Optex Systems Holdings Inc 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Optex Systems Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Optex Systems Holdings, Inc. and subsidiaries (the “Company”) as of October 1, 2023 and October 2, 2022, and the related consolidated statements of income, stockholders’ equity, and cash flows for the twelve months then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 1, 2023 and October 2, 2022, and the results of their operations and their cash flows for the twelve months then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Whitley Penn LLP We have served as the Company’s auditor since 2017. Dallas, Texas December 18, 2023 42 Optex Systems Holdings, Inc. Consolidated Balance Sheets October 1, 2023 October 2, 2022 (Thousands, except share and per share data) October 1, 2023 October 2, 2022 ASSETS Cash and Cash Equivalents $ 1,204 $ 934 Accounts Receivable, Net 3,624 2,908 Inventory, Net 12,153 9,212 Contract Asset 336 - Prepaid Expenses 219 328 Current Assets 17,536 13,382 Property and Equipment, Net 998 968 Other Assets Deferred Tax Asset 922 942 Right-of-use Asset 2,740 3,222 Security Deposits 23 23 Other Assets 3,685 4,187 Total Assets $ 22,219 $ 18,537 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts Payable $ 810 $ 706 Operating Lease Liability 620 604 Federal Income Taxes Payable 247 331 Accrued Expenses 1,265 958 Accrued Selling Expense 336 - Accrued Warranty Costs 75 169 Contract Loss Reserves 243 289 Customer Advance Deposits 481 311 Current Liabilities 4,077 3,368 Other Liabilities Credit Facility 1,000 - Operating Lease Liability, net of current portion 2,282 2,761 Other Liabilities 3,282 2,761 Total Liabilities 7,359 6,129 Commitments and Contingencies Stockholders’ Equity Common Stock – ($ 0.001 par, 2,000,000,000 authorized, 6,763,070 and 6,716,638 shares issued and outstanding, respectively) 7 7 Additional Paid in Capital 21,285 21,096 Accumulated Deficit ( 6,432 ) ( 8,695 ) Stockholders’ Equity 14,860 12,408 Total Liabilities and Stockholders’ Equity $ 22,219 $ 18,537 The accompanying notes are an integral part of these financial statements. 43 Optex Systems Holdings, Inc. Consolidated Statements of Income October 1, 2023 October 2, 2022 (Thousands, except share and per share data) Twelve months ended October 1, 2023 October 2, 2022 Revenue $ 25,659 $ 22,383 Cost of Sales 19,040 17,486 Gross Profit 6,619 4,897 General and Administrative Expense 3,832 3,250 Operating Income 2,787 1,647 Interest Expense 55 - Income Before Taxes 2,732 1,647 Income Tax Expense, net 469 364 Net income applicable to common shareholders $ 2,263 $ 1,283 Basic income per share $ 0.34 $ 0.16 Weighted Average Common Shares Outstanding - basic 6,616,462 8,128,024 Diluted income per share $ 0.34 $ 0.16 Weighted Average Common Shares Outstanding - diluted 6,653,573 8,219,069 The accompanying notes are an integral part of these financial statements. 44 Optex Systems Holdings, Inc. Consolidated Statements of Cash Flows October 1, 2023 October 2, 2022 (Thousands) Twelve months ended October 1, 2023 October 2, 2022 Cash Flows from Operating Activities: Net Income $ 2,263 $ 1,283 Adjustments to Reconcile Net Income to Net Cash provided by (used in) Operating Activities: Depreciation 345 307 Stock Compensation Expense 247 162 Change in Deferred Tax Asset 20 346 Accounts Receivable ( 716 ) 254 Bad Debt Expense - 21 Inventory ( 2,941 ) ( 1,629 ) Contract Asset ( 336 ) - Prepaid Expenses 109 ( 66 ) Leases 20 80 Accounts Payable and Accrued Expenses 411 313 Federal Income Taxes Payable ( 84 ) 331 Accrued Warranty Costs ( 94 ) 91 Accrued Selling Expense 336 - Customer Advance Deposits 170 311 (Decrease) Increase In Accrued Estimated Loss On Contracts ( 46 ) 238 Total Adjustments ( 2,559 ) 759 Net Cash (used in) provided by Operating Activities ( 296 ) 2,042 Cash Flows used in Investing Activities Purchases of Property and Equipment ( 376 ) ( 257 ) Net Cash used in Investing Activities ( 376 ) ( 257 ) Cash Flows provided by (used) in Financing Activities Cash Paid for Taxes Withheld On Net Settled Restricted Stock Unit Share Issue ( 58 ) ( 19 ) Borrowings from Credit Facility 1,507 - Payments to Credit Facility ( 507 ) - Common Stock Repurchases - ( 4,732 ) Net Cash provided by (used in) Financing Activities 942 ( 4,751 ) Net Increase (Decrease) in Cash and Cash Equivalents 270 ( 2,966 ) Cash and Cash Equivalents at Beginning of Year 934 3,900 Cash and Cash Equivalents at End of Year $ 1,204 $ 934 Supplemental Cash Flow Information: Non Cash Transactions: Right-of-Use Asset $ - $ 51 Operating Lease Liabilities - ( 51 ) Treasury stock retired - 4,801 Cash Transactions: Cash Paid for (Refund of) Taxes 534 ( 312 ) Cash Paid for Interest 55 - The accompanying notes are an integral part of these financial statements. 45 Optex Systems Holdings, Inc. Consolidated Statement of Stockholders’ Equity Issued Shares Stock Stock Capital Earnings Equity (Thousands, except share data) Common Additional Total Shares Treasury Common Treasury Paid in Retained Stockholders Issued Shares Stock Stock Capital Earnings Equity Balance at October 3, 2021 8,523,704 35,555 $ 9 $ ( 69 ) $ 25,752 $ ( 9,978 ) $ 15,714 Stock Compensation Expense - - - - 162 - 162 Vested restricted stock units issued net of tax withholding 23,216 - - - ( 19 ) - ( 19 ) Common Stock Repurchase (1) - 190,954 - ( 371 ) - - ( 371 ) Cancellation of Treasury Shares (1) ( 226,509 ) ( 226,509 ) - 440 ( 440 ) - - Tender Offer Stock Repurchase and Cancellation (2) ( 1,603,773 ) - ( 2 ) - ( 4,359 ) - ( 4,361 ) Net income - - - - - 1,283 1,283 Balance at October 2, 2022 6,716,638 - $ 7 $ - $ 21,096 $ ( 8,695 ) $ 12,408 Balance, value 6,716,638 - $ 7 $ - $ 21,096 $ ( 8,695 ) $ 12,408 Stock Compensation Expense - - - - 247 - 247 Vested restricted stock units issued net of tax withholding 46,432 - - - ( 58 ) - ( 58 ) Restricted Shares Issued (4) 40,000 - - - - - - Forfeited Unvested Shares (3) ( 40,000 ) - - - - - - Net income - - - - - 2,263 2,263 Balance at October 1, 2023 6,763,070 - $ 7 $ - $ 21,285 $ ( 6,432 ) $ 14,860 Balance, value 6,763,070 - $ 7 $ - $ 21,285 $ ( 6,432 ) $ 14,860 (1) Common shares repurchased in the open market during the twelve months ended October 2, 2022. Shares were held in treasury using the cost method. As of October 1, 2023, all of the treasury shares have been cancelled. (2) Common shares repurchased pursuant to the tender offer that closed on September 15, 2022. Total tendered shares of 1,603,773 at $ 2.65 , or $ 4.25 million, plus transaction costs of $ 111 thousand. Repurchased shares were immediately cancelled. (3) Unvested common restricted shares which were forfeited and cancelled in February 2023. (4) Restricted and unvested shares issued to board member on May 9, 2023. Shares vest on 50 % January 1, 2024 and 50% January 1, 2025 . The accompanying notes are an integral part of these financial statements. 