Optex Systems Holdings Inc

Previous 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).

Current wording

Our wholly-owned subsidiary, Optex Systems, Inc., manufactures optical sighting systems and assemblies, primarily for Department of Defense applications. Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems, Inc. also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems, Inc. 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.

Previous wording

The Optex Richardson segment has numerous fixed price multi-year contracts covering delivery periods up to five years from the contract award. Approximately 7% of our Optex Richardson segment backlog are for items priced prior to 2021. Since the year 2021, we have experienced substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected the Optex Richardson segment margins for deliveries against those orders during the three and six months ended March 30, 2025 and which are expected to continue to have a negative effect on the margins generated under several of our long-term fixed contracts through the first fiscal quarter of 2026. 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.

Current wording

The Optex Richardson segment has numerous fixed price multi-year contracts covering delivery periods up to five years from the contract award. Approximately 7% of our Optex Richardson segment backlog are for items priced prior to 2021. Since the year 2021, we have experienced substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected the Optex Richardson segment margins for deliveries against those orders during the three and nine months ended June 29, 2025 and which are expected to continue to have a negative effect on the margins generated under several of our long-term fixed contracts through the first fiscal quarter of 2026. 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 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. In the first six months of fiscal year 2025, we have increased our periscope production levels by 50% over the 2024 fiscal year level. 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 and 2025, 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. In the first nine months of fiscal year 2025, we have increased our periscope production levels by 74% over the corresponding period in fiscal year 2024. 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 and 2025, 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

The table below summarizes our three and six-month operating results for the periods ended March 30, 2025 and March 31, 2024, 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 29, 2025 and June 30, 2024, 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 $1.8 million for the three months ended March 30, 2025, as compared to net income of $1.1 million for the prior year period. Our adjusted EBITDA increased by $0.8 million to $2.4 million for the three months ended March 30, 2025, as compared to adjusted EBITDA of $1.6 million for the prior year period.

Current wording

Our net income increased by $0.2 million to $1.5 million for the three months ended June 29, 2025, as compared to net income of $1.3 million for the prior year period. Our adjusted EBITDA increased by $0.3 million to $2.1 million for the three months ended June 29, 2025, as compared to adjusted EBITDA of $1.8 million for the prior year period.

Previous wording

Our net income increased by $1.1 million to $2.6 million for the six months ended March 30, 2025, as compared to net income of $1.5 million for the prior year period. Our adjusted EBITDA increased by $1.2 million to $3.6 million for the six months ended March 30, 2025, as compared to adjusted EBITDA of $2.4 million for the prior year period.

Current wording

Our net income increased by $1.3 million to $4.1 million for the nine months ended June 29, 2025, as compared to net income of $2.8 million for the prior year period. Our adjusted EBITDA increased by $1.5 million to $5.7 million for the nine months ended June 29, 2025, as compared to adjusted EBITDA of $4.2 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 increased revenue and gross profit. Operating segment performance is discussed in greater detail throughout the following sections.

Current wording

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

Previous wording

For the three months ended March 30, 2025, our total revenues increased by $2.2 million, or 25.9%, compared to the prior year period. The increase in revenue was primarily driven increased periscope production capacity at the Optex Richardson segment and higher customer demand for laser filters at the Applied Optics Center.

Current wording

For the three months ended June 29, 2025, our total revenues increased by $2.1 million, or 22.6%, compared to the prior year period. The increase in revenue was primarily driven by increased customer demand at the Company’s Optex Richardson segment.

Previous wording

For the six months ended March 30, 2025, our total revenues increased by $3.4 million, or 22.2%, compared to the prior year period. The increase in revenue was primarily driven increased periscope production capacity at the Optex Richardson segment and higher customer demand for laser filters at the Applied Optics Center.

Current wording

For the nine months ended June 29, 2025, our total revenues increased by $5.5 million, or 22.3%, compared to the prior year period. The increase in revenue was primarily driven by increased customer demand across both the Optex Richardson and the Applied Optics operating segments.

