UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

~~[X]~~☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 27, 2021~~January 2, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to______.

OPTEX SYSTEMS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware

000-54114

90-0609531

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(IRS Employer

Identification No.)

1420 Presidential Drive, Richardson, TX		75081-2439
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (~~(972)~~972) 764-5700

~~Check~~Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None.

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ~~[X]~~☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

~~Large Accelerated Filer [ ]~~

~~Accelerated Filer [ ]~~

~~Non-Accelerated Filer~~ ~~[X]~~

~~Smaller Reporting Company~~ ~~[X]~~

~~[ ]~~	~~Emerging growth company~~

~~[ ]~~	If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ~~[X]~~☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth ~~company as defined in Rule 405~~company. See definition of ~~the Securities Act of 1933 (§230.405 of this chapter) or~~“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the ~~Securities~~ Exchange ~~Act of 1934 (§240.12b-2 of this chapter).~~Act:

~~Yes [ ]~~ No ~~[X]~~

Large Accelerated Filer ☐

Accelerated Filer ☐

Non-Accelerated Filer ☒

Smaller Reporting Company ☒

☐	Emerging growth company

☐	If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

Yes ~~[ ]~~ No☐ ~~[X]~~No ☒

~~Securities registered pursuant to Section 12(b) of the Act:~~

~~Title of each class~~		~~Trading Symbol(s)~~		~~Name of each exchange on which registered~~
~~None.~~

~~State~~Indicate the number of shares outstanding of each of the issuer’s classes of common ~~equity,~~stock, as of ~~August 16, 2021:~~February 7, 2022: ~~8,483,295~~8,429,406 shares of common stock.

OPTEX SYSTEMS HOLDINGS, INC.

FORM 10-Q

For the period ended ~~June 27, 2021~~January 2, 2022

INDEX

PART I— FINANCIAL INFORMATION		F-1

Item 1.	Consolidated Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 4.3.	~~Control~~Quantitative and ~~Procedures~~Qualitative Disclosures About Market Risk	15
~~PART II— OTHER INFORMATION~~		1513
Item 14.	~~Legal Proceedings~~Controls and Procedures	1315
PART II— OTHER INFORMATION		13
Item 1A1.	~~Risk Factors~~Legal Proceedings	1315
Item 41A.	Risk Factors	14
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3.	Defaults Upon Senior Securities	14
Item 4.	Mine Safety Disclosures	1415
Item 6.	Exhibits	1516
SIGNATURE		1716

Part 1. Financial Information

Item 1. Consolidated Financial Statements

OPTEX SYSTEMS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF ~~JUNE 27, 2021~~JANUARY 2, 2022

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF ~~JUNE 27, 2021~~JANUARY 2, 2022 (UNAUDITED) AND ~~SEPTEMBER 27, 2020~~OCTOBER 3, 2021	F-2

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~JUNE 27, 2021~~JANUARY 2, 2022 (UNAUDITED) AND THE THREE ~~AND NINE~~ MONTHS ENDED ~~JUNE 28,~~DECEMBER 27, 2020 (UNAUDITED)	F-3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~NINE~~THREE MONTHS ENDED ~~JUNE~~JANUARY 2, 2022 (UNAUDITED) AND THE THREE MONTHS ENDED DECEMBER 27, ~~2021~~2020 (UNAUDITED)	F-4

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~JUNE 27, 2021~~JANUARY 2, 2022 (UNAUDITED) AND FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~JUNE 28,~~DECEMBER 27, 2020 (UNAUDITED)	F-5

CONDENSED CONSOLIDATED FINANCIAL STATEMENT FOOTNOTES (UNAUDITED)	F-6

F-1

Optex Systems Holdings, Inc.

Condensed Consolidated Balance Sheets

	June 27, 2021			September 27, 2020				Jan 2022	Oct 2021
	(Thousands, except share and per share data)						(Thousands, except share and per share data)
	June 27, 2021			September 27, 2020			January 2, 2022			October 3, 2021
	(Unaudited)						(Unaudited)
ASSETS
		��

Cash and Cash Equivalents	$	4,758		$	4,700		$	5,285		$	3,900
Accounts Receivable, Net		1,382			2,953			2,010			3,183
Inventory, Net		8,645			8,791			7,919			7,583
Prepaid Expenses		324			229			250			262

Current Assets		15,109			16,673			15,464			14,928

Property and Equipment, Net		1,026			1,006			1,035			1,017

Other Assets
Deferred Tax Asset		1,309			1,227			1,302			1,288
Right-of-use Asset		3,721			1,416			3,531			3,599
Security Deposits		23			23			23			23

Other Assets		5,053			2,666			4,856			4,910

Total Assets	$	21,188		$	20,345		$	21,355		$	20,855

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts Payable	$	408		$	833		$	1,018		$	551
Credit Facility		377			-
Operating Lease Liability		529			417			579			528
Accrued Expenses		872			1,077			840			851
Warrant Liability		519			2,544
Accrued Warranty Costs		68			83			122			78
Customer Advance Deposits		-			1

Current Liabilities		2,773			4,955			2,559			2,008

Other Liabilities
Credit Facility		-			377
Operating Lease Liability, net of current portion		3,254			1,037			3,070			3,133

Other Liabilities		3,254			1,414
Total Liabilities		6,027			6,369			5,629			5,141

Commitments and Contingencies		-						-			-

Stockholders’ Equity
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,334,995 and 8,795,869 shares issued, and 8,334,995 and 8,690,136 outstanding, respectively)		8			9
Treasury Stock (at cost, zero and 105,733 shares held, respectively)		-			(200	)
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,546,920 and 8,523,704 shares issued, and 8,474,127 and 8,488,149 outstanding, respectively)								9			9
Treasury Stock (at cost, 72,793 and 35,555 shares held, respectively)								(143	)		(69	)
Additional Paid in capital		25,403			26,276			25,809			25,752
Accumulated Deficit		(10,250	)		(12,109	)		(9,949	)		(9,978	)

Stockholders’ Equity		15,161			13,976			15,726			15,714

Total Liabilities and Stockholders’ Equity	$	21,188		$	20,345		$	21,355		$	20,855

The accompanying notes are an integral part of these financial statements

F-2

Optex Systems Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

June 27, 2021 June 28, 2020 June 27, 2021 June 28, 2020
(Thousands, except share and per share data)
Three months ended Nine months ended
June 27, 2021 June 28, 2020 June 27, 2021 June 28, 2020

