Optex Systems Holdings Inc

Previous wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to supplement and complement our audited condensed consolidated financial statements and notes thereto for the fiscal year ended October 1, 2023 and our unaudited consolidated financial statements and notes thereto for the quarter ended March 31, 2024, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to review our consolidated financial statements in conjunction with your review of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial results as supplemental information, as we believe their use provides more insight into our performance. When a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP measure and reconciled to the most closely corresponding GAAP measure.

Current wording

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to supplement and complement our audited consolidated financial statements and notes thereto for the fiscal year ended October 1, 2023 and our unaudited condensed consolidated financial statements and notes thereto for the quarter ended June 30, 2024, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to review our consolidated financial statements in conjunction with your review of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial measures as supplemental information, as we believe their use provides more insight into our performance. When a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP measure and reconciled to the most closely corresponding GAAP measure.

Previous wording

On January 18, 2024, Optex Systems Holdings, Inc., through its wholly-owned subsidiary Optex Systems, Inc. (collectively, the “Company”), entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. (“RUB”). Under the agreements, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line, which is primarily used for firearm projectile speed detection, measuring and tracking. RUB will continue to manufacture Speedtracker Mach products on behalf of the Company. The Company acquired the assets using $1 million in cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement is one year, subject to additional one-year renewal terms to which both parties must agree.

Current wording

On January 18, 2024, we entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. (“RUB”). Under the agreements, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line, which is primarily used for firearm projectile speed detection, measuring and tracking. RUB will continue to manufacture Speedtracker Mach products on behalf of the Company. The Company acquired the assets using $1 million in cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement is one year, subject to additional one-year renewal terms to which both parties must agree. Subsequent to the acquisition, the Company has determined it would be more economical to move the manufacturing operations in house and is no longer ordering assembled units against the contract manufacturing agreement.

Previous wording

The acquisition included transaction costs of $30 thousand for legal fees and a contingent liability for payment against an earnout agreement based on meeting certain revenue milestones. As of March 31, 2024, the fair value of the contingent liability was $86 thousand. Pursuant to the asset purchase agreement, the total earnout payment will be $238 thousand only if the earnout revenue milestone is achieved during the earnout period, otherwise the earnout will be zero. The asset will be amortized on a straight-line basis over a seven-year period.

Current wording

The acquisition included transaction costs of $30 thousand for legal fees and a contingent liability for payment against an earnout agreement based on meeting certain revenue milestones. As of June 30, 2024, the fair value of the contingent liability was zero. Pursuant to the asset purchase agreement, the total earnout payment will be $238 thousand only if the earnout revenue milestone is achieved during the earnout period, otherwise the earnout will be zero. As of June 30, 2024 the Company determined the likelihood of achieving the revenue milestone during the earnout period was highly unlikely. The asset will be amortized on a straight-line basis over a seven-year period.

Previous wording

Recent supply chain disruptions have strained our suppliers and extended supplier delivery lead times, affecting our ability to sustain operations. We anticipate market wide material shortages for paint and resin products as well as critical epoxies and chemicals used in our manufacturing process. In addition, we are seeing substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected our net income in the year ended October 1, 2023 and the three and six months ended March 31, 2024, and is expected to continue to have a negative effect on the margins expected to be generated under our long-term fixed contracts over the next three years. See also “Item 1A. Risk Factors – Risks Related to Our Business -Certain of our products are dependent on specialized sources of supply potentially subject to disruption which could have a material, adverse impact on our business” in ourAnnual Report on Form 10-K for the year ended October 1, 2023.

Current wording

Recent supply chain disruptions have strained our suppliers and extended supplier delivery lead times, affecting our ability to sustain operations. We anticipate market wide material shortages for paint and resin products as well as critical epoxies and chemicals used in our manufacturing process. In addition, we have seen substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected our net income in the year ended October 1, 2023 and the three and nine months ended June 30, 2024, and is expected to continue to have a negative effect on the margins expected to be generated under our long-term fixed contracts over the next two years. See also “Item 1A. Risk Factors – Risks Related to Our Business -Certain of our products are dependent on specialized sources of supply potentially subject to disruption which could have a material, adverse impact on our business” in ourAnnual Report on Form 10-K for the year ended October 1, 2023.