46 Note 1 — Organization and Operations Optex Systems Holdings, Inc. (“the Company”) manufactures optical sighting systems and assemblies for the U.S. Department of Defense, foreign military applications and commercial markets. Its products are installed on a variety of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. Optex Systems Holdings also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that are delivered both directly to the military and to other defense prime contractors or commercial customers. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of October 1, 2023, the Company operated with 106 full-time equivalent employees. Note 2 — Summary of Significant Accounting Policies Basis of Presentation Principles of Consolidation : The consolidated financial statements include the accounts of Optex Systems Holdings and its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation. Use of Estimates : The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Segment Reporting : FASB ASC 280 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker in decisions regarding resource allocations and performance assessments. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. Segments are determined based on differences in products, internal reporting and how operational decisions are made. Management has determined that the Optex Systems, Richardson plant, and the Applied Optics Center, Dallas plant are separately managed, organized, and internally reported as separate business segments. The FASB ASC 280 requires that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliations of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise’s general-purpose financial statements. Fiscal Year : Optex System Holdings’ fiscal year ends on the Sunday nearest September 30. Fiscal year 2023 ended on October 1, 2023 and included 52 weeks. Fiscal year 2022 ended on October 2, 2022 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. 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. 47 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 $ 1.2 million in cash on deposit with our banks. Only a portion of the cash, currently $ 381 thousand, would be covered by federal deposit insurance and the uninsured balances are substantially greater than the insured amounts. Concentration of Credit Risk : The Company’s revenues for fiscal year ended October 1, 2023 are derived from sales to U.S. government agencies ( 22 %), three U.S. defense contractors ( 14 %, 7 %, and 6 %), one major commercial customer ( 23 %) and all other customers ( 28 %). The Company’s revenues for fiscal year ended October 2, 2022 are derived from sales to U.S. government agencies ( 14 %), three major U.S. defense contractors ( 22 %, 15 % and 7 %), one major commercial customer ( 22 %) and all other customers ( 20 %). Optex Systems Holdings does not believe that this concentration results in undue credit risk because of the financial strength of the obligees. Accounts Receivable : Optex Systems Holdings records its accounts receivable at the original sales invoice amount less liquidations for previously collected advance/progress bills and an allowance for doubtful accounts. An account receivable is considered to be past due if any portion of the receivable balance is outstanding beyond its scheduled due date. On a quarterly basis, Optex Systems Holdings evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on its history of past write-offs and collections, and current credit conditions. No interest is accrued on past due accounts receivable. As of October 1, 2023, and October 2, 2022, 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 in which they are first deemed uncollectible. In the fiscal year 2023 we recognized zero in bad debt expenses associated with uncollectible accounts. In the fiscal year 2022 we recognized $ 21 thousand in bad debt expenses associated with uncollectible accounts. Accounts receivable was $ 3,183 as of October 3, 2021. As of October 1, 2023, 79 % of the accounts receivable balance was comprised of six customers: the U.S. government, 17 %, four major defense contractors, 21 %, 9 %, 8 % and 6 %, and a commercial customer, 18 %. As of October 2, 2022, 89 % of the accounts receivable balance was comprised of eight customers: the U.S. government, 10 %, five major defense contractors, 14 %, 12 %, 9 %, 8 % and 7 %, a commercial customer, 19 %, and a foreign military customer, 10 %. Inventory : Inventory is recorded at the lower of cost or net realizable value, and adjusted as appropriate for decreases in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected sales activity, inventory costs and inventory balances to determine appropriate reserve levels. Cost is determined using the first-in first-out method. As of October 1, 2023, and October 2, 2022 inventory included: Schedule of Inventory As of October 1, 2023 As of October 2, 2022 (Thousands) As of October 1, 2023 As of October 2, 2022 Raw Materials $ 8,211 $ 6,953 Work in Process 4,460 2,722 Finished Goods 489 348 Gross Inventory 13,160 10,023 Less: Inventory Reserves ( 1,007 ) ( 811 ) Net Inventory $ 12,153 $ 9,212 In the twelve months ended October 1, 2023 Optex Systems recorded $ 196 thousand of obsolete and excess inventory reserves. Net Inventory increased by $ 2.9 million in support of increased customer backlog and higher revenue. 