Revenue $ 4,433 $ 5,849 $ 13,149 $ 18,682

Cost of Sales 3,687 4,368 11,190 14,114

Gross Margin 746 1,481 1,959 4,568

General and Administrative Expense 689 855 2,238 2,442

Operating Income (Loss) 57 626 (279 ) 2,126

Gain (Loss) on Change in Fair Value of Warrants 1,167 (585 ) 2,025 (504 )

Interest Expense (4 ) (5 ) (9 ) (17 )
Other Income (Expense) 1,163 (590 ) 2,016 (521 )

Income Before Taxes 1,220 36 1,737 1,605

Income Tax Expense (Benefit), net $ (154 ) $ 131 (122 ) 435

Net Income (Loss) $ 1,374 $ (95 ) $ 1,859 $ 1,170

Deemed dividends on participating securities (464 ) - (622 ) (372 )
Net income (loss) applicable to common shareholders $ 910 $ (95 ) $ 1,237 $ 798
Basic income (loss) per share $ 0.11 $ (0.01 ) $ 0.15 $ 0.09

Weighted Average Common Shares Outstanding - basic 8,101,223 8,491,803 8,204,994 8,472,739

Diluted income (loss) per share $ 0.11 $ (0.01 ) $ 0.15 $ 0.09

Weighted Average Common Shares Outstanding - diluted 8,138,106 8,491,803 8,292,544 8,596,745
Jan 2 2022 Dec 27, 2020
(Thousands, except share and per share data)
Three months ended
January 2, 2022 December 27, 2020

Revenue $ 4,340 $ 4,471

Cost of Sales 3,517 3,636

Gross Margin 823 835

General and Administrative Expense 808 756

Operating Income 15 79

Gain on Change in Fair Value of Warrants - 1,027

Interest Expense - (3 )
Other Income - 1,024

Income Before Taxes 15 1,103

Income Tax (Benefit) Expense, net $ (14 ) $ 16

Net Income $ 29 $ 1,087
Deemed dividends on participating securities - (361 )
Net income applicable to common shareholders $ 29 $ 726
Basic income per share $ 0.00 $ 0.09

Weighted Average Common Shares Outstanding - basic 8,228,980 8,299,278

Diluted income per share $ 0.00 $ 0.09

Weighted Average Common Shares Outstanding - diluted 8,281,841 8,488,042
The accompanying notes are an integral part of these financial statements

F-3
Optex Systems Holdings, Inc.
~~Condensed~~ Consolidated Statements of Cash Flows
(Unaudited)
June 27, 2021 June 28, 2020
(Thousands)
Nine months ended
June 27, 2021 June 28, 2020

Cash Flows from Operating Activities:
Net Income $ 1,859 $ 1,170

Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities:
Depreciation and Amortization 195 185
(Gain) Loss on Change in Fair Value of Warrants (2,025 ) 504
Stock Compensation Expense 171 120
Deferred Tax (81 ) 144
Accounts Receivable 1,570 89
Inventory 146 332
Prepaid Expenses (95 ) 69
Leases 23 (32 )
Accounts Payable and Accrued Expenses (631 ) (782 )
Accrued Warranty Costs (15 ) 65
Customer Advance Deposits (1 ) (3 )
Increase (Decrease) In Accrued Estimated Loss On Contracts - -
Total Adjustments (743 ) 691
Net Cash provided by Operating Activities 1,116 1,861

Cash Flows used in Investing Activities
Purchases of Property and Equipment (214 ) (150 )
Net Cash used in Investing Activities (214 ) (150 )

Cash Flows provided by (used in) Financing Activities
Cash Paid for Taxes Withheld On Net Settled Restricted Stock Unit Share Issue (44 ) (54 )
Borrowings from Credit Facility - 127
Stock Repurchase (800 ) (64 )

Net Cash (used in) provided by Financing Activities (844 ) 9

Net Increase in Cash and Cash Equivalents 58 1,720
Cash and Cash Equivalents at Beginning of Period 4,700 1,068
Cash and Cash Equivalents at End of Period $ 4,758 $ 2,788

Supplemental Cash Flow Information:

Non Cash Transactions:
Right-of-Use Asset $ 3,688 $ 1,811
Operating Lease Liabilities 3,688 1,894
Treasury stock retired 1,000 -

Cash Transactions:
Cash Paid for Taxes 48 289
Cash Paid for Interest 9 16
Jan 2022 Dec 2020
(Thousands)
Three months ended
January 2, 2022 December 27, 2020

Cash Flows from Operating Activities:
Net Income $ 29 $ 1,087

Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities:
Depreciation and Amortization 72 63
Gain on Change in Fair Value of Warrants - (1,027 )
Stock Compensation Expense 57 57
Deferred Tax (14 ) 16
Accounts Receivable 1,173 815
Inventory (335 ) (557 )
Prepaid Expenses 11 62
Leases 55 (14 )
Accounts Payable and Accrued Expenses 457 (44 )
Accrued Warranty Costs 44 (34 )
Customer Advance Deposits - (1 )
Total Adjustments 1,520 (664 )
Net Cash provided by Operating Activities 1,549 423

Cash Flows used in Investing Activities
Purchases of Property and Equipment (90 ) (81 )
Net Cash used in Investing Activities (90 ) (81 )

Cash Flows used in Financing Activities
Common Stock Repurchase (74 ) (415 )
Net Cash used in Financing Activities (74 ) (415 )

Net Increase (Decrease) in Cash and Cash Equivalents 1,385 (73 )
Cash and Cash Equivalents at Beginning of Period 3,900 4,700
Cash and Cash Equivalents at End of Period $ 5,285 $ 4,627

Supplemental Cash Flow Information:

Cash Transactions:
Cash Paid for Interest - 3
The accompanying notes are an integral part of these financial statements