Previous wording

We have experienced significant material shortages during the year ended October 1, 2023 and extending into the first six months of fiscal year 2024 from several significant suppliers of our periscope covers and housings. These shortages affect several of our periscope products at the Optex Richardson segment. The delays in key components, combined with labor shortages during the year ended October 1, 2023 and continuing into the first six months of fiscal year 2024, have negatively impacted our production levels and continue to push back expected delivery dates. We are aggressively seeking alternative sources and actively expediting our current suppliers for these components as well as increasing employee recruitment initiatives and overtime to attempt to mitigate any continuing risks to the periscope line. We are seeing some recent improvements in the local labor market and are adding to our direct labor force in concert with improvements in our supplier delivery performance. While we are encouraged by improvements in supplier performance for the Optex Richardson segment periscope line which yielded increased revenue performance during fiscal year 2023 and into the first six months of fiscal 2024, our suppliers have yet to ramp up deliveries sufficiently to keep pace with our current customer demands. As such, we cannot give any assurances that expected customer delivery dates for our periscope products will not experience further delays.

Current wording

We have also experienced significant material shortages during the year ended October 1, 2023 and extending into the first nine months of fiscal year 2024 from several significant suppliers of our periscope covers and housings. These shortages affect several of our periscope products at the Optex Richardson segment. The delays in key components, combined with labor shortages during the year ended October 1, 2023 and continuing into the first nine months of fiscal year 2024, have negatively impacted our production levels and continue to push back expected delivery dates. We are actively seeking alternative sources as well as expediting our current suppliers for these components. We are also increasing employee recruitment initiatives and overtime to attempt to mitigate any continuing risks to the periscope line.

Previous wording

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, which we do not consider relevant to our operations. Adjusted EBITDA is a financial measure not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).

Current wording

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 compensation expenses related to equity stock grants, 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, which we do not consider relevant to our operations. Adjusted EBITDA is a financial measure not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).

Previous wording

The table below summarizes our three and six-month operating results for the periods ended March 31, 2024 and April 2, 2023, 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 better to evaluate our overall performance.

Current wording

The table below summarizes our three-and nine-month operating results for the periods ended June 30, 2024 and July 2, 2023, 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 better to evaluate our overall performance.

Previous wording

Our net income increased by $0.6 million to $1.1 million for the three months ended March 31, 2024, as compared to net income of $0.5 million for the prior year period. Our adjusted EBITDA increased by $0.9 million to $1.6 million for the three months ended March 31, 2024, as compared to adjusted EBITDA of $0.7 million for the prior year period.

Current wording

Our net income increased by $0.7 million to $1.3 million for the three months ended June 30, 2024, as compared to net income of $0.6 million for the prior year period. Our adjusted EBITDA increased by $0.9 million to $1.8 million for the three months ended June 30, 2024, as compared to $0.9 million for the prior year period.

Previous wording

Our net income increased by $1.2 million to $1.5 million for the six months ended March 31, 2024, as compared to net income of $0.3 million for the prior year period. Our adjusted EBITDA increased by $1.8 million to $2.4 million for the six months ended March 31, 2024, as compared to adjusted EBITDA of $0.6 million for the prior year period.

Current wording

Our net income increased by $1.9 million to $2.8 million for the nine months ended June 30, 2024, as compared to a net income of $0.8 million for the prior year period. Our adjusted EBITDA increased by $2.7 million to $4.2 million for the nine months ended June 30, 2024, as compared to $1.5 million for the prior year period.

Previous wording

The increase in net income and adjusted EBITDA for the most recent three and six-month periods compared to the prior year periods is primarily driven by higher revenue and improved gross profit performance across both operating segments. Operating segment performance is discussed in greater detail throughout the following sections.

Current wording

The increase in the most recent three and nine-month period net income and adjusted EBITDA is primarily driven by increased revenue and gross profit, which was only partially offset by increased general and administrative expenses. Operating segment performance is discussed in greater detail throughout the following sections.

