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 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.

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 September 29, 2024 and our unaudited condensed consolidated financial statements and notes thereto for the quarter ended December 29, 2024, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to review our condensed consolidated financial statements in conjunction with your review of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial results as supplemental information, as we believe their use provides more insight into our performance. When a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP measure and reconciled to the most closely corresponding GAAP measure.

Previous wording

Optex Systems Holdings, Inc. (together with its subsidiaries, the “Company,” “we,” “us” and “our) manufactures optical sighting systems and assemblies, primarily for Department of Defense applications. Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and armored security vehicles and have been selected for installation on the Stryker family of vehicles. We also manufacture and deliver numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Our products consist primarily of build-to-customer print products that are delivered both directly to the armed services and to other defense prime contractors. Less than 1% of today’s revenue is related to the resale of products substantially manufactured by others. In this case, the product would likely be a simple replacement part of a larger system previously produced by us.

Current wording

Optex Systems, Inc. (Delaware) manufactures optical sighting systems and assemblies, primarily for Department of Defense applications. Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems, Inc. (Delaware) also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems, Inc. (Delaware) products consist primarily of build-to-customer print products that are delivered both directly to the armed services and to other defense prime contractors. Less than 1% of revenue is related to the resale of products substantially manufactured by others. In this case, the product would likely be a simple replacement part of a larger system previously produced by Optex Systems, Inc. (Delaware).

Previous wording

We are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE Systems plc, ADS Inc. and others. We are also a military supplier to foreign governments such as Israel, Australia and South American countries and as a subcontractor for several large U.S. defense companies serving foreign governments.

Current wording

We are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE, ADS Inc. and others. We are also a military supplier to foreign governments such as Israel, Australia and South American countries and as a subcontractor for several large U.S. defense companies serving foreign governments.

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 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.

Current wording

We have experienced substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected our net income in the quarter ended December 29, 2024 and is expected to continue to have a negative effect on the margins generated under several of 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 our Annual Report on Form 10-K for the year ended September 29, 2024.

Previous 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.

Current wording

We have experienced significant material shortages during the fiscal year ended October 1, 2023 and the first half of fiscal year ended September 29, 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 first half of the fiscal year ended September 29, 2024, have negatively impacted our production levels and have pushed back expected delivery dates. We have obtained an alternative source for one of our key components and are expediting our other suppliers to support the increased production levels.

Previous wording

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 nine months of fiscal 2024, we 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 seen improvements in the local labor market since 2023 and increased our direct labor force and employee overtime in concert with improvements in our supplier delivery performance. Further, we have invested in additional machinery and equipment and other process improvements to increase production capacity and alleviate process bottlenecks. While we are encouraged by improvements in supplier performance and available manpower for the Optex Richardson segment periscope line which yielded increased revenue performance during fiscal year 2024, we 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.

Previous wording

We refer also to “Item 1. Business – Market Opportunity: U.S. Military”in ourAnnual Report on Form 10-K for the year ended October 1, 2023 for a description of current trends in U.S. government military spending and its potential impact on Optex, which may be material, including particularly the tables included in that section and disclosure on the significant reduction in spending for U.S. ground system military programs, which has a direct impact on the Optex Richardson segment revenue, all of which is incorporated herein by reference.

Current wording

We refer also to “Item 1. Business – Market Opportunity: U.S. Military” in our Annual Report on Form 10-K for the year ended September 29, 2024 for a description of current trends in U.S. government military spending and its potential impact on Optex, which may be material, including particularly the tables included in that section and disclosure on the significant reduction in spending for U.S ground system military programs, which has a direct impact on the Optex Systems Richardson segment revenue, all of which is incorporated herein by reference.

Previous wording

Our operating income for the three months ended June 30, 2024 increased by $0.9 million, or 114.8%, compared to the prior year period. Our operating income for the nine months ended June 30, 2024 increased by $2.4 million, or 224.4%, compared to the prior year period. The increase in operating income for the three and nine-month periods was primarily driven by higher revenue and increased gross margin in both operating segments.

Current wording

Our operating income for the three months ended December 29, 2024 increased by $0.4 million compared to the prior year period. The increase in operating income was primarily driven by higher revenue and gross profit, which outpaced increased general and administrative spending.