Previous wording

Consolidated gross profit for the three months ended March 30, 2025 increased by $0.8 million, or 31.4%, compared to the prior year period. Consolidated gross profit for the six months ended March 30, 2025 increased by $1.2 million, or 29.4%, compared to the prior year period.

Current wording

Consolidated gross profit for the three months ended June 29, 2025 increased by $0.3 million, or 10.0%, compared to the prior year period. Consolidated gross profit for the nine months ended June 29, 2025 increased by $1.5 million, or 21.6%, compared to the prior year period.

Previous wording

The increase in the most recent three and six-month period gross margin was primarily attributable to increased revenue and higher absorption of fixed costs across the higher revenue base.

Current wording

The increase in the most recent three and nine-month period gross margin was primarily attributable to increased revenue and changes in product mix.

Previous wording

Our operating income for the six months ended March 30, 2025 increased by $1.2 million, or 65.2%, compared to the prior year period. The increase in operating income was primarily driven by higher revenue and gross profit across both operating segments.

Current wording

Our operating income for the three months ended June 29, 2025 increased by $0.3 million, or 18.3%, compared to the prior year period. The increase in operating income was primarily driven by higher revenue and gross profit.

Previous wording

Our operating income for the three months ended March 30, 2025 increased by $0.9 million, or 65.0%, compared to the prior year period. The increase in operating income was primarily driven by higher revenue and gross profit combined with lower general and administrative costs.

Current wording

Our operating income for the nine months ended June 29, 2025 increased by $1.5 million, or 43.8%, compared to the prior year period. The increase in operating income was primarily driven by higher revenue and gross profit.

Previous wording

During the six months ended March 30, 2025, the Company booked $15.7 million in new orders, representing a (12.3 %) decrease over the prior year period. The decrease in orders is primarily attributable to a (19.8%) decrease in the Optex Richardson segment orders over the prior year period. The Applied Optics Center orders remained flat as compared to the prior year period.

Current wording

During the nine months ended June 29, 2025, the Company booked $24.1 million in new orders, representing a 14.8% decrease over the prior year period. The decrease in orders was primarily attributable to a 43.2% decrease in the Optex Richardson segment orders, which was partially offset by increases of 38.8% at the Applied Optics Center, over the prior year period.

Previous wording

The following table depicts the new customer orders for the six months ending March 30, 2025 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 29, 2025 as compared to the prior year period in millions of dollars by segment and product line:

Previous wording

During the current year six-month period, Optex Richardson orders decreased by $2.2 million, or (19.8%) as compared to the prior year period. The primary reason for the decrease relates to the timing of order releases against our periscope and other contracts. We have seen an increase in proposal requests over the last three months and expect additional orders to be forthcoming over the next three to six months.

Current wording

During the current year nine-month period, Optex Richardson orders decreased by ($8.0) million, or (43.2%) as compared to the prior year period. The primary reason for the decrease relates to lower orders in our periscope product line. We have seen an increase in proposal requests over the last three months and expect additional orders to be forthcoming over the next three months. On July 7, 2025 the Company announced a $2.8 million order from a major prime contractor in support of the XM30 combat vehicle and on July 22, 2025, the Company announced the award of a five-year requirement-type contract by the Army Contracting Command for Abrams based optical sighting systems. We anticipate the initial year task award against this contract within the fiscal year.

Previous wording

Backlog as of March 30, 2025 was $41.1 million, compared to a backlog of $44.2 million as of March 31, 2024 and as of September 29, 2024, representing a decrease of ($3.1) million, or (7.0%). The following table depicts the current expected delivery by period of all contracts awarded as of March 30, 2025 in millions of dollars:

Current wording

Backlog as of June 29, 2025 was $38.3 million, compared to a backlog of $45.6 million as of June 30, 2024 and $44.2 million as of September 29, 2024, representing a decrease of ($7.3) million, or (16.0%) from the prior year June period. The following table depicts the current expected delivery by period of all contracts awarded as of June 29, 2025 in millions of dollars:

Previous wording

Optex Richardson backlog as of March 30, 2025 was $31.0 million as compared to a backlog of $29.9 million as of March 31, 2024, representing an increase of $1.1 million or 3.7%.