Previous wording

The increase in the most recent three and six-month period gross margin was primarily attributable to higher revenue spread across a fixed manufacturing cost base combined with changes in product mix and improved pricing and operating performance in both operating segments.

Current wording

Consolidated gross profit for the three months ended June 30, 2024 increased by $1.2 million, or 68.3%, compared to the prior year period. Consolidated gross profit for the nine months ended June 30, 2024 increased by $3.1 million, or 78.8%, compared to the prior year period. The increase in the most recent three and nine-month period’s gross margin was primarily attributable to higher revenue spread across a fixed manufacturing cost base combined with changes in product mix and improved pricing and operating performance in both operating segments.

Previous wording

The following table depicts the new customer orders for the six months ending March 31, 2024 as compared to the prior year period in millions of dollars by segment and product line:

Current wording

The following table depicts the new customer orders for the nine months ending June 30, 2024 as compared to the prior year period in millions of dollars:

Previous wording

During the current year six-month period, Optex Richardson orders decreased by $3.5 million, or (24.0%) as compared to the prior year period. The primary reason for the decrease relates to a prior year award for $3.4 million in sighting systems to repair and refurbish night vision equipment for the Government of Israel. The order represents a significant increase in our Optex Richardson sighting systems business base over the next two to three years and includes an additional potential award value with a 100% optional award quantity clause. We began shipments against the contract in December 2023. The Applied Optics Center orders increased $2.3 million, or 51.1% as we continue to see increases in orders for laser filter units for several prime government contractors.

Current wording

During the current year nine-month period ended June 30, 2024, orders in the Company’s Optex Richardson segment decreased by ($0.1) million, or (0.5%) as compared to the prior year period. The primary reason for the decrease relates to a prior year award for $3.4 million in sighting systems to repair and refurbish night vision equipment for the Government of Israel. We began shipments against the contract in December 2023. The decrease in orders for sighting systems and other products was offset by a significant increase in periscope orders in the current year nine-month period. The Applied Optics Center orders increased $2.1 million, or 27.3% as we continue to see increases in orders for laser filter units for several prime government contractors, in addition to an increase in customer orders for commercial optical assemblies and other products driven by our new program of Infrared (IR) Signature Reduction Coatings used on aircraft.

Previous wording

Backlog as of March 31, 2024 was $44.2 million, compared to a backlog of $41.6 million as of April 2, 2023, representing an increase of $2.6 million, or 6.3%. Backlog as compared to October 1, 2023 increased by $2.4 million, or 5.7%, from $41.8 million. The following table depicts the current expected delivery by period of all contracts awarded as of March 31, 2024 in millions of dollars:

Current wording

Backlog as of June 30, 2024 was $45.6 million. This compares to a backlog of $41.8 million as of October 1, 2023, representing an increase of $3.8 million, or 9.1%, and a backlog of $41.6 million as of July 2, 2023, representing an increase of $4.0 million, or 9.6%. The following table depicts the current expected delivery by period of all contracts awarded as of June 30, 2024 in millions of dollars:

Previous wording

Optex Richardson backlog as of March 31, 2024 was $29.9 million as compared to a backlog of $25.2 million as of April 2, 2023, representing an increase of $4.7 million or 18.7%.

Current wording

Optex Richardson backlog as of June 30, 2024, was $32.7 million as compared to a backlog of $26.1 million as of July 2, 2023, representing an increase of $6.6 million or 25.3%.

Previous wording

Please refer to “Material Trends” above or “Liquidity and Capital Resources” below for more information on recent developments and trends with respect to our orders and backlog, which information is incorporated herein by reference.

Current wording

Please refer to “Material Trends” above and “Liquidity and Capital Resources” below for more information on recent developments and trends with respect to our orders and backlog, which information is incorporated herein by reference.

Previous wording

The Company continues to aggressively pursue international and commercial opportunities in addition to maintaining its current footprint with U.S. 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 excess capacity.

Current wording

The Company continues to pursue domestic, international and commercial opportunities in addition to maintaining its current footprint with U.S. 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 excess capacity.