F-4

Optex Systems Holdings, Inc.
~~Condensed~~ Consolidated ~~Statements~~Statement of Stockholders’ Equity
(Thousands, except share data)
Issued Shares Stock Stock Capital Earnings Equity
Three months ended June 27, 2021
Common Additional Total
Shares Treasury Common Treasury Paid in Retained Stockholders
Issued Shares Stock Stock Capital Earnings Equity
Balance at March 28, 2021 8,854,261 480,667 $ 9 $ (930 ) $ 26,346 $ (11,624 ) $ 13,801
Stock Compensation Expense - - - - 57 - 57
Common Stock Repurchase ⁽¹⁾ - 38,599 - (70 ) - - (70 )
Cancellation of Treasury Shares (519,266 ) (519,266 ) (1 ) 1,000 (1,000 ) - (1 )
Vested restricted stock units issued net of tax withholding
Vested restricted stock units issued net of tax withholding, shares
Restricted Board Shares Issued
Restricted Board Shares Issued, shares
Net income - - - - - 1,374 1,374

Balance at June 27, 2021 8,334,995 - $ 8 $ - $ 25,403 $ (10,250 ) $ 15,161
Common Treasury Common S Treasury Additional Retained
Three months ended January 2, 2022
Common Additional Total
Shares Treasury Common Treasury Paid in Retained Stockholders
Issued Shares Stock Stock Capital Earnings Equity
Balance at October 3, 2021 8,523,704 35,555 $ 9 $ (69 ) $ 25,752 $ (9,978 ) $ 15,714
Stock Compensation Expense - -         - - 57 - 57
Common Stock Repurchase⁽¹⁾ - 37,238 - (74 ) - - (74 )
Vested Restricted Stock Units, net of withheld taxes 23,216 - - - - - -
Net income - - - - - 29 29

Balance at January 2, 2022 8,546,920 72,793 $ 9 $ (143 ) $ 25,809 $ (9,949 ) $ 15,726
Nine months ended June 27, 2021
Common Additional Total
Shares Treasury Common Treasury Paid in Retained Stockholders
Issued Shares Stock Stock Capital Earnings Equity
Balance at September 27, 2020 8,795,869 105,733 $ 9 $ (200 ) $ 26,276 $ (12,109 ) $ 13,976
Stock Compensation Expense - - - - 171 - 171
Vested restricted stock units issued net of tax withholding 58,392 - - - (44 ) - (44 )
Common Stock Repurchase ⁽¹⁾ - 413,533 - (800 ) - - (800 )
Cancellation of Treasury Shares (519,266 ) (519,266 ) (1 ) 1,000 (1,000 ) - (1 )
Net income - - - - - 1,859 1,859

Balance at June 27, 2021 8,334,995 - $ 8 $ - $ 25,403 $ (10,250 ) $ 15,161
Three months ended June 28, 2020
Common Additional Total
Shares Treasury Common Treasury Paid in Retained Stockholders
Issued Shares Stock Stock Capital Earnings Equity
Balance at March 29, 2020 8,495,869 - $ 8 $ - $ 26,137 $ (12,669 ) 13,476
Stock Compensation Expense - - - 63 - 63
Restricted Board Shares Issued ⁽²⁾ 300,000 - 1 - (1 ) - -
Common Stock Repurchase ⁽¹⁾ - 34,243 - (64 ) - - (64 )
Net loss - - - - (95 ) (95 )

Balance at June 28, 2020 8,795,869 34,243 $ 9 $ (64 ) $ 26,199 $ (12,764 ) $ 13,380
Nine months ended June 28, 2020
Common Additional Total
Shares Treasury Common Treasury Paid in Retained Stockholders
Issued Shares Stock Stock Capital Earnings Equity
Balance at September 29, 2019 8,436,422 - $ 8 $ - $ 26,134 $ (13,934 ) 12,208
Stock Compensation Expense - - - 120 - 120
Vested restricted stock units issued net of tax withholding 59,447 - - (54 ) - (54 )
Restricted Board Shares Issued ⁽²⁾ 300,000 - 1 - (1 ) - -
Common Stock Repurchase ⁽¹⁾ - 34,243 - (64 ) - - (64 )
Common Stock Repurchase - 34,243 - (64 ) - - (64 )
Net income - - - - 1,170 1,170

Balance at June 28, 2020 8,795,869 34,243 $ 9 $ (64 ) $ 26,199 $ (12,764 ) $ 13,380
Three months ended December 27, 2020
Common Additional Total
Shares Treasury Common Treasury Paid in Retained Stockholders
Issued Shares Stock Stock Capital Earnings Equity
Balance at September 27, 2020 8,795,869 105,733 $ 9 $ (200 ) $ 26,276 $ (12,109 ) $ 13,976
Stock Compensation Expense - -          - - 57 - 57
Common Stock Repurchase ⁽¹⁾ - 208,592 - (415 ) - - (415 )
Net income - - - - - 1,087 1,087

Balance at December 27, 2020 8,795,869 314,325 $ 9 $ (615 ) $ 26,333 $ (11,022 ) $ 14,705

(1)
Common shares repurchased in the open market ~~through June~~during the three months ended January 2, 2022 and December 27, ~~2021. Shares were~~2020, respectively. The shares are held inas treasury stock using the cost ~~method and cancelled in June 2021.~~
~~(2)~~ ~~100,000~~ ~~restricted common shares issued to each of the Independent Board of Directors (Rimmy Maholtra, Dale Lehman, Larry Hagenbuch) on April 30, 2020 with~~ ~~20%~~ ~~vesting as of each January 1 each year over a~~ ~~five year~~ ~~period. The value of the shares at issue date is~~ ~~$525,000~~ ~~for~~ ~~300,000~~ ~~shares to be amortized over the vesting period.~~method.

The accompanying notes are an integral part of these financial statements
F-5

Note 1 - Organization and Operations

Optex Systems Holdings, Inc. (the “Company”) manufactures optical sighting systems and assemblies for the U.S. Department of Defense, foreign military applications and commercial markets. Its products are installed on a variety of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. The Company also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that are delivered both directly to the military and to other defense prime contractors or commercial customers. The Company’s consolidated revenues ~~are~~for the three months ended January 2, 2022 were derived from the U.S. government (~~28.3%~~15%), three major U.S. defense contractors (~~29.7%~~25%, ~~12.4%~~8% and ~~6.0%~~6%, respectively), one major commercial customer (~~6.8%~~26,%) and all other customers (~~16.8%~~20%). Approximately ~~90.5%~~92% of the total company revenue is generated from domestic customers and ~~9.5%~~8% is derived from foreign ~~customers.~~customers, primarily in Canada. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of ~~June 27, 2021,~~January 2, 2022, Optex Systems Holdings operated with 8587 full-time equivalent employees.