48 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 with the period end backlog of returned customer units awaiting repair or replacement plus any estimated warranty expenses related to anticipated future returns on previous deliveries. As of October 1, 2023 and October 2, 2022, the existing warranty reserve balances of $ 75 thousand and $ 169 thousand, respectively, were reviewed and determined to be adequate to satisfy any future warranty claims that may have existed as of the end of each fiscal year for shipments occurring in the prior 12 months. We have made numerous improvements to our supplier bases and internal production process to reduce the return rate on future shipments but will continue to review and monitor the reserve balances related to this product line against any existing warranty backlog and current trend data as we repair and replace our current warranty backlog and process future warranty returns. The table below summarizes the warranty expenses and incurred warranty costs for the twelve months ended October 1, 2023 and October 2, 2022. Schedule of Warranty Reserves 2023 2022 Years ended 2023 2022 Beginning balance $ 169 $ 78 Incurred costs for warranties satisfied during the period ( 133 ) ( 4 ) Warranty Expenses: Warranties reserved for new product shipped during the period (1) 223 198 Change in estimate for pre-existing warranty liabilities (2) ( 184 ) ( 103 ) Warranty Expense 39 95 Ending balance $ 75 $ 169 (1) Warranty expenses accrued to cost of sales (based on current year shipments and historical warranty return rate). (2) Changes in estimated warranty liabilities recognized in cost of sales associated with: the period end customer returned warranty backlog, or the actual costs of repaired/replaced warranty units which were shipped to the customer during the year. During the twelve months ended October 1, 2023, the warranty return rate was significantly below historical levels resulting in a favorable change in estimate during the period. Property and Equipment : Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years . Expenditures for renewals and betterments are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place. Leases : In February 2016, FASB issued ASU 2016-02— Leases (Topic 842). The update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As such, Optex Systems Holdings adopted these provisions as of the fiscal year beginning on September 30, 2019. Optex Systems Holdings has two significant operating facilities leases which extend beyond twelve months and fall under the guidance of ASC Topic 842. On January 11, 2021, the Company executed amendments extending the lease terms of both facilities for eighty-six months. As of the twelve months ended October 2, 2022, the Company has recognized $ 51 thousand in right-of-use-asset and corresponding operating lease liabilities of $ 51 thousand for an office equipment lease expiring in December 2025. See also Note 7. 49 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 $ 455 thousand for the twelve months ended October 1, 2023 and $ 464 thousand for the twelve months ended October 2, 2022. The Company has on occasion, outside of the presented periods, received selective contract awards and modifications which included substantive milestone performance obligations, contract modifications, negotiated settlements and financing arrangements which could fall within the scope of FASB ASC 606 revenue recognition guidance on reoccurrence, and as such, the Company has expanded their contract review process to ensure any new contract awards, changes, modifications, financing arrangements or potential negotiated settlements are recorded in compliance to the new standard guidance. During the twelve months ended October 1, 2023 there was $ 242 thousand of revenue recognized from customer deposit liabilities (deferred contract revenue). During the twelve months ended October 2, 2022, there was zero revenue recognized during the period from customer deposit liabilities (deferred contract revenue). As of October 1, 2023, there was $ 336 thousand in accrued selling expenses and $ 336 thousand in contract assets related to a new $ 3.4 million contract booked in November 2022. The costs will be amortized against the revenue for the contract deliveries expected to begin in the first half of fiscal year 2024 and extend through fiscal year 2025. As of October 2, 2022, there was no significant contract assets or selling expenses. Customer Advance Deposits : Customer advance deposits represent amounts collected from customers in advance of shipment or revenue recognition which relate to undelivered product due to non-substantive milestone payments or other cash in advance payment terms. As of October 1, 2023 and October 2, 2022, Optex Systems, Inc. had a balance of $ 481 thousand and $ 311 thousand, respectively, in customer advance deposits. Customer advance deposits were zero as of October 3, 2021. Contract Loss Reserves : The Company records loss provisions in the event that the current estimated total revenue against a contract and the total estimated cost remaining to fulfill the contract indicate a loss upon completion. When the estimated costs indicate a loss, we record the entire value of the loss against the contract loss reserve in the period the determination is made. The Company has several long-term fixed price contracts that are currently indicative of a loss condition due to recent inflationary pressures on material and labor, combined with increased manufacturing overhead costs. As of October 1, 2023, the Company had contract loss reserves of $ 243 thousand which have been separately itemized on the balance sheet. As of October 2, 2022, the Company had contract loss reserves of $ 289 thousand. Government Contracts : Many of Optex Systems Holdings’ contracts are prime or subcontracted directly with the Federal government and as such, are subject to Federal Acquisition Regulation (Federal Acquisition Regulation) Subpart 49.5, “Contract Termination Clauses” and more specifically Federal Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the Government (Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for default”. These clauses are standard clauses on prime military contracts and are required by the government to be “flowed down” by the prime contractor to any subcontractors used to perform work or provide components against the award. It has been Optex Systems Holdings’ experience that the termination for convenience is rarely invoked, except where it has been mutually beneficial for both parties. Optex Systems Holdings is not currently aware of any pending terminations for convenience or default on its existing prime contracts or customer purchase orders. 50 Impairment or Disposal of Long-Lived Assets : Optex Systems Holdings follows the provisions of FASB ASC 360-10, “ Accounting for the Impairment or Disposal of Long-lived Assets ”. This standard requires, among other things, that long-lived assets be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. No impairment of long-lived assets was recorded for the periods presented. Stock-Based Compensation : FASB ASC 718 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, but primarily focuses on transactions whereby an entity obtains employee services for share-based payments. FASB ASC 718 requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Income Tax/Deferred Tax : FASB ASC 740 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differing treatment of items for financial reporting and income tax reporting purposes. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that Optex Systems Holdings will not realize tax assets through future operations. When assessing the recoverability of deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies and results of recent operations. Based on those estimates, management has determined that a portion of the deferred tax assets may not be realized and has established a valuation allowance against the deferred tax asset balance. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. As of October 1, 2023, Optex Systems Inc. has a net carrying value of $ 0.9 million in deferred tax assets represented by deferred tax assets of $ 1.7 million and a deferred tax asset valuation allowance of ($ 0.8 ) million against those assets. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control occurring in fiscal year 2018. As of October 1, 2023 and October 2, 2022, 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. During the twelve months ended October 1, 2023, the Company recognized an income tax expense of $ 0.5 million. During the twelve months ended October 2, 2022, the Company recovered $ 0.3 million in cash for a tax refund related to a net operating loss carryback from the prior year ended October 1, 2022, and recognized an income tax expense of $ 0.4 million. 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. 51 The potentially dilutive securities that Optex Systems Holdings had outstanding were restricted shares, restricted stock units and performance-based shares. Optex Systems Holdings uses the Treasury Stock Method to compute the dilutive effect of these securities. Securities that are anti-dilutive are excluded from the calculation of diluted earnings per common share. For the twelve months ended October 1, 2023, 39,000 unvested restricted stock units, 120,000 restricted unvested shares and 27,000 performance shares (which converts to 37,111 incremental dilutive shares) were included in the diluted earnings per share calculation as dilutive and 108,000 performance shares were excluded from diluted earnings per share as they were below the target share price. For the twelve months ended October 2, 2022, 66,000 unvested restricted stock units and 180,000 unvested restricted shares (which converts to 91,045 incremental dilutive shares) were included in the diluted earnings per share calculation as dilutive. Note 3 — Recent Accounting Pronouncements There are no significant recent accounting pronouncements that affect the Company. 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. For both segments, the chief operating decision maker is Danny Schoening, CEO. 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 86 % of the Optex Systems segment revenue is comprised of domestic military customers, and 11 % is comprised of foreign military customers and 3 % is comprised of commercial customers. Optex Systems segment revenue is derived from the U.S. government, 19 %, and two major U.S. defense contractors representing 14 % 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 October 1, 2023, the Richardson facility operated with 59 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 46 % and military sales to prime and subcontracted customers represent 54 % of the total segment revenue. Approximately 94 % of the AOC revenue is derived from external customers and approximately 6 % is related to intersegment sales to Optex Systems in support of military contracts. For the twelve months ended October 1, 2023, the AOC segment revenue from one major commercial customer, and one major defense contractor represent approximately 23 % and 7 % of the Company’s consolidated revenue, respectively. The Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of October 1, 2023, AOC operated with 47 full time equivalent employees in a single shift operation. 52 The financial table below presents the information for each of the reportable segments profit or loss as well as segment assets for each year. The Company does not allocate interest expense, income taxes or unusual items to segments. Schedule of Segment Reporting Information Reportable Segment Financial Information (thousands) Twelve months ended October 1, 2023 Optex Systems Richardson Applied Optics Center Dallas Other (non-allocated costs and intersegment eliminations) Consolidated Total Revenues from external customers $ 12,120 $ 13,539 $ - $ 25,659 Intersegment revenues - 893 ( 893 ) - Total Revenue $ 12,120 $ 14,432 $ ( 893 ) $ 25,659 Interest expense $ - $ - $ 55 $ 55 Depreciation and Amortization $ 39 $ 306 $ - $ 345 Income (loss) before taxes $ 608 $ 2,426 $ ( 302 ) $ 2,732 Other significant noncash items: Allocated home office expense $ ( 1,338 ) $ 1,338 $ - $ - Stock compensation expense $ - $ - $ 247 $ 247 Warranty expense $ - $ 39 $ - $ 39 Segment Assets $ 14,043 $ 8,176 $ - $ 22,219 Expenditures for segment assets $ 33 $ 343 $ - $ 376 53 Reportable Segment Financial Information (thousands) Twelve months ended October 2, 2022 Optex Systems Richardson Applied Optics Center Dallas Other (non-allocated costs and intersegment eliminations) Consolidated Total Revenues from external customers $ 9,533 $ 12,850 $ - $ 22,383 Intersegment revenues - 879 ( 879 ) - Total Revenue $ 9,533 $ 13,729 $ ( 879 ) $ 22,383 Interest expense $ - $ - $ - $ - Depreciation and Amortization $ 38 $ 269 $ - $ 307 Income (loss) before taxes $ ( 380 ) $ 2,189 $ ( 162 ) $ 1,647 Other significant noncash items: Allocated home office expense $ ( 1,141 ) $ 1,141 $ - $ - Stock compensation expense $ - $ - $ 162 $ 162 Warranty expense $ - $ 95 $ - $ 95 Segment Assets $ 11,286 $ 7,251 $ - $ 18,537 Expenditures for segment assets $ 64 $ 193 $ - $ 257 Note 5 — Property and Equipment A summary of property and equipment at October 1, 2023 and October 2, 2022 is as follows: Schedule of Property and Equipment Estimated Useful Life October 1, 2023 October 2, 2022 (Thousands) Estimated Useful Life October 1, 2023 October 2, 2022 Property and Equipment Furniture and Fixtures 3 - 5 yrs $ 428 $ 405 Machinery and Equipment 5 yrs 4,531 4,231 Leasehold Improvements 7 yrs 404 351 Property and Equipment, gross 7 yrs 404 351 Less: Accumulated Depreciation ( 4,365 ) ( 4,019 ) Net Property & Equipment $ 998 $ 968 Depreciation Expense $ 345 $ 307 During the twelve months ended October 1, 2023, Optex Systems Holdings’ purchased $ 23 thousand in new furniture and fixtures, $ 300 thousand in machinery and equipment and $ 53 thousand in leasehold improvements. During the twelve months ended October 1, 2023, there were no sales or retirements of fixed assets. During the twelve months ended October 2, 2022, Optex Systems Holdings’ purchased $ 6 thousand in new furniture and fixtures, $ 196 thousand in machinery and equipment and $ 55 thousand in leasehold improvements. During the twelve months ended October 2, 2022, there were no sales or retirements of fixed assets. 