Previous wording

Revenues. For the three months ended March 31, 2024, revenues increased by $2.1 million or 33.8% compared to the prior year period as set forth in the table below:

Current wording

Revenue. For the three months ended June 30 2024, revenue increased by $1.9 million or 26.3% compared to the prior year period as set forth in the table below:

Previous wording

Optex Richardson revenue increased by $1.2 million or 40.0% for the three months ended March 31, 2024 as compared to the prior year period on higher customer demand across all product lines.

Current wording

Optex Richardson revenue increased by $1.6 million or 52.3% for the three months ended June 30, 2024 as compared to the prior year period on higher customer demand for periscopes, sighting systems and other products including collimators, cell assemblies, and spare parts.

Previous wording

Applied Optics Center revenue increased by $2.1 million or 36.3% for the six months ended March 31, 2024 as compared to the prior year period. The revenue increase is primarily attributable to increased sales on laser filters, day windows and other, partially offset by decreased sales of our commercial optical assemblies.

Current wording

Applied Optics Center revenue increased by $0.3 million or 6.9% for the three months ended June 30, 2024 as compared to the prior year period. The revenue increase is primarily attributable to increased customer demand for laser filters andother products driven by our new program of Infrared (IR) Signature Reduction Coatings used on aircraft partially offset by lower customer demand for commercial optical assemblies.

Previous wording

Gross Profit. Gross margin during the three-month period ended March 31, 2024 was 30.0% of revenue as compared to a gross margin of 24.4% of revenue for the prior year period. Gross profit increased by $1.0 million to $2.6 million for the three months ended March 31, 2024 as compared to $1.6 million in the prior year three months. The increase in gross profit is primarily attributable to higher revenue, changes in product mix, and increased absorption of fixed overhead across a higher revenue mix. Cost of sales increased to $6.0 million for the current period as compared to the prior year period of $4.8 million on higher revenue.

Current wording

Gross Margin. The gross margin during the three-month period ended June 30, 2024 was 31.8% of revenue as compared to a gross margin of 23.9% of revenue for the prior year period. The increase in gross profit is primarily attributable to higher revenue, changes in product mix, and increased absorption of fixed overhead across a higher revenue mix. Cost of sales increased to $6.2 million for the current period as compared to the prior year period of $5.5 million on higher revenue.

Previous wording

Operating Income. During the three months ended March 31, 2024, we recorded operating income of $1.4 million, as compared to operating income of $0.6 million during the three months ended April 2, 2023. The $0.8 million increase in operating income for the current year period from the prior year period is primarily due to higher revenue and gross profit during the current year period, partially offset by increased operating expenses.

Current wording

Operating Income. During the three months ended June 30, 2024, we recorded operating income of $1.6 million, as compared to operating income of $0.8 million during the three months ended July 2, 2023. The $0.8 million increase in operating income for the current year period from the prior year period is primarily due to increased revenue and gross margin, partially offset by higher general and administrative spending.

Previous wording

Six Months Ended March 31, 2024 Compared to the Six Months Ended April 2, 2023

Current wording

Nine months Ended June 30, 2024 Compared to the Nine months Ended July 2, 2023

Previous wording

Revenues. For the six months ended March 31, 2024, revenues increased by $5.1 million or 48.8% compared to the prior year period as set forth in the table below:

Current wording

Revenue. For the nine months ended June 30, 2024, revenues increased by $7.0 million or 39.6% compared to the prior year period as set forth in the table below:

Previous wording

Optex Richardson revenue increased by $3.0 million or 64.1% for the six months ended March 31, 2024 as compared to the prior year period primarily on higher customer demand across all product lines.

Current wording

Optex Richardson revenue increased by $4.6 million or 59.4% for the nine months ended June 30, 2024 as compared to the prior year period on higher customer demand for periscopes, sighting systems and other products including collimators, cell assemblies, and spare parts.

Previous wording

Applied Optics Center revenue increased by $0.9 million or 28.1% for the three months ended March 31, 2024 as compared to the prior year period. The revenue increase was primarily driven by increased sales on laser filters, day windows and other, offset by decreased sales of our commercial optical assemblies.