Current wording

Optex Richardson backlog as of June 29, 2025 was $25.7 million as compared to a backlog of $32.7 million as of June 30, 2024, representing a decrease of ($7.0) million or (21.4%).

Previous wording

Revenues. For the three months ended March 30, 2025, revenues increased by $2.2 million or 25.9 % compared to the prior year period as set forth in the table below:

Current wording

Revenues. For the three months ended June 29, 2025, revenues increased by $2.1 million or 22.6% compared to the prior year period as set forth in the table below:

Previous wording

Optex Richardson revenue increased by $2.0 million or 47.8% for the three months ended March 30, 2025 as compared to the prior year period on increased production volume on our periscope product line.

Current wording

Optex Richardson revenue increased by $2.2 million or 46.3% for the three months ended June 29, 2025 as compared to the prior year period on increased periscope production levels.

Previous wording

Gross Profit. Gross margin during the three-month period ended March 30, 2025 was 31.3% of revenue as compared to a gross margin of 30.0% of revenue for the prior year period. Gross profit increased by $0.8 million to $3.4 million for the three months ended March 30, 2025 as compared to $2.6 million in the prior year three months. The increase in gross profit is primarily attributable to increased revenue and higher fixed costs absorption across both operating segments. Cost of sales increased to $7.4 million for the current period as compared to the prior year period of $6.0 million on higher revenue.

Current wording

Gross Profit. Gross margin during the three-month period ended June 29, 2025 was 28.5% of revenue as compared to a gross margin of 31.8% of revenue for the prior year period. The decrease in gross margin was primarily a result of shifts in revenue between segments and product groups as compared to the prior year period. Gross profit increased by $0.3 million to $3.2 million for the three months ended June 29, 2025 as compared to $2.9 million in the prior year three months. The increase in gross profit is primarily attributable to higher revenue. Cost of sales increased to $7.9 million for the current period as compared to the prior year period of $6.2 million on increased revenue and changes in product mix.

Previous wording

G&A Expenses. During the three months ended March 30, 2025 and March 31, 2024, we recorded operating expenses of $1.1 million and $1.2 million, respectively. Operating expenses decreased $0.1 million in the current year period as compared with the prior year period on lower stock compensation expenses.

Current wording

G&A Expenses. During the three months ended June 29, 2025 and June 30, 2024, we recorded operating expenses of $1.3 million. Operating expenses remained flat in the current year period as compared with the prior year period.

Previous wording

Operating Income. During the three months ended March 30, 2025, we recorded operating income of $2.2 million, as compared to operating income of $1.4 million during the three months ended March 31, 2024. 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 and lower general and administrative costs during the current year period.

Current wording

Operating Income. During the three months ended June 29, 2025, we recorded operating income of $1.9 million, as compared to operating income of $1.6 million during the three months ended June 30, 2024. The $0.3 million increase in operating income for the current year period from the prior year period is primarily due to increased revenue and gross profit.

Previous wording

Six Months Ended March 30, 2025 Compared to the Six Months Ended March 31, 2024

Current wording

Nine Months Ended June 29, 2025 Compared to the Nine Months Ended June 30, 2024

Previous wording

Revenues. For the six months ended March 30, 2025, revenues increased by $3.4 million or 22.2% compared to the prior year period as set forth in the table below:

Current wording

Revenues. For the nine months ended June 29, 2025, revenues increased by $5.5 million or 22.3% compared to the prior year period as set forth in the table below:

Previous wording

Optex Richardson revenue increased by $2.1 million or 26.9% for the six months ended March 30, 2025 as compared to the prior year period primarily on increased periscope revenue, partially offset by lower revenue in other products including mirrors, beamsplitters, day cameras and objective lenses. We anticipate lower revenues for the balance of the fiscal year in other products, as compared to the prior year, offset by higher revenue in periscopes.