We may be at risk as a result of the current COVID-19 pandemic. Risks that could affect our business include the duration and scope of the COVID-19 pandemic and the impact on the demand for our products; impacts on our supply chain; actions by governments, businesses and individuals taken in response to the pandemic; the length of time of the ~~COVID-19~~ pandemic and the possibility of its reoccurrence; the timing required to develop and implement effective ~~treatments and distribute vaccines in~~treatments; the ~~event~~success of ~~future outbreaks;~~global vaccination efforts; the eventual impact of the pandemic and actions taken in response to the pandemic on global and regional economies; and the pace of recovery when the ~~COVID-19~~ pandemic subsides.

~~During the last twelve months,~~Beginning in April 2020 through October 3, 2021, we ~~have~~ experienced a significant reduction in new orders and ending customer backlog ~~across all but one~~in our Optex Richardson segment, resulting in an overall decrease in backlog of ~~our product lines.~~40% between September 29, 2019 and October 3, 2021. We attribute the lower orders to a combination of factors including a COVID-19 driven slow-down of contract awards for both U.S. military sales and foreign military sales (FMS), combined with ~~some~~significant shifting in defense spending budget allocations in US military sales and FMS away from Army ground system vehicles toward other military agency applications. ~~Due to the significant level of uncertainty surrounding~~In addition, the pandemic ~~and its impact to our customers and~~has caused several program delays throughout the defense supply chain ~~we are unable to ascertain~~as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supply chain issues.
While the ~~impact further delays in contract awards and customer orders may have on the next twelve months.~~ ~~We have~~Applied Optics Center segment experienced a ~~reduction of 29.6%~~significant decline in ~~revenue volume~~orders during the ~~first nine months~~second half of fiscal year 2020, the segment saw a sizable increase in new orders during the fiscal year ended October 3, 2021, as a result of increased military spending in Army infantry optical equipment, a larger customer base and higher customer demand for commercial optical assemblies. As of October 3, 2021, the Applied Optics Center segment backlog had increased by 153% as compared to the ~~first nine months~~level on September 29, 2019. As a result of this significant shift in orders and backlog between segments, we anticipate corresponding shifts in revenue during the 2022 fiscal year, ~~2020. We have experienced a recent increase in proposal requests,~~with revenue from the Optex Richardson segment decreasing, and ~~anticipate an increase in orders over~~revenue from the next six to twelve months, however the timing and nature of new orders in the near term cannot be determined. We have implemented several cost-saving initiatives during the first nine months, including reductions in force, employee compensation and discretionary spending. We are reviewing additional cost reductions during the next sixty to ninety days as required to further minimize the impact of any sustained delays in customer orders beyond the first nine months of fiscal year 2021.Applied Optics Center segment increasing.

Note 2 - Accounting Policies

Basis of Presentation

Principles of Consolidation: The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

F-6
These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Optex Systems Holdings’ Form 10-K for the year ended ~~September 27, 2020~~October 3, 2021 and other reports filed with the SEC.
~~F-6~~

The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of Optex Systems Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required for interim financial reporting purposes has been omitted.

~~Leases~~: On January 11, 2021 the Company executed amendments for each of the leased facilities extending the terms for eighty-six (86) months, commencing at the end of the current lease agreements. The Richardson lease amendment commences on April 1, 2021 for an eighty-six (86) month term ending on May 31, 2028. The Dallas lease amendment commences on November 1, 2021 for an eighty-six (86) month term ending on December 31, 2028. Each of the leases include two full months of rent abatement at the beginning of the commencement term. Execution of the new lease amendments resulted in the balance sheet recognition of a right-of-use asset of ~~$3.7~~ ~~million and corresponding operating lease liabilities of approximately~~ ~~$3.7~~ ~~million during the nine months ended June 27, 2021. See also Note 4.~~
Inventory: As of ~~June 27,~~January 2, 2022, and October 3, 2021, ~~and September 27, 2020,~~ inventory included:
Schedule of Inventory
June 27, 2021 September 27, 2020 January 2, 2022 October 3, 2021
(Thousands) (Thousands)
June 27, 2021 September 27, 2020 January 2, 2022 October 3, 2021
Raw Material $ 4,724 $ 5,506 $ 4,580 $ 4,926
Work in Process 3,768 3,214 3,287 2,664
Finished Goods 720 638 685 629
Gross Inventory $ 9,212 $ 9,358 $ 8,552 $ 8,219
Less: Inventory Reserves (567 ) (567 ) (633 ) (636 )
Net Inventory $ 8,645 $ 8,791 $ 7,919 $ 7,583

Concentration of Credit Risk: Optex Systems Holdings’ accounts receivables ~~for the period ended June 27, 2021 are derived from revenues~~as of January 2, 2022 consist of U.S. government ~~agencies:~~ agencies (~~19%~~10%), ~~six~~five major U.S. defense ~~contractors:~~ contractors (~~14%~~17%, ~~14%~~17%, ~~11%~~14%, ~~10%~~9, 8%,% and 6%6%, respectively), one foreign military agency (7%), one commercial ~~customer:~~ customer (~~15%~~13,%) and all other ~~customers:~~ customers (3%7%). The Company does not believe that this concentration results in undue credit risk because of the financial strength of the customers and ~~its~~the Company’s long history with these customers.

Accrued Warranties: Optex Systems Holdings accrues product warranty liabilities based on the historical return rate against period shipments as they occur and reviews and adjusts these accruals quarterly for any significant changes in estimated costs or return rates. The accrued warranty liability includes estimated costs to repair or replace returned warranty backlog units currently in-house plus estimated costs for future warranty returns that may be incurred against warranty covered products previously shipped as of the period end date. As of ~~June 27,~~January 2, 2022, and October 3, 2021, ~~and September 27, 2020,~~ the Company had warranty reserve balances of $~~$68~~122 thousand and $~~$83~~78 thousand, respectively.
Schedule of Warranty Reserves
June 27, 2021 June 28, 2020 June 27, 2021 June 28, 2020
Three months ended Nine months ended Three months ended
June 27, 2021 June 28, 2020 June 27, 2021 June 28, 2020 January 2, 2022 December 27, 2020
Beginning balance $ 63 $ 105 $ 83 $ 46 $ 78 $ 83

Incurred costs for warranties satisfied during the period (4 ) (16 ) (71 ) (16 ) (2 ) (43 )

Warranty Expenses:
Warranties reserved for new product shipped during the period⁽¹⁾ 9 22 18 78 46 4
Change in estimate for pre-existing warranty liabilities ⁽²⁾ - - 38 3 - 5
Warranty Expense 9 22 56 81 46 9

Ending balance $ 68 $ 111 $ 68 $ 111 $ 122 $ 49
(1) Warranty expenses accrued to cost of sales (based on current period shipments and historical warranty return ~~rate.~~rate).
(2) Changes in estimated warranty liabilities ~~for~~recognized in cost of sales associated ~~with~~with: the period end customer returned warranty backlog, or the actual costs of repaired/replaced warranty units which were shipped to the customer during the current period.