54 Note 6 — Accrued Expenses The components of accrued liabilities as of October 1, 2023 and October 2, 2022 are summarized below: Schedule of Accrued Liabilities October 1, 2023 October 2, 2022 (Thousands) October 1, 2023 October 2, 2022 Accrued Vacation 403 402 Property Taxes 108 115 Operating Expenses 484 213 Payroll & Payroll Related 270 228 Total Accrued Expenses $ 1,265 $ 958 Note 7 — Commitments and Contingencies Rental Payments under Non-cancellable Operating Leases Optex Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc. Richardson location and the Applied Optics Center Dallas location. The Company also leases certain office equipment under non-cancellable operating leases. The leased facility under Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months, commencing on April 1, 2021 and ending on May 31, 2028 . The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each year thereafter. The initial term included 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately $ 12 thousand for additional Common Area Maintenance fees and taxes (“CAM”), to be adjusted annually based on actual expenses incurred by the landlord. The leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet of space at the premises. The previous lease term for this location expired on October 31, 2021 and the monthly base rent was $21.9 thousand through the end of the lease. On January 11, 2021 the Company executed a first amendment extending the terms of the lease for eighty-six (86) months, commencing on November 1, 2021 and ending on December 31, 2028 . The initial base rent is set at $23.6 thousand as of January 1, 2022 and escalates 2.75% on January 1 each year thereafter. The initial term includes 2 months of rent abatement for November and December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing rental rate” or the then current base rental rate. Our obligations to make payments under the lease are secured by a $ 125,000 standby letter of credit. The monthly rent includes approximately $ 9 thousand for additional CAM, to be adjusted annually based on actual expenses incurred by the landlord. The Company had 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 was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November 18, 2021 for an additional 48 months at a cost of $1.2 thousand per month. The start of the lease was delayed until April 2022 due to temporary equipment shortages. The lease renewal resulted in the recognition of an additional right of use asset and a lease liability of $ 51 thousand during the twelve months ended October 2, 2022. 55 As of October 1, 2023, the remaining minimum base lease and estimated common area maintenance (CAM) payments under the non-cancellable office equipment and facility space leases are as follows: Non-cancellable Operating Leases Minimum Payments Schedule of Non-cancellable Operating Leases Minimum Payments Fiscal Year Facility Lease Payments Facility Lease Payments Lease Payments Total Lease Payments Total Variable CAM Estimate (Thousands) Optex Richardson Applied Optics Center Office Equipment Consolidated Fiscal Year Facility Lease Payments Facility Lease Payments Lease Payments Total Lease Payments Total Variable CAM Estimate 2024 Base year lease $ 327 $ 296 $ 15 $ 638 $ 256 2025 Base year lease 336 305 15 656 261 2026 Base year lease 346 313 3 662 266 2027 Base year lease 357 322 - 679 272 2028 Base year lease 242 330 - 572 198 2029 Base year lease - 83 - 83 30 Total base lease payments $ 1,608 $ 1,649 $ 33 $ 3,290 $ 1,283 Imputed interest on lease payments (1) ( 180 ) ( 206 ) ( 2 ) ( 388 ) Total Operating Lease Liability (2) $ 1,428 $ 1,443 $ 31 $ 2,902 Right-of-use Asset (3) $ 1,340 $ 1,369 $ 31 $ 2,740 (1) Assumes a discount borrowing rate of 5.0 % on the new lease amendments effective as of January 11, 2021 . (2) Includes $ 162 thousand of unamortized deferred rent. (3) Short-term and Long-term portion of Operating Lease Liability is $ 620 thousand and $ 2,282 thousand, respectively. Total expense under both facility lease agreements for the twelve months ended October 1, 2023 was $ 862 thousand. Total expense under both facility lease agreements as of the twelve months ended October 2, 2022 was $ 849 thousand. Total office equipment rentals included in operating expenses was $ 20 thousand for the twelve months ended October 1, 2023 and $ 22 thousand for the twelve months ended October 2, 2022. Note 8 — Debt Financing Credit Facility — PNC Bank (formerly BBVA, USA) On April 16, 2020, Optex Systems Holdings, Inc. and its subsidiary, Optex Systems, Inc. (collectively, the “Borrowers”) entered into a line of credit facility (the “PNC Facility”) with BBVA, USA. In June 2021, PNC Bank completed its acquisition of BBVA, USA and the bank name changed to PNC Bank (“PNC”). The substantive terms were as follows: ● The principal amount of the PNC Facility was $ 2.25 million. The PNC Facility matured on April 15, 2022 . The interest rate was variable based on PNC’s Prime Rate plus a margin of - 0.250 %, initially set at 3 % at loan origination, and all accrued and unpaid interest was payable monthly in arrears starting on May 15, 2020; and the principal amount was due in full with all accrued and unpaid interest and any other fees on April 15, 2022. ● There were commercially standard covenants including, but not limited to, covenants regarding maintenance of corporate existence, not incurring other indebtedness except trade debt, not changing more than 25% stock ownership of Borrower, and a Fixed Charge Coverage Ratio of 1.25:1, with the Fixed Charge Coverage Ratio defined as (earnings before taxes, amortization, depreciation, amortization and rent expense less cash taxes, distribution, dividends and fair value of warrants) divided by (current maturities on long term debt plus interest expense plus rent expense). ● The PNC Facility contained commercially standard events of default including, but not limited to, not making payments when due; incurring a judgment of $ 10,000 or more not covered by insurance; not maintaining collateral and the like. ● The PNC Facility was secured by a first lien on all of the assets of Borrower. 