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 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”).

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 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”).

Previous 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.

Current wording

The table below summarizes our three-month operating results for the periods ended December 29, 2024 and December 31, 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 $0.7 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.

Current wording

Our net income increased by $0.4 million to $0.8 million for the three months ended December 29, 2024, as compared to $0.4 million for the prior year period. Our adjusted EBITDA increased by $0.4 million to $1.1 million for the three months ended December 29, 2024, as compared to $0.8 million for the prior year period.

Previous 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.

Current wording

The increase is primarily driven by higher revenue and gross profit at the Applied Optics Center segment. Operating segment performance is discussed in greater detail throughout the following sections.

Previous wording

During the nine months ended June 30, 2024, the Company booked $28.3 million in new orders, representing a 7.6% increase over the prior year period. The orders for the most recently completed nine months consist of $18.5 million for our Optex Richardson segment and $9.8 million attributable to the Applied Optics Center segment.

Current wording

During the three months ended December 29, 2024, the Company booked $6.0 million in new orders, representing a 40.6% decrease over the prior year period orders of $10.1 million. The orders for the most recently completed three months consist of $2.6 million for our Optex Richardson segment and $3.3 million attributable to the Applied Optics Center segment.

Previous 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:

Current wording

The following table depicts the new customer orders for the three months ending December 29, 2024 as compared to the prior year period in millions of dollars:

Previous 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:

Current wording

Backlog as of December 29, 2024 was $42.0 million as compared to a backlog of $45.0 million as of December 31, 2023, representing a decrease of 6.7%. The following table depicts the current expected delivery by quarter of all contracts awarded as of December 29, 2024, as well as the December 29, 2024 backlog as compared to the backlog on December 31, 2023.

Previous 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.

Current 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.

Previous 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.

Current wording

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

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:

Current wording

Revenue. For the three months ended December 29, 2024, revenue increased by $1.2 million or 17.7% compared to the prior year period as set forth in the table below:

Previous 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.

Current wording

Applied Optics Center revenue increased by $1.2 million or 33.8% for the three months ended December 29, 2024 as compared to the prior year period. The revenue increase is primarily attributable to military spending on filters, day windows and other, partially offset by lower revenue from commercial optical assemblies during the three months ended December 29, 2024 as compared to the prior year period.

Previous 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.

Current wording

Gross Margin. The gross margin during the three-month period ended December 29, 2024 was 26.0% of revenue as compared to a gross margin of 24.2% of revenue for the prior year period. The increase in gross profit is primarily attributable to higher revenue against a fixed cost base combined with changes in product mix between segments. Cost of sales increased to $6.1 million for the recently completed period as compared to the prior year period of $5.3 million due to higher revenue.

Previous wording

G&A Expenses. During the three months ended June 30, 2024 and July 2, 2023, we recorded operating expenses of $1.3 million and $1.0 million, respectively. Operating expenses increased by 31.9% between the respective periods primarily due to increased spending on royalties, selling expenses, investor relations, IT support services and legal expenses.

Current wording

G&A Expenses. During the three months ended December 29, 2024 and December 31, 2023, we recorded operating expenses of $1.2 million and $1.1 million, respectively. Operating expenses increased by 7.2% over the prior year period primarily due to increases in royalties and selling expenses over the prior year period.

Previous 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.

Current wording

Operating Income. During the three months ended December 29, 2024, we recorded operating income of $0.9 million, as compared to operating income of $0.6 million during the three months ended December 31, 2023. The $0.4 million increase in operating income is primarily due to higher revenue and gross profit, slightly offset by increased general and administrative spending.

Previous 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.

Current wording

The Company has capital commitments of $110 thousand for the purchase of property and equipment.

Previous 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.

Current wording

Backlog as of December 29, 2024 was $42.0 million as compared to $45.0 million as of December 31, 2023, representing a decrease of 6.7%. For further details, see “Results of Operations – New Orders and Backlog” above.

Previous wording

At June 30, 2024, the Company had $0.5 million in cash and an outstanding payable balance of $1.0 million against its line of credit. At June 30, 2024, our outstanding accounts receivable balance was $3.3 million. We expect the accounts to be collected during the fourth quarter of fiscal 2024.