Current wording

Optex Richardson revenue increased by $4.2 million or 34.3% for the nine months ended June 29, 2025 as compared to the prior year period primarily on increased periscope production, partially offset by reductions in customer demand for other products. We anticipate lower revenues for the balance of the fiscal year in other products, as compared to the prior year, offset by higher revenue in periscopes.

Previous wording

Applied Optics Center revenue increased by $1.4 million or 17.5% for the six months ended March 30, 2025 as compared to the prior year period. The revenue increase is primarily attributable to military products, primarily laser filters, partially offset by lower revenue on our commercial optical assemblies. We expect this trend to continue through the end of the fiscal year.

Current wording

Applied Optics Center revenue increased by $1.3 million or 10.3% for the nine months ended June 29, 2025 as compared to the prior year period. The revenue increase is primarily attributable to increased customer demand for military filters, day windows and other products, partially offset by lower customer demand for commercial optical assemblies. We expect this trend to continue through the balance of the fiscal year and into the first half of fiscal year 2026.

Previous wording

Gross Profit. The gross margin during the six-month period ended March 30, 2025 was 29.0% of revenue as compared to a gross margin of 27.4% of revenue for the prior year period. The gross profit increased by $1.3 million to $5.5 million for the six months ended March 30, 2025 as compared to $4.2 million for the prior year period. The increase in gross profit is primarily attributable to higher revenue, absorption of fixed cost across the higher revenue base and changes in mix between operating segments. Cost of sales increased to $13.4 million for the six months ended March 30, 2025 as compared to the prior year period of $11.3 million on higher period revenue.

Current wording

Gross Profit. The gross margin during the nine-month period ended June 29, 2025 was 28.8% of revenue as compared to a gross margin of 29.0% of revenue for the prior year period. The gross profit increased by $1.5 million to $8.7 million for the nine months ended June 29, 2025 as compared to $7.1 million for the prior year period. The increase in gross profit is primarily attributable to increased revenue. Cost of sales increased to $21.4 million for the nine months ended June 29, 2025 as compared to the prior year period of $17.4 million on higher period revenue.

Previous wording

G&A Expenses. During the six months ended March 30, 2025 and March 31, 2024, we recorded operating expenses of $2.3 million.

Current wording

G&A Expenses. During the nine months ended June 29, 2025 and June 30, 2024, we recorded operating expenses of $3.6 million.

Previous wording

Operating Income. During the six months ended March 30, 2025, we recorded operating income of $3.2 million, as compared to operating income of $1.9 million during the six months ended March 31, 2024. The $1.3 million increase in operating income is primarily due to higher revenue and gross profit.

Current wording

Operating Income. During the nine months ended June 29, 2025, we recorded operating income of $5.1 million, as compared to operating income of $3.5 million during the nine months ended June 30, 2024. The $1.6 million increase in operating income is primarily due to higher revenue and gross profit.

Previous wording

As of March 30, 2025, Optex Systems Holdings had working capital of $17.9 million, as compared to $15.1 million as of September 29, 2024. During the six months ended March 30, 2025, we generated operating cash of $4.0 million, primarily driven by higher income of $2.6 million, use of inventory of $0.9 million, and other changes in working capital of $0.5 million. During the six months ended March 30, 2025, we paid $1.0 million against the credit facility and purchased capital assets of $0.5 million.

Current wording

As of June 29, 2025, Optex Systems Holdings had working capital of $19.4 million, as compared to $15.1 million as of September 29, 2024. During the nine months ended June 29, 2025, we generated operating cash of $5.4 million, primarily driven by increased net income, reductions in inventory and increased accounts payable. During the nine months ended June 29, 2025, we paid $1.0 million against the credit facility and purchased capital assets of $0.5 million.

Previous wording

As of March 30, 2025, the Company had no outstanding capital commitments for the purchase of property and equipment. We anticipate additional capital projects forthcoming in the next three to six months.

Current wording

As of June 29, 2025, the Company had no outstanding capital commitments for the purchase of property and equipment. We anticipate additional capital projects forthcoming in the next six months.

Previous wording

Backlog as of March 30, 2025 was $41.1 million as compared to $44.2 million and $44.2 million as of September 29, 2024 and March 31, 2024, respectively. For further details, see “Results of Operations – New Orders and Backlog” above.