56 On April 12, 2022, the Borrowers entered into an Amended and Restated Loan Agreement (the “PNC Loan Agreement”) with PNC, pursuant to which the Borrowers’ existing revolving line of credit facility was decreased from $ 2.25 million to $ 1.125 million, and the maturity date was extended from April 15, 2022 to April 15, 2023.The PNC Loan Agreement required the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1. On November 21, 2022, the Borrowers issued an Amended and Restated Revolving Line of Credit Note (the “Line of Credit Note”) to PNC in connection with an increase of the Borrowers’ revolving line of credit facility under the Loan Agreement from $ 1.125 million to $ 2.0 million. The maturity date remained April 15, 2023. Obligations outstanding under the credit facility accrued interest at a rate equal to the Lender’s prime rate minus 0.25 %. The Line of Credit Note and PNC Loan Agreement contained customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The PNC Facility was secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the credit facility were subject to acceleration upon the occurrence of an event of default as defined in the Line of Credit Note and PNC Loan Agreement. As of October 2, 2022 and October 1, 2023 the outstanding balance under the PNC Facility was zero . The PNC Facility was replaced by the Texas Capital Facility on March 22, 2023. Credit Facility — Texas Capital Bank On March 22, 2023, the Borrowers entered into a Business Loan Agreement (the “Loan Agreement”) with Texas Capital Bank (the “Lender”), pursuant to which the Lender will make available to the Borrowers a revolving line of credit in the principal amount of $ 3 million (the “Texas Capital Facility”). The Texas Capital Facility replaced the $ 2 million PNC Facility. The commitment period for advances under the Texas Capital Facility is twenty-six months expiring on May 22, 2025 . We refer to the expiration of that time period as the “Maturity Date.” Outstanding advances under the Texas Capital Facility will accrue interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. As of October 1, 2023 the interest rate was 8.07 % per annum. The Loan Agreement contains customary events of default (including a 25 % change in ownership) and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes (including changes in management), investments, and restricted payments (including cash dividends). The Loan Agreement also requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1 and a total leverage ratio of 3.00:1. The Texas Capital Facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the Texas Capital Facility are subject to acceleration upon the occurrence of an event of default as defined in the Loan Agreement. The Loan Agreement further provides for a $ 125,000 Letter of Credit sublimit. The outstanding balance under the Texas Capital Facility was $ 1.0 million as of October 1, 2023. For the year ended October 1, 2023, the total interest expense under the above facilities was $ 55 thousand. For the year ended October 2, 2022, the total interest expense under the PNC Facility was zero . 57 Note 9 — Stock Based Compensation Restricted Stock, Performance Shares and Restricted Stock Units issued to Directors, Officers and Employees The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units, and performance shares: Schedule of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted and Performance Shares Restricted Stock Units Weighted Average Grant Date Fair Value Restricted Shares Weighted Average Grant Date Fair Value Performance Shares Weighted Average Grant Date Fair Value Outstanding at October 3, 2021 99,000 $ 1.59 240,000 $ 1.75 — — Granted — — — — — — Vested ( 33,000 ) 1.73 ( 60,000 ) 1.75 — — Forfeited — — — — — — Outstanding at October 2, 2022 66,000 $ 1.52 180,000 $ 1.75 — — Granted 42,000 3.05 40,000 3.09 135,000 2.37 Vested ( 66,000 ) 1.52 ( 60,000 ) 1.75 — — Forfeited ( 3,000 ) 3.00 ( 40,000 ) 1.75 — — Outstanding at October 1, 2023 39,000 $ 3.06 120,000 $ 2.20 135,000 $ 2.37 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. Effective December 1, 2021, the vesting terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described below. The Company amortizes the grant date fair value of $ 264 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019. As of October 1, 2023, there was no unrecognized compensation cost relating to this award. 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 amortized the grant date fair value of $ 107 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February 17, 2020. On April 30, 2020, the 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 shares of restricted stock to each independent director which vest at a rate of 20% per year (20,000 shares) each January 1 st through January 1, 2025. The total fair value for the 300,000 shares was $ 525 thousand based on the stock price of $ 1.75 as of April 30, 2020. On each of January 1, 2021, January 1, 2022, and January 1, 2023, 60,000 of the restricted director shares vested. On February 16, 2023, 40,000 of the unvested restricted shares were forfeited and cancelled when one of the independent directors departed the Board. On May 9, 2023, the Board of Directors approved a grant of 40,000 shares of restricted stock to independent board member Dayton Judd. The shares vest 50 % on each of January 1, 2024 and January 1, 2025. As of the grant date, the fair value of the shares was $ 124 thousand, to be amortized on a straight-line basis through December 31, 2024. The Company amortizes the grant date fair value to stock compensation expense on a straight-line basis across the five -year and two -year vesting periods beginning on April 30, 2020 and May 9, 2023, respectively. As of October 1, 2023, there were 120,000 unvested restricted shares outstanding. 