of taxable income relating to Awards or cash payments derived from the Awards on such terms and conditions as the Committee determines, including, by way of example, the form and manner of the deferral election, the treatment of dividends paid on the Shares during the deferral period or a means for providing a return to a Participant on amounts deferred, and the permitted distribution dates or events (provided that no such deferral means may result in an increase in the number of Shares issuable under this Plan);
(ii) the purchase of Shares under Options in installments;
(iii) the payment of the purchase price of Options by delivery of cash or other Shares or other securities of the Company (including by attestation) having a then Fair Market Value equal to the purchase price of such Shares, or by delivery (including by electronic delivery) to the Company or its designated agent of an executed irrevocable option exercise form together with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of the Shares and deliver the sale or margin loan proceeds directly to the Company to pay for the exercise price;
(v) restrictions on resale or other disposition; and
(vi) compliance with federal or state securities laws and stock exchange requirements.
Notwithstanding anything to the contrary in this Plan, the current payment of dividends or dividend equivalents on unvested Awards is prohibited under this Plan. For the sake of clarity, unvested Awards can accrue dividends and dividend equivalents with payment deferred until the underlying Shares vest or are settled, as applicable.
(b) Employment. Nothing in the Plan or an Award Agreement shall interfere with or limit in any way the right of the Company or its Affiliates to terminate any Participant’s employment or other service relationship at any time, nor confer upon any Participant any right to continue in the capacity in which the Participant is employed or otherwise serves the Company or its Affiliates. Unless the Committee provides otherwise in a Participant’s Award Agreement, if a Participant changes status from an employee to a Director, or vice versa, or directly transfers employment among the Company or any of its Affiliates such that the Participant does not cease to be an employee of the Company and its Affiliates, the Participant shall not be considered to have terminated employment or service under the terms of this Plan or the Participant’s Award (except, in the case of an incentive stock option, as required by the Code for purposes of determining the Option’s qualification as an incentive stock option). However, in the event that the Company sells its entire interest in an Affiliate, or sells a portion of its interest in such Affiliate so that such entity no longer meets the definition of an Affiliate, then a Participant at such entity will be considered to have terminated employment at such time for purposes of this Plan and the Participant’s Award Agreement, unless the Participant’s Award Agreement or the Committee provides otherwise.
(c) Award Agreement. No Award granted under this Plan shall be effective unless and until either (i) the Company and the Participant execute a written agreement that sets forth the terms and provisions applicable to the Participant’s Award, or (ii) the Company issues a written statement to a Participant describing the terms and provisions of the Participant’s Award (such agreement or written statement, an “Award Agreement”).
(d) No Fractional Shares. No fractional Shares or other securities may be issued or delivered pursuant to this Plan, and the Committee may determine whether cash, other securities or other property will be paid or transferred in lieu of any fractional Shares or other securities, or whether such fractional Shares or other securities or any rights to fractional Shares or other securities will be canceled, terminated or otherwise eliminated.
(e) Unfunded Plan. This Plan is unfunded and does not create, and should not be construed to create, a trust or separate fund with respect to this Plan’s benefits. This Plan does not establish any fiduciary relationship between the Company and any Participant or other person. To the extent any person holds any rights by virtue of an Award granted under this Plan, such rights are no greater than the rights of the Company’s general unsecured creditors.
(f) Requirements of Law. The granting of Awards under this Plan and the issuance of Shares in connection with an Award are subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchanges as may be required. Notwithstanding any other provision of this Plan or any Award Agreement, the Company has no liability to deliver any Shares under this Plan or make any payment unless such delivery or payment would comply with all applicable laws and the applicable requirements of any national securities exchange, over-the-counter market or similar entity.
(g) Governing Law. This Plan, and all agreements under this Plan, should be construed in accordance with and governed by the laws of the State of Delaware, without reference to any conflict of law principles.
(h) Construction. Titles and heading to sections are for purposes of reference only, and shall in no way limit, define or otherwise affect the meaning or interpretation of the Plan. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, any feminine term used herein also shall include the masculine, the plural shall include the singular, and the singular shall include the plural.
(i) Severability. If any provision of this Plan or any Award Agreement or any Award (i) is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any person or Award, or (ii) would disqualify this Plan, any Award Agreement or any Award under any law the Committee deems applicable, then such provision should be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of this Plan, Award Agreement or Award, then such provision should be stricken as to such jurisdiction, person or Award, and the remainder of this Plan, such Award Agreement and such Award will remain in full force and effect.
(j) Non-Exclusivity. The adoption of this Plan shall not preclude the Company from maintaining or adopting any additional stock option, restricted stock, SAR, performance share, performance unit, bonus, incentive or other compensation plans or arrangements for any of its officers, directors, employees or other service providers.
(k) Recoupment/Claw-back. All Awards (including any proceeds, gains or other economic benefit actually or constructively received by the Participant upon any receipt or exercise of any Award or upon the receipt or resale of any shares of Common Stock underlying the Award) shall be subject to the provisions of any claw-back policy implemented by the Company, including, without limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, to the extent set forth in such claw-back policy and/or in the applicable Award Agreement.