F-7

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.

Fair Value of Financial Instruments: Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of the financial statement presentation date.

The carrying value of cash and cash equivalents, accounts receivable and accounts payable, are carried at, or approximate, fair value as of the reporting date because of their short-term nature. The credit facility is reported at fair value as it bears market rates of interest. Fair values for the Company’s warrant liabilities and derivatives are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.

The accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement. Fair value estimates are reviewed at the origination date and again at each applicable measurement date and interim or annual financial reporting dates, as applicable for the financial instrument, and are based upon certain market assumptions and pertinent information available to management at those times.

The methods and significant inputs and assumptions utilized in estimating the fair value of the warrant liabilities, as well as the respective hierarchy designations are discussed further in Note 6 “Warrant Liabilities”. The warrant liability measurement is considered a Level 3 measurement based on the availability of market data and inputs and the significance of any unobservable inputs as of the measurement date.
Revenue Recognition: The majority of the Company’s contracts and customer orders originate with fixed determinable unit prices for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the specific due date for the transfer of control and title of each of those deliverables to the customer at pre-established payment terms, which are generally within thirty to sixty days from the transfer of title and control. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. In addition, the Company has one ongoing service contract which began in October 2017 which relates to optimized weapon system support (OWSS) and includes ongoing program maintenance, repairs and spare inventory support for the customer’s existing fleet units in service over a three-year period. Revenue recognition for this program has been recorded by the Company, and compensated by the customer, at fixed monthly increments over time, consistent with the defined contract maintenance period. During the three ~~and nine~~ months ended ~~June~~January 2, 2022 and December 27, ~~2021 and June 28,~~ 2020, there was $$120 thousand and $~~$359~~120 thousand ~~in 2021 and~~ ~~$113~~ ~~thousand and~~ ~~$339~~ ~~thousand in 2020~~ in service contract revenue recognized over time.

F-8

During the ~~three- and nine-month~~three-month periods ended ~~June~~January 2, 2022 and December 27, ~~2021 and June 28,~~ 2020, there was 0 and $$1 thousand ~~in 2021 and~~ 0 ~~and~~ $3 ~~thousand in 2020~~ of revenue recognized from customer deposit liabilities (deferred contract revenue). As of ~~June 27, 2021,~~January 2, 2022, there are no0 customer deposit liabilities. As of the ~~nine~~three months ended ~~June 27, 2021,~~January 2, 2022, there are no0 sales commissions or other significant deferred contract costs.

Income Tax/Deferred Tax: : As of ~~June 27,~~January 2, 2022 and October 3, 2021, ~~and September 27, 2020,~~ Optex Systems, Inc. has a deferred tax asset valuation allowance of ($$~~1.0~~0.8) million against deferred tax assets of $~~2.3~~ ~~million for a net deferred tax asset of $1.3~~2.1 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. During the three months ended January 2, 2022, our deferred tax assets increased by $14 thousand related to temporary tax adjustments].

Earnings per Share: Basic earnings per share is computed by dividing income available for common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

A significant number of our warrants outstanding ~~warrants are~~through August 26, 2021 were participating securities, which ~~share~~shared dividend distributions and the allocation of any undistributed earnings (deemed dividends) with our common shareholders. ~~During~~Since the warrants expired in accordance with their terms on August 26, 2021, during the three ~~and nine~~ months ended ~~June 27, 2021,~~January 2, 2022, there were 0no declared dividends and ~~$464~~ ~~and~~ ~~$622~~ ~~thousand in~~no allocated undistributed earnings attributable to the participating warrants, respectively. During the three ~~and nine~~ months ended ~~June 28,~~December 27, 2020, there were 0declared dividends and $0361~~and~~ ~~$372~~ thousand in allocated undistributed earnings attributable to the participating warrants, respectively.

The Company has potentially dilutive securities outstanding which include unvested restricted stock units, stock options and, for the quarter ended December 27, 2020, warrants. In computing the dilutive effect of warrants, the numerator is adjusted to add back any deemed dividends on participating securities (warrants) and the denominator is increased to assume the conversion of the number of additional incremental common shares. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Unvested restricted stock units, stock options and warrants that are anti-dilutive are excluded from the calculation of diluted earnings per common share.

For the three months ~~and nine months~~ ended ~~June 27, 2021,~~January 2, 2022, ~~99,000~~66,000 unvested restricted stock units and ~~240,000~~180,000 shares of unvested restricted stock (which convert to an aggregate of ~~36,883~~ ~~and~~ ~~87,550~~52,861 incremental shares) were included in the diluted earnings per share ~~calculation.~~
calculation due to the antidilutive effect of the undistributed earnings. For the three months ended ~~June 28,~~December 27, 2020, 182,000 unvested restricted stock units and 300,000 shares of unvested restricted stock (which convert to ~~210,112~~ ~~incremental shares) were excluded from the diluted earnings per share calculation due to the net loss for the period. For the nine months ended June 28, 2020,~~ ~~182,000~~ ~~unvested restricted stock units and~~ ~~300,000~~ ~~shares~~an aggregate of ~~unvested restricted stock (which convert to~~ ~~124,006~~188,764 incremental shares) were included in the diluted earnings per share ~~calculation.~~
~~For the three~~calculation and ~~nine-months ended June 27, 2021 and the three and nine-months ended June 28, 2020,~~ 4,125,200 warrants (which convert to 984,185~~warrants~~ incremental shares) were excluded from the diluted earnings per share calculation due to the antidilutive effect of the undistributed ~~earnings.~~earnings

Note 3 - Segment Reporting

The Company’s reportable segments are strategic businesses offering similar products to similar markets and customers; however, the companies are operated and managed separately due to differences in manufacturing technology, equipment, geographic location, and specific product mix. Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was retained. Both the Applied Optics Center and Optex Systems – Richardson operate as reportable segments under the Optex Systems, Inc. corporate umbrella.

The Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies for the Optex Systems-Richardson (“Optex Systems”) segment. Intersegment sales and transfers are accounted for at annually agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general and administrative costs, but exclude profits that would apply to third party external customers.
F-9
Optex Systems (OPX) – Richardson, Texas

The Optex Systems segment revenue is comprised of approximately ~~86.5~~82% % domestic military customers and ~~13.5~~18% % foreign military customers. For the ~~nine~~three months ~~ending June 27, 2021,~~ended January 2, 2022, Optex Systems – Richardson represented 43% of the ~~Optex segment~~Company’s total consolidated revenue ~~is derived from~~and consisted of the U.S. government (~~28%~~15%~~, and two~~) one major U.S. defense ~~contractors representing~~ contractor (~~22%~~ 19%), and all other customers (~~12%~~9%~~, of the Company’s consolidated revenue, respectively.~~).

Optex Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of ~~June 27, 2021,~~January 2, 2022, the Richardson facility operated with 5347 full time equivalent employees in a single shift operation. Optex Systems, Richardson serves as the home office for both the Optex Systems and Applied Optics Center segments.

Applied Optics Center (AOC) – Dallas, Texas

The Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represent approximately ~~29%~~48% and military sales to prime and subcontracted customers represent approximately ~~71%~~52% of the external segment revenue. Approximately ~~82%~~93% of the AOC revenue is derived from external customers and approximately ~~18%~~7% is related to intersegment sales to Optex Systems in support of military contracts. For the ~~nine~~three months ended ~~June 27, 2021,~~January 2, 2022, AOC represented 57% of the ~~AOC segment~~Company’s total consolidated revenue ~~from two~~and consisted of three major defense contractors ~~represents approximately~~ (8%, 6% and 6% ~~of the Company’s consolidated revenue, respectively, and revenue from~~), one commercial customer ~~represents~~ (7%26% ~~of the Company’s consolidated revenue.~~), and all other customers (11%).

The Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of ~~June 27, 2021,~~January 2, 2022, AOC operated with 3240 full time equivalent employees in a single shift operation.

The financial tables below present information on the ~~information~~reportable segments’ profit or loss for each ~~of the reportable segment’s profit or loss~~period, as well as segment assets ~~for~~as of each ~~year.~~period end The Company does not allocate interest expense, income taxes or unusual items to segments.
Schedule of Segment Reporting Information
Reportable Segment Financial Information
(thousands) Reportable Segment Financial Information
(thousands)
Three months ended June 27, 2021 As of and for the three months ended January 2, 2022
Optex Systems
Richardson Applied Optics Center
Dallas Other
(non-allocated costs and intersegment eliminations) Consolidated
Total Optex Systems
Richardson Applied Optics Center
Dallas Other
(non-allocated costs and intersegment eliminations) Consolidated
Total

Revenues from external customers $ 3,126 $ 1,307 $ - $ 4,433 $ 1,857 $ 2,483 $ - $ 4,340
Intersegment revenues - 41 (41 ) - - 180 (180 ) -
Total Revenue $ 3,126 $ 1,348 $ (41 ) $ 4,433 $ 1,857 $ 2,663 $ (180 ) $ 4,340

Interest expense $ - $ - $ 4 $ 4

Depreciation and Amortization $ 10 $ 57 $ - $ 67 $ 10 $ 62 $ - $ 72

Income (loss) before taxes $ 328 $ (214 ) $ 1,106 $ 1,220 $ (216 ) $ 288 $ (57 ) $ 15

Other significant noncash items:
Allocated home office expense $ (177 ) $ 177 $ - $ - $ (236 ) $ 236 $ - $ -
Gain on change in fair value of warrants $ - $ - $ (1,167 ) $ (1,167 )
Stock compensation expense $ - $ - $ 57 $ 57 $ - $ - $ 57 $ 57
Warranty Expense $ - $ 9 $ - $ 9
Warranty expense $ - $ 46 $ - $ 46

Segment Assets $ 14,690 $ 6,498 $ - $ 21,188 $ 14,267 $ 7,088 $ - $ 21,355
Expenditures for segment assets $ (3 ) $ 89 $ - $ 86 $ 25 $ 65 $ - $ 90

F-10

Reportable Segment Financial Information
(thousands)
Three months ended June 28, 2020
Optex Systems
Richardson Applied Optics Center
Dallas Other
(non-allocated costs and intersegment eliminations) Consolidated
Total

Revenues from external customers $ 3,851 $ 1,998 $ - $ 5,849
Intersegment revenues - 421 (421 ) -
Total Revenue $ 3,851 $ 2,419 $ (421 ) $ 5,849

Interest expense $ - $ - $ 5 $ 5

Depreciation and Amortization $ 10 $ 51 $ - $ 61

Income before taxes $ 97 $ 592 $ (653 ) $ 36

Other significant noncash items:
Allocated home office expense $ (170 ) $ 170 $ - $ -
Loss on Change in Fair Value of Warrants $ - $ - $ 585 $ 585
Stock option compensation expense $ - $ - $ 63 $ 63
Warranty Expense $ - $ 22 $ - $ 22

Segment Assets $ 13,602 $ 6,522 $ - $ 20,124
Expenditures for segment assets $ 54 $ - $ - $ 54
Reportable Segment Financial Information
(thousands)
Nine months ended June 27, 2021
Optex Systems
Richardson Applied Optics Center
Dallas Other
(non-allocated costs and intersegment eliminations) Consolidated
Total

Revenues from external customers $ 8,958 $ 4,191 $ - $ 13,149
Intersegment revenues - 937 (937 ) -
Total Revenue $ 8,958 $ 5,128 $ (937 ) $ 13,149

Interest expense $ - $ - $ 9 $ 9

Depreciation and Amortization $ 31 $ 164 $ - $ 195

Income (loss) before taxes $ 351 $ (459 ) $ 1,845 $ 1,737

Other significant noncash items:
Allocated home office expense $ (530 ) $ 530 $ - $ -
Gain on change in fair value of warrants $ - $ - $ (2,025 ) $ (2,025 )
Stock compensation expense $ - $ - $ 171 $ 171
Warranty expense $ - $ 56 $ - $ 56