58 The Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021. The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,” that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control. As of the December 1, 2021 modification date related to the third and final vesting date of the 49,500 unvested restricted stock units held by Danny Schoening, there was no change in the fair value of the modified award as compared to the original award immediately prior to the modification date. The restricted stock units initially were certain to vest on January 1, 2022, but due to the modification, they were less certain to vest, contingent on a “change in control” occurring, which change in control, in case Mr. Schoening was terminated by the Company without cause or he resigns with good reason prior to such change in control, was required to occur prior to March 13, 2023. As of the modification date, there was $ 5 thousand of unrecognized compensation cost associated with the original award. As a matter of expediency, the unrecognized compensation expense as of the modification date was fully expensed through January 1, 2022. There is no additional compensation expense associated with the modification of the restricted stock unit agreement. On January 4, 2022, the Company issued 23,216 common shares to Karen Hawkins, CFO, and Bill Bates (AOC GM), net of tax withholding of $ 19 thousand, in settlement of 33,000 restricted stock units which vested on January 1, 2022. On November 28, 2022, the Company entered into a new employment agreement with Danny Schoening which amended Mr. Schoening’s RSU Agreement, dated January 2, 2019, which had been previously amended as of December 1, 2021, by changing the third and final vesting date for the restricted stock units granted under such agreement from the “change of control date” to January 1, 2023. On January 4, 2023, the Company issued 46,432 common shares to Danny Schoening, CEO, and Bill Bates (AOC GM), net of tax withholding of $ 58 thousand, in settlement of 66,000 restricted stock units which vested on January 1, 2023. On May 1, 2023, the Company granted an aggregate of 39,000 restricted stock units to eleven employees under its 2023 Equity Incentive Plan. As of the grant date, assuming a 23.1 % forfeiture rate based on expected turnover across the three years, the aggregate value of the restricted stock units is $ 90 thousand which will be amortized across the three-year period on a straight-line basis. During the twelve months ended October 1, 2023, there were 3,000 restricted stock units forfeited. On August 14, 2023 there was an additional grant of 3,000 restricted stock units to one new employee with a fair value of $ 11 thousand. The restricted stock units will vest at a rate of 33.33 % annually on the anniversary date of the grant and any unvested restricted stock units will be forfeited if employment terminates prior to the relevant vesting date. As of October 1, 2023 there were 39,000 unvested restricted stock units outstanding. On May 3, 2023, the Board of Directors approved a grant of 100,000 and 35,000 performance shares to Danny Schoening, CEO, and Karen Hawkins, CFO, respectively. Each performance share represents a contingent right to receive one share of common stock. The performance shares vest in five equal increments if, in each case and during a five-year performance period beginning on October 2, 2023, the average VWAP per share of common stock over a 30 consecutive trading day period equals or exceeds $3.70, $4.45, $5.35, $6.40, or $7.70. The fair value of the shares, as of the grant date, is $ 320 thousand and will be amortized through December 31, 2025 based on the derived service periods using a Monte Carlo simulation valuation model. 59 The assumptions and results for the Monte Carlo simulation are as follows: Schedule of Assumptions and Results for the Monte Carlo Simulation Assumptions Performance Period Start 10/2/2023 Performance Period End 10/1/2028 Term of simulation (1) 5.42 years Time steps in simulation 1,365 Time steps per year 252 Common share price at valuation date (2) $ 3.04 Volatility (annual) (4) 50.0 % Risk-free rate (annual) (5) 3.37 % Cost of equity (6) 11.5 % Dividend yield (3) 0.0 % Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Number of performance shares in the Tranche (1) 27,000 27,000 27,000 27,000 27,000 Fair Value of One Performance share (7) $ 2.75 $ 2.58 $ 2.39 $ 2.18 $ 1.93 Total Fair Value of Tranche $ 74,345 $ 69,742 $ 64,446 $ 58,819 $ 52,238 Derived Service Period (Years) (7) 0.71 1.13 1.60 2.06 2.48 (1) Based on the terms of the Performance Shares agreement issued by the Company on May 3, 2023. (2) Closing price of OPXS shares on the Valuation Date, as obtained via S&P Capital IQ. (3) Expected dividends provided by management. (4) Based on historical volatility of OPXS and comparable public companies. (5) Interest rate for US Treasury commensurate with the Performance Shares holding period, as of the Valuation Date, as obtained via S&P Capital IQ. (6) Estimated cost of equity for OPXS as of the Valuation Date. (7) Based on Monte Carlo simulation. 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 and performance shares awarded as well as the unrecognized compensation costs are summarized in the table below: Schedule of Unrecognized Compensation Costs Recognized Compensation Expense Unrecognized Compensation Expense Year Ended Year Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 Restricted Shares $ 118 $ 105 173 $ 236 Performance Shares 107 - 212 - Restricted Stock Units 22 57 77 9 Total Stock Compensation $ 247 $ 162 462 $ 245 The unrecognized compensation expense for restricted shares, performance shares and restricted stock units as of October 1, 2023, is expected to be recognized over a weighted-average period of 1.3 years, 2.3 years and 1.6 years, respectively. 60 Note 10 — Defined Contribution Plan The Company sponsors a defined contribution pension plan under Section 401(k) of the Internal Revenue Code for all employees. Company contributions are voluntary and are determined annually at the discretion of the Board of Directors at the beginning of each fiscal year. For the fiscal years ended October 1, 2023 and October 2, 2022, the Company offered a qualified automatic contribution arrangement (QACA) with a 100% match of the first 1% and 50% matching of the next 5% and a 2-year vesting requirement. The Company’s contribution expense for the fiscal years ended October 1, 2023 and October 2, 2022 were $ 163 thousand and $ 155 thousand, respectively. Note 11 — Stockholders’ Equity Dividends There were no dividends declared or paid during the twelve months ended October 1, 2023 and October 2, 2022. Common stock During the twelve months ended October 1, 2023, there were 46,432 common shares issued to officers, net of tax withholding of $ 58 thousand, in settlement of 66,000 restricted stock units which vested on January 1, 2023. During the twelve months ended October 2, 2022, there were 23,216 common shares issued to officers, net of tax withholding of $ 19 thousand, in settlement of 33,000 restricted stock units which vested on January 1, 2022. During the twelve months ended October 1, 2023, there were 40,000 unvested restricted shares cancelled on the departure of a board member and 40,000 unvested restricted shares granted to a newly elected board member. On