Current wording

Applied Optics Center revenue increased by $2.4 million or 24.1% for the nine months ended June 30, 2024 as compared to the prior year period. The revenue increase is primarily attributable to increased customer demand for laser filters andother products driven by our new program of Infrared (IR) Signature Reduction Coatings used on aircraft partially offset by lower customer demand for commercial optical assemblies.

Previous wording

Gross Profit. The gross margin during the six-month period ended March 31, 2024 was 27.4% of revenue as compared to a gross margin of 21.8% of revenue for the prior year period. The gross profit increased by $2.0 million to $4.2 million for the six months ended March 31, 2024 as compared to $2.2 million for the prior year period. The increase in gross profit is primarily attributable to higher revenue, changes in product mix and increased fixed cost absorption across a higher revenue base. Cost of sales increased to $11.3 million for the six months ended March 31, 2024 as compared to the prior year period of $8.1 million on higher period revenue.

Current wording

Gross Margin. The gross margin during the nine-month period ended June 30, 2024 was 29.0% as compared to a gross margin of 22.7% for the prior year period. The increase in gross profit is primarily attributable to higher revenue, changes in product mix, and increased absorption of fixed overhead across a higher revenue mix. Cost of sales increased to $17.4 million for the nine months ended June 30, 2024 as compared to the prior year period of $13.6 million on higher revenue.

Previous wording

G&A Expenses. During the six months ended March 31, 2024 and April 2, 2023, we recorded operating expenses of $2.3 million and $1.9 million, respectively. Operating expenses increased by 20.4% comparing the respective periods primarily due to increased labor, stock compensation, royalty and selling expenses.

Current wording

G&A Expenses. During the nine months ended June 30, 2024 and July 2, 2023, we recorded operating expenses of $3.6 million and $2.9 million, respectively. Operating expenses increased by 24.2% between the respective periods primarily due to increased spending on labor, stock compensation, royalties, selling expenses, investor relations and IT support services.

Previous wording

Operating Income. During the six months ended March 31, 2024, we recorded operating income of $1.9 million, as compared to operating income of $0.3 million during the six months ended April 2, 2023. The $1.6 million increase in operating income is primarily due to higher gross profit, which was partially offset by increased general and administrative expenses.

Current wording

Operating Income. During the nine months ended June 30, 2024, we recorded operating income of $3.5 million, as compared to an operating income of $1.1 million during the nine months ended July 2, 2023. The $2.4 million increase in operating income is primarily due to increased revenue and gross margin, partially offset by higher general and administrative spending.

Previous wording

As of March 31, 2024, the Company had working capital of $13.6 million, as compared to $13.5 million as of October 1, 2023.

Current wording

As of June 30, 2024, the Company had working capital of $14.2 million, as compared to $13.5 million as of October 1, 2023.

Previous wording

During the six months ended March 31, 2024, the Company had operating cash provided by operations of $1.0 million, used $0.5 million to pay down our line of credit and spent $0.2 million on acquisitions of property and equipment and $1.0 million on the acquisition of intellectual property. During the period, our inventory increased $1.5 million in support of new program awards and increasing revenues anticipated over the next six months.

Current wording

During the nine months ended June 30, 2024, we generated operating cash of $1.0 million, and spent $1.5 million on acquisitions of equipment and intangible assets. During the period, our inventory increased $3.0 million in support of new program awards, higher backlog and increasing revenues anticipated over the next twelve months.

Previous wording

The Company has capital commitments of $0.6 million for the purchase of property and equipment consisting of a CNC Machine, a Ur5e Robot Reach and a significant coating chamber upgrade.

Current wording

The Company has capital commitments of $0.4 million for the purchase of property and equipment consisting of a significant coating chamber upgrade, an Opotek tunable laser system and a laser engraving machine.

Previous wording

Backlog as of March 31, 2024 was $44.2 million as compared to a backlog of $41.8 million and $41.6 million as of October 1, 2023 and April 2, 2023, respectively, and representing an increase of 5.7% and 6.3%, respectively. For further details, see “Results of Operations – New Orders and Backlog” above.