Current wording

At December 29, 2024, the Company had approximately $2.5 million in cash and no draws against our revolving credit line. As of December 29, 2024, our outstanding accounts receivable balance was $1.7 million, which has been collected during the second quarter of fiscal 2025.

Previous 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.

Current wording

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

Previous wording

In the short term, the Company plans to utilize its current cash, available line of credit and operating cash flow to fund inventory purchases in support of the backlog growth and higher anticipated revenue during the next twelve months. Short term cash in excess of our working capital needs may be also be used to fund the purchase of product lines and other assets, including property and equipment required to maintain or meet our growing backlog, in addition to repurchasing common stock against our current stock repurchase plan. Longer term, excess cash beyond our operating needs may be used to fund new product development, company or product line acquisitions, or additional stock purchases as attractive opportunities present themselves.

Current wording

In the short term, the Company plans to utilize its current cash, available line of credit and operating cash flow to fund inventory purchases in support of the backlog growth and higher anticipated revenue during the next twelve months. Short term cash in excess of our working capital needs may be also be used to fund the purchase of product lines and other assets. We may also repurchase common stock against our current stock repurchase plan. Longer term, excess cash beyond our operating needs may be used to fund new product development, company, product line or other asset acquisitions, or additional stock purchases as attractive opportunities present themselves.

Previous 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.

Current wording

On January 18, 2024, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line and entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. (“RUB”). The Company acquired the assets using $1 million cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement was one year, subject to additional one-year renewal terms. After the acquisition, the Company determined it would be more economical to move the manufacturing operations in house and is no longer ordering assembled units under the original contract manufacturing agreement. RUB will continue to provide the Company with purchased kit parts for the manufacture of the Speedtracker Mach products.

Previous 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.

Current wording

The acquisition included transaction costs of $30 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. As of September 29, 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

We refer to “Note 4 – Commitments and Contingencies – Non-cancellable Operating Leases” for a tabular depiction of our remaining minimum lease and estimated CAM payments under such leases as of June 30, 2024, which disclosure is incorporated herein by reference.

Current wording

We refer to “Note 5 – Commitments and Contingencies – Non-cancellable Operating Leases” for a tabular depiction of our remaining minimum lease and estimated Common Area Maintenance (“CAM”) payments under such leases as of December 29, 2024, which disclosure is incorporated herein by reference.

Previous wording

The Company expects to generate net income and positive cash flow from operating activities over the next twelve months. To achieve and retain profitability, we need to maintain a level of revenue adequate to support our cost structure. Management intends to manage operations commensurate with its level of working capital and line of credit during the next twelve months and beyond; however, uneven revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program delays associated with the pandemic, labor shortages and supply chain issues could create a working capital shortfall. In the event the Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.

Current wording

The Company expects to generate net income and positive cash flow from operating activities over the next twelve months. To remain profitable, we need to maintain a level of revenue adequate to support our cost structure. Management intends to manage operations commensurate with its level of working capital and line of credit facility during the next twelve months and beyond; however, uneven revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program delays associated with the pandemic could create a working capital shortfall. In the event the Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.

Previous 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.

Current 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. As of December 29, 2024, the interest rate was 7.35% 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 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.

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 December 29, 2024, there was zero borrowed under the Credit Facility. As of December 29, 2024, the Company was 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 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.

Current wording

On September 22, 2021 the Company announced authorization for an additional $1 million stock repurchase program. As of September 29, 2024, there was an authorized balance of $560 thousand remaining to be spent against the repurchase program. During the three months ended December 29, 2024, there were no stock repurchases against the plan.

Previous wording

Our critical accounting estimates include warranty costs, contract losses and the deferred tax asset valuation. 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. Our warranty covered sales primarily include the Applied Optics Center optical assemblies. While our warranty period is 12 months, our reserve balances assume a general 90-day return period for optical assemblies previously delivered plus any returned backlog in-house that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of June 30, 2024, the Company had accrued warranty costs of $36 thousand, as compared to $75 thousand as of October 1, 2023. The primary reason for the $39 thousand decrease in reserve balances relates to lower sales of commercial optical assemblies in combination with improved warranty return trends during the nine-month period.