September 22, 2021 the Company announced authorization for a $ 1 million stock repurchase program. The shares authorized to be repurchased under the repurchase program may be purchased from time to time at prevailing market prices, through open market or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. During the twelve months ended October 1, 2023, there were no common shares repurchased through the program. During the twelve months ended October 2, 2022, there were 190,954 common shares repurchased through the program at a cost of $ 371 thousand. As of October 1, 2023, all of the repurchased shares had been cancelled. A summary of the purchases under the plan follows: Summary of Purchases Under Plan Fiscal Period Total number of shares purchased Total purchase cost Average price paid per share (with commission) Maximum dollar value that may yet be purchased under the plan October 4, 2021 through October 31, 2021 18,265 $ 37 $ 2.01 $ 894 November 1, 2021 through November 28, 2021 4,415 9 2.04 885 November 29, 2021 through January 2, 2022 14,558 28 1.93 857 January 3, 2022 through January 30, 2022 15,585 29 1.89 828 January 31, 2022 through February 27, 2022 27,618 49 1.75 779 February 28, 2022 through April 3, 2022 35,530 70 1.98 709 April 4, 2022 through May 1, 2022 12,304 27 2.22 682 May 2, 2022 through May 29, 2022 10,482 22 2.11 660 May 30, 2022 through July 3, 2022 49,657 95 1.90 565 July 4, 2022 through July 25,2022 610 1 2.10 564 July 26, 2022 through August 13, 2022 1,930 4 2.09 560 Total shares repurchased for twelve months ended October 2, 2022 190,954 $ 371 $ 1.94 $ 560 61 Furthermore, on August 18, 2022, the Company announced the commencement of a tender offer to purchase up to $ 4.25 million in value of shares of its common stock. On September 15, 2022, the Company’s “modified Dutch auction” tender offer expired. In accordance with the terms and conditions of the tender offer, the Company accepted for purchase 1,603,773 shares of common stock at a price of $ 2.65 per share, for an aggregate cost of approximately $ 4.25 million, excluding fees and expenses relating to the tender offer. The transaction cost associated with the tender offer was $ 111 thousand. The shares were immediately cancelled upon completion of the transaction. As of October 1, 2023, and October 2, 2022, the total outstanding common shares were 6,763,070 and 6,716,638 , respectively. Note 12 — Income Taxes The income tax provision for the years ended October 1, 2023 and October 2, 2022 include the following: Schedule of Income Tax Provision 2023 2022 (Thousands) 2023 2022 Current income tax expense: Current year federal income tax $ 484 $ 331 Prior year tax adjustment ( 35 ) - Current income tax expense 449 331 Deferred income tax provision: Federal 20 33 Provision for income taxes, net $ 469 $ 364 As of October 1, 2023, Optex Systems Inc. has a net carrying value of $ 0.9 million in deferred tax assets represented by deferred tax assets of $ 1.7 million and a deferred tax asset valuation allowance of ($ 0.8 ) million against those assets. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control occurring in fiscal year 2018. As of October 1, 2023 and October 2, 2022, 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. During the twelve months ended October 1, 2023, the Company recognized $ 20 thousand in tax expenses to deferred tax assets. During the twelve months ended October 2, 2022, the Company recognized $ 33 thousand in tax expenses to deferred tax assets. We will continue to review the deferred tax assets and related valuation reserves in accordance with ASC 740 on an annual basis. The income tax provision for Optex Systems as of October 1, 2023 and October 2, 2022 differs from those computed using the statutory federal tax rate in the respective years due to the following permanent differences: Schedule of Effective Income Tax Rate Reconciliation 2023 % 2022 % Tax provision at statutory federal rate $ 574 21 $ 346 21 Nondeductible expenses 3 - 1 - Other temporary adjustments ( 4 ) - ( 17 ) ( 1 ) Prior year federal income tax adjustment ( 35 ) ( 1 ) - - Change in deferred tax valuation allowance ( 69 ) ( 3 ) 34 2 Provision for income taxes, net $ 469 17 $ 364 22 62 Deferred income taxes recorded in the balance sheets result from differences between financial statement and tax reporting of income and deductions. A summary of the composition of the deferred income tax assets (liabilities) follows: Schedule of Deferred Income Taxes As of October 1, 2023 As of October 2, 2022 (Thousands) Deferred Tax Asset As of October 1, 2023 As of October 2, 2022 Stock Compensation $ 151 $ 76 Inventory Reserve 211 170 Unicap 47 34 Deferred Compensation 53 29 Property and Equipment ( 212 ) ( 219 ) Goodwill Amortization - 100 Intangible Asset Amortization - 57 Contract Loss Reserve 51 61 Accrued Paid Time Off 85 85 Net Operating Losses 1,258 1,327 Other 52 65 Subtotal $ 1,696 $ 1,785 Valuation allowance ( 774 ) ( 843 ) Net deferred asset $ 922 $ 942 The Company has a net loss carryforward of $ 6.0 million as of October 1, 2023 as compared to a net loss carryforward of $ 6.3 million as of October 2, 2022. 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 $ 2.3 million of the current net operating loss carryforward for a net tax benefit of $ 0.5 million through fiscal year ending in 2037. During the twelve months ended October 1, 2023, the Company recovered $ 0.3 million in cash for a tax refund related to the net operating loss carryback from the October 3, 2021 year end. The Company applied FASB ASC 740-10 and has no unrecognized tax benefits. By statute, the tax years ended October 1, 2023, October 2, 2022 and October 3, 2021 are open to examination by the major taxing jurisdictions to which the Company is subject. During the twelve months ended October 1, 2023 the Company paid $ 534 thousand in income taxes. During the twelve months ended October 2, 2022 the Company paid zero in income taxes, received a tax refund of $ 312 thousand for fiscal year 2021 operating loss carrybacks, and recorded a current year federal income tax liability of $ 331 thousand which was paid during the twelve months ended October 1, 2023. As of October 1, 2023 the Company has recorded a tax liability of $ 247 thousand. Note 13 — Subsequent Events On October 2, 2023, 27,000 performance shares vested with an average 30-day VWAP of $4.15 which exceeded the $3.70 benchmark for Tranche 1. On October 24, 2023 the Company issued 21,060 shares, net of tax withheld of $ 24 thousand. 63 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.