Current wording

Backlog as of June 29, 2025 was $38.3 million as compared to $44.2 million and $45.6 million as of September 29, 2024 and June 30, 2024, respectively. For further details, see “Results of Operations – New Orders and Backlog” above.

Previous wording

At March 30, 2025, the Company had approximately $3.5 million in cash and no draws against its revolving credit line. As of March 30, 2025, our outstanding accounts receivable balance was $4.2 million to be collected during the third quarter of fiscal 2025.

Current wording

At June 29, 2025, the Company had approximately $4.9 million in cash and no draws against its revolving credit line. As of June 29, 2025, our outstanding accounts receivable balance was $4.1 million to be collected during the fourth quarter of fiscal 2025.

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. As of March 30, 2025, the interest rate was 7.07% per annum. We are currently in process of renewing the Credit Facility and expect renewal to be completed prior to the Maturity Date.

Current wording

On May 21, 2025, the Company and Optex renewed their existing credit facility with the Lender by entering into a new Business Loan Agreement (the “Loan Agreement”) effective May 22, 2025, pursuant to which the Lender will continue to make available a revolving line of credit in the principal amount of $3 million (the “Texas Capital Facility”). The commitment period for advances under the Texas Capital Facility is twenty-four months expiring on May 22, 2027 (the “Maturity Date”). Outstanding advances under the Texas Capital Facility will accrue interest at a variable rate equal to the secured overnight financing rate (SOFR) plus a specified margin. The interest rate is currently at 7.10% 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 30, 2025, there was zero borrowed under the Credit Facility. As of March 30, 2025, the Company was in compliance with all covenants under the Credit Facility.

Current wording

The Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing capital expenditures (limited to $1 million per year), indebtedness and liens, affiliate transactions, fundamental changes (including change in management), investments, and restricted payments (including 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 3:1. The Texas Capital Facility is secured by substantially all of the operating assets of the borrowers as collateral. The 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.

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 March 30, 2025, the Company had accrued warranty costs of $106 thousand, as compared to $52 thousand as of September 29, 2024. The primary reason for the $54 thousand increase in reserve balances relates to accrual related to a potential warranty issue on our Applied Optics Day Windows of $83 thousand, offset by lower shipments and reduced warranties on our commercial optical assemblies.

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 June 29, 2025, the Company had accrued warranty costs of $173 thousand, as compared to $52 thousand as of September 29, 2024. The primary reason for the $121 thousand increase in reserve balances relates to accrual related to a potential warranty issue on our Applied Optics Day Windows of $143 thousand, offset by lower shipments and reduced revenue and warranties on our commercial optical assemblies.

Previous wording

As of March 30, 2025 and September 29, 2024, we had $226 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 and six months ended March 30, 2025, the Company recognized $11 thousand and $18 thousand in loss reserves on new contract awards, changes in estimates for the contract loss reserves of ($10) thousand and $4 thousand and applied reserves of $8 thousand and $47 thousand to cost of sales against revenues booked during the periods, respectively.

Current wording

As of June 29, 2025 and September 29, 2024, we had $423 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 and nine months ended June 29, 2025, the Company recognized $32 thousand and $101 thousand in loss reserves on new contract awards, changes in estimates for the contract loss reserves of $184 thousand and $134 thousand and applied reserves of ($19) thousand and ($71) thousand to cost of sales against revenues booked during the periods, respectively. Estimated loss reserves increased during the period as a result of higher rework and labor inefficiencies as we have ramped up to the higher production levels and trained new employees on the periscope line. During the three and nine months ended June 30, 2025, 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 and ($97) thousand to cost of sales against revenues booked during the periods, respectively.

Previous wording

As of March 30, 2025 and September 29, 2024, 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, for a net deferred tax asset of $0.8 million and $0.9 million, respectively. 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.

Current wording

As of June 29, 2025 and September 29, 2024, 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, for a net deferred tax asset of $0.9 and $0.9 million, respectively. 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.