Segment Assets $ 14,690 $ 6,498 $ - $ 21,188
Expenditures for segment assets $ 17 $ 197 $ - $ 214
~~F-11~~
Reportable Segment Financial Information
(thousands) Reportable Segment Financial Information
(thousands)
Nine months ended June 28, 2020 As of and for the three months ended December 27, 2020
Optex Systems
Richardson Applied Optics Center
Dallas Other
(non-allocated costs and intersegment eliminations) Consolidated
Total Optex Systems
Richardson Applied Optics Center
Dallas Other
(non-allocated costs and intersegment eliminations) Consolidated
Total

Revenues from external customers $ 11,917 $ 6,765 $ - $ 18,682 $ 3,029 $ 1,442 $ - $ 4,471
Intersegment revenues - 1,202 (1,202 ) - - 366 (366 ) -
Total Revenue $ 11,917 $ 7,967 $ (1,202 ) $ 18,682 $ 3,029 $ 1,808 $ (366 ) $ 4,471

Interest expense $ - $ - $ 17 $ 17 $ - $ - $ 3 $ 3

Depreciation and Amortization $ 24 $ 161 $ - $ 185 $ 11 $ 52 $ - $ 63

Income before taxes $ 1,148 $ 1,098 $ (641 ) $ 1,605
Income (loss) before taxes $ 213 $ (77 ) $ 967 $ 1,103

Other significant noncash items:
Allocated home office expense $ (510 ) $ 510 $ - $ - $ (200 ) $ 200 $ - $ -
Loss on change in fair value of warrants $ - $ - $ 504 $ 504
Stock option compensation expense $ - $ - $ 120 $ 120
Warranty Expense $ - $ 81 $ - $ 81
Gain on change in fair value of warrants $ - $ - $ (1,027 ) $ (1,027 )
Stock compensation expense $ - $ - $ 57 $ 57
Warranty expense $ - $ 9 $ - $ 9

Segment Assets $ 13,602 $ 6,522 $ - $ 20,124 $ 13,985 $ 5,865 $ - $ 19,850
Expenditures for segment assets $ 100 $ 50 $ - $ 150 $ 20 $ 61 $ - $ 81

Note 4 - Commitments and Contingencies

Non-cancellable Operating Leases

Optex Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc., Richardson address and the Applied Optics Center Dallas address, as well as certain office equipment under non-cancellable operating leases.

The leased facility under Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of ~~space.~~space at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of ~~its Optex Systems, Richardson location~~the lease for eighty-six (86) months, commencing on April 1, 2021 and ending on May 31, 2028. The initial base rent is set at $25.3 thousand and escalates 3% ~~each year thereafter~~ on April 1 each ~~year.~~year thereafter. The initial term included 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately $~~$11.6~~11.3 thousand for additional Common Area Maintenance ~~(CAM)~~ fees and taxes (“CAM”), to be adjusted annually based on actual expenses incurred by the landlord.

The leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet of space at the premises. The ~~current~~previous lease term ~~will expire~~for this location expired on October 31, 2021. and ~~The~~the monthly base rent iswas $21.9 thousand through ~~October 31, 2021.~~ ~~Our obligations to make payments under~~ the ~~lease are secured by a $125,000 standby letter~~end of ~~credit.~~the lease. On January 11, 2021 the Company executed a first amendment extending the terms of ~~its current Applied Optics Center, Dallas location~~the lease for eighty-six (86) months, commencing on November 1, 2021 and ending on December 31, 2028. The initial base rent is set at ~~$23.6~~$23.6 thousand as of January 1, 2022 and escalates 2.75% ~~each year thereafter~~ on January 1 each ~~year.~~year thereafter. The initial term includes 2 months of rent abatement for November and December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing rental rate” or the then current base ~~rent~~rental rate. Our obligations to make payments under the lease are secured by a $125,000 standby letter of credit. The monthly rent includes approximately $~~$7.8~~7.9 thousand for additional CAM, to be adjusted annually based on actual expenses incurred by the landlord.

~~F-12~~F-11

~~The Company has one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease cost for the equipment is~~ ~~$1.5~~ ~~thousand per month from October 1, 2018 through December 31, 2021.~~
Optex Systems Holdings adopted the provisions of ASC Topic 842 “Leases” as of the fiscal year beginning on September 30, 2019. Optex Systems Holdings has two significant operating facilities leases and one equipment lease which extends beyond twelve months and fall under the guidance of ASC Topic 842. Adoption of ASC Topic 842 resulted in the balance sheet recognition of a right-of-use asset of ~~$1.8~~ ~~million and corresponding operating lease liabilities of approximately~~ ~~$1.9~~ ~~million as of September 30, 2019, which represented the present value of future lease payments for the term of the equipment lease and both segment facility leases and which assumed the exercise of a~~ ~~five-year renewal option at the Applied Optics Center as of November 1, 2021.~~ Execution of the new lease amendments for the Dallas and Richardson facilities on January 11, 2021 resulted in the balance sheet recognition of a right-of-use asset of $$3.7 million and corresponding operating lease liabilities of approximately $$3.7 million during the ~~nine~~twelve months ended ~~June 27,~~October 3, 2021.
The Company had one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease cost for the equipment was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November 18, 2021 for an additional 48 months at a cost of $1.2 thousand per month. Equipment for the lease has not yet been delivered due to part shortages. The lease effectivity date has been delayed by the supplier pending the receipt of the equipment by Optex.