Current wording

Backlog as of June 30, 2024 was $45.6 million as compared to backlog of $41.6 million as of July 2, 2023 and $41.8 million as of October 1, 2023, representing an increase of 9.6% and 9.1%, respectively. For further details, see “Results of Operations – New Orders and Backlog” above.

Previous wording

The Company has historically funded its operations through cash from 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 March 31, 2024, the Company had approximately $0.3 million in cash and an outstanding balance of $0.5 million on its line of credit. As of March 31, 2024, our outstanding accounts receivable was $3.7 million. We expect the accounts to be collected during the third quarter of fiscal 2024.

Current wording

The Company has historically funded its operations through cash from 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.

Previous wording

We refer to the disclosure above under “Material Trends” with respect to recent supply chain disruptions and material shortages, which disclosure is incorporated herein by reference.

Current wording

We refer to the disclosure under*“Material Trends”* with respect to recent supply chain disruptions and material shortages, which disclosure is incorporated herein by reference.

Previous wording

The acquisition included transaction costs of $30 thousand for legal fees and a contingent liability for payment against an earnout agreement based on meeting certain revenue milestones. As of March 31, 2024, the fair value of the contingent liability was $86 thousand. Pursuant to the asset purchase agreement, the total earnout payment will be $238 thousand only if the earnout revenue milestone is achieved during the earnout period, otherwise the earnout will be zero. The asset will be amortized on a straight-line basis over a seven-year period.

Current wording

The acquisition included transaction costs of $30 thousand for legal fees. Pursuant to the asset purchase agreement, the total earnout payment will be $238 thousand only if the earnout revenue milestone is achieved during the earnout period, otherwise the earnout will be zero. As of June 30, 2024, it was determined that the earnout revenue milestone was unlikely to be achieved during the earnout period and the fair value of the contingent liability was zero. The asset will be amortized on a straight-line basis over a seven-year period.

Previous wording

On March 22, 2023, the Company and its subsidiary, Optex Systems, Inc. (“Optex”, and with the Company, 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 “Credit Facility”). The commitment period for advances under the Credit 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 Credit 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. The interest rate is currently at 8.08% per annum.

Current wording

On March 22, 2023, we 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 “Credit Facility”). The commitment period for advances under the Credit 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 Credit 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. The interest rate is currently at 8.07% per annum.

Previous wording

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 Credit Facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the Credit Facility are subject to acceleration upon the occurrence of an event of default as defined in the Loan Agreement. The Loan Agreement further provides for a $125,000 Letter of Credit sublimit. As of March 31, 2024, there was $0.5 million borrowed under the Credit Facility. As of March 31, 2024, the Company is in compliance with all covenants under the Credit Facility.

Current wording

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 Credit Facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the Credit Facility are subject to acceleration upon the occurrence of an event of default as defined in the Loan Agreement. The Loan Agreement further provides for a $125,000 Letter of Credit sublimit. As of June 30, 2024, there was $1.0 million borrowed under the Credit Facility. As of June 30, 2024, the Company is in compliance with all covenants under the Credit Facility.

Previous wording

On September 22, 2021 the Company announced authorization for an additional $1 million stock repurchase program. As of March 31, 2024, there was an authorized balance of $560 thousand remaining to be spent against the repurchase program. During the six months ended March 31, 2024, there were no stock repurchases against the plan.

Current wording

On September 22, 2021 the Company announced authorization for an additional $1 million stock repurchase program. As of June 30, 2024, there was an authorized balance of $560 thousand remaining to be spent against the repurchase program. During the nine months ended June 30, 2024, there were no stock repurchases against the plan.

Previous wording

Our significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies are described in Note 2 (Accounting Policies) to consolidated financial statements in our Annual Report on Form 10-K for the year ended October 1, 2023.

Current wording

Our significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies are described in “Critical Policies and Accounting Pronouncements” and Note 2 (Accounting Policies) to consolidated financial statements in our Annual Report on Form 10-K for the year ended October 1, 2023.