Current wording

Our critical accounting estimates include warranty costs, contract losses and the deferred tax asset valuation. 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. Our warranty covered sales primarily include the Applied Optics Center optical assemblies. While our warranty period is 12 months, our reserve balances assume a general 90-day return period for optical assemblies previously delivered plus any returned backlog in-house that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of December 29, 2024, the Company had accrued warranty costs of $22 thousand, as compared to $52 thousand as of September 29, 2024. The primary reason for the $30 thousand decrease in reserve balances relates to lower-than-expected warranty returns on product deliveries during the three months ended December 29, 2024.

Previous wording

As of June 30, 2024 and October 1, 2023, we had $101 thousand, and $243 thousand, respectively, of contract loss reserves included in our balance sheet accrued expenses. These loss contracts are related to some of our older legacy periscope IDIQ contracts which were priced in 2018 through early 2020, prior to COVID-19 and the significant downturn in defense spending on ground system vehicles. Due to inflationary price increases on component parts and higher internal manufacturing costs (as a result of escalating labor costs and higher burden rates on reduced volume), some of these contracts are in a loss condition, or at marginal profit rates. These contracts are typically three-year IDIQ contracts with two optional award years, and as such, we are obligated to accept new task awards against these contracts until the contract expiration. One of these long-term contracts has an option year ordering period ending in February 2025 with deliveries that may extend into February 2026. Should contract costs continue to increase above the negotiated selling price, or in the event the customer should release substantial quantities against these existing loss contracts, the losses could be material. For contracts currently in a loss status based on the estimated per unit contract costs, losses are booked immediately on new task order awards. During the three and nine months ended June 30, 2024, the Company recognized a gain on changes in estimates for the contract loss reserves of $16 thousand and $45 thousand and applied reserves of $34 thousand $97 thousand to cost of sales against revenues booked during the periods, respectively. There is no way to reasonably estimate future inflationary impacts, or customer awards on the existing loss contracts.

Current wording

As of December 29, 2024 and September 29, 2024, we had $213 thousand, and $259 thousand, respectively, of contract loss reserves included in our balance sheet accrued expenses. These loss contracts are related to some of our older legacy periscope IDIQ contracts which were priced in 2018 through early 2020, prior to Covid-19 and the significant downturn in defense spending on ground system vehicles. Due to inflationary price increases on component parts and higher internal manufacturing costs (as a result of escalating labor costs and higher burden rates on reduced volume), some of these contracts are in a loss condition, or at marginal profit rates. These contracts are typically three-year IDIQ contracts with two optional award years, and as such, we are obligated to accept new task awards against these contracts until the contract expiration. Should contract costs continue to increase above the negotiated selling price, or in the event the customer should release substantial quantities against these existing loss contracts, the losses could be material. For contracts currently in a loss status based on the estimated per unit contract costs, losses are booked immediately on new task order awards. During the three months ended December 29, 2024, the Company recognized $7 thousand in loss reserves on new contract awards, made shipments resulting in reductions of $53 thousand against existing loss reserves.

Previous wording

As of June 30, 2024 and October 1, 2023, the Company had a deferred tax asset valuation allowance of ($0.8) million against deferred tax assets of $1.6 million and $1.7 million, respectively, for a net deferred tax asset of $0.8 million and $0.9 million, respectively. During the nine months ended June 30, 2024, our deferred tax assets decreased by $0.1 million related to temporary tax adjustments. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2011 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control.

Current wording

As of December 29, 2024 and September 29, 2024, Optex Systems, Inc. has a deferred tax asset valuation allowance of ($0.8) million against deferred tax assets of $1.7 million, for a net deferred tax asset of $0.9 million. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2011 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control. The valuation allowance covers certain deferred tax assets where we believe we will be unlikely to recover those tax assets through future operations. The valuation reserve includes assumptions related to future taxable income which would be available to cover net operating loss carryforward amounts. Because of the uncertainties of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are subject to change over time. While we believe our current estimate to be reasonable, changing market conditions and profitability, changes in equity structure and changes in tax regulations may impact our estimated reserves in future periods.