As of ~~June 27, 2021,~~January 3, 2022, the remaining minimum lease and estimated CAM payments under the non-cancelable ~~office and~~ facility space leases are as follows:

Schedule of Non-cancellable Operating Leases Minimum Payments
~~Non-cancellable Operating Leases~~
Fiscal Year Facility
Lease
Payments Facility
Lease
Payments Total Lease Payments Total Variable CAM Estimate

Non-cancellable Operating Leases
(Thousands)

Optex Richardson Applied Optics Center Consolidated
Fiscal Year Facility
Lease
Payments Facility
Lease
Payments Total Lease Payments Total Variable CAM Estimate
2022 Base year lease 232 212 444 175
2023 Base year lease 317 288 605 235
2024 Base year lease 327 296 623 240
2025 Base year lease 336 305 641 245
2026 Base year lease 346 313 659 249
2027 Base year lease 357 322 679 254
2028 Base year lease 242 330 572 184
2029 Base year lease - 83 83 27
Total base lease payments 2,157 $ 2,149 4,306 $ 1,609
Imputed interest on lease payments ⁽¹⁾ (316 ) (341 ) (657 )
Total Operating Lease Liability⁽²⁾ $ 1,841 $ 1,808 $ 3,649

Right-of-use Asset⁽³⁾ $ 1,773 $ 1,758 $ 3,531

(Thousands)
Optex Richardson Applied Optics Center Office Equipment Consolidated
Fiscal Year Facility
Lease
Payments Facility
Lease
Payments Lease Payments Total Lease Payments Total Variable CAM Estimate
2021 Base year lease 76 66 5 147 58
2022 Base year lease 308 234 5 547 237
2023 Base year lease 317 288 605 242
2024 Base year lease 327 296 623 247
2025 Base year lease 336 305 641 252
2026 Base year lease 346 313 659 257
2027 Base year lease 357 322 679 262
2028 Base year lease 241 330 571 188
2029 Base year lease - 83 83 27
Total base lease payments 2,308 $ 2,237 $ 10 4,555 $ 1,770
Imputed interest on lease payments ⁽¹⁾ (363 ) (408 ) (1 ) (772 )
Total Operating Lease Liability⁽²⁾ $ 1,945 $ 1,829 $ 9 $ 3,783

Right-of-use Asset⁽³⁾ $ 1,889 $ 1,823 $ 9 $ 3,721
(1) Assumes a discount borrowing rate of 5.0% on the new lease amendments effective as of January 11, 2021 ~~and 7.5% on the remaining lease term for the Applied Optics Dallas facility through~~ ~~October 31, 2021~~.
(2) Includes $118 thousand of unamortized deferred rent.
(3) Short-term and Long-term portion of Operating Lease Liability is $~~$529~~579 thousand and $~~$3,254~~3,070 thousand, respectively.
~~(3)~~ ~~Includes~~ ~~$62~~ ~~thousand of unamortized deferred rent.~~

Total facilities rental and CAM expense for both facility lease agreements as of the three ~~and nine~~ months ended ~~June~~January 2, 2022 and December 27, ~~2021~~2020 was $~~$207~~209 thousand and $~~$569~~178 thousand, ~~respectively. Total facilities rental and CAM expense for both facility lease agreements as of the three and nine months ended June 28, 2020 was~~ ~~$187~~ ~~thousand and~~ ~~$541~~ ~~thousand, respectively.~~
~~F-13~~
~~Total office equipment rentals included in operating expenses was~~ $6 ~~thousand and~~ ~~$17~~ ~~thousand for the three and nine months ended June 27, 2021,~~ respectively. Total office equipment rentals included in operating expenses was $$74 ~~thousand~~ and $~~$19~~5 thousand for the three ~~and nine~~ months ended ~~June 28,~~January 2, 2022 and December 27, 2020, respectively.
F-12
Note 5 - Debt Financing

Credit Facility — PNC Bank (formerly BBVA, USA)

On April 16, 2020, the Company terminated its facility with Avidbank and entered into a new facility with BBVA USA.

On April 16, 2020, Optex Systems Holdings, Inc. and its subsidiary, Optex Systems, Inc. ~~(and with the Company,~~(collectively, the “Borrower”) entered into a line of credit facility (the “Facility”) with BBVA, USA. In June 2021, PNC Bank completed its acquisition of BBVA, USA and the bank name changed to PNC Bank (“~~BBVA”~~PNC”). The substantive terms are as follows:

● The principal amount of the Facility is $$2.25 million. The Facility matures on April 15, 2022. The interest rate is variable based on ~~BBVA’s~~PNC’s Prime Rate plus a margin of -~~-0.250%~~0.250%, initially set at 3% at loan origination, and all accrued and unpaid interest is payable monthly in arrears starting on May 15, 2020; and the principal amount is due in full with all accrued and unpaid interest and any other fees on April 15, 2022.

● There are commercially standard covenants including, but not limited to, covenants regarding maintenance of corporate existence, not incurring other indebtedness except trade debt, not changing more than 25% stock ownership of Borrower, and a Fixed Charge Coverage Ratio of 1.25:1, with the Fixed Charge Coverage Ratio defined as (earnings before taxes, amortization, depreciation, amortization and rent expense less cash taxes, distribution, dividends and fair value of warrants) divided by (current maturities on long term debt plus interest expense plus rent expense). As of ~~June 27, 2021,~~January 2, 2022, the Company was in compliance with the covenants.

● The Facility contains commercially standard events of default including, but not limited to, not making payments when due; incurring a judgment of $$10,000 or more not covered by insurance; not maintaining collateral and the like.

● The Facility is secured by a first lien on all of the assets of Borrower.

The outstanding balance on the facility was zero as of January 2, 2022 and October 3, 2021. For the three months ended January 2, 2022 and December 27, 2020, the total interest expense against the outstanding line of credit balance was 0 and $~~377~~3 thousand, ~~as of June 27, 2021 and September 27, 2020.~~respectively.
Note 6-Warrant Liabilities

On August 26, 2016, Optex Systems Holdings, Inc. issued 4,323,135 warrants to new shareholders and the underwriter, in connection with a public share offering. The warrants ~~entitle~~entitled the holder to purchase one share of our common stock at an exercise price equal to $$1.50 per share at any time on or after August 26, 2016 ~~(the “Initial Exercise Date”)~~ and on or prior to the close of business on August 26, 2021 (the “Termination Date”). The Company determined that these warrants ~~are~~were free standing financial instruments that ~~are~~were legally detachable and separately exercisable from the common stock included in the public share offering. Management also determined that the warrants ~~are~~were puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480 “Distinguishing Liabilities from Equity”. The Company ~~has~~had no plans to consummate a fundamental transaction and ~~does~~did not believe a fundamental transaction iswas likely to occur during the remaining term of the ~~outstanding~~ warrants. In accordance with the accounting guidance, the outstanding warrants ~~are~~were recognized as a warrant liability on the balance sheet, and ~~are~~were measured at their inception date fair value and subsequently re-measured at each reporting period with changes ~~being~~ recorded as a component of other income in the consolidated ~~statements~~statement of ~~operations.~~income. The warrants expired on the Termination Date in accordance with their terms; therefore, no warrants were outstanding as of October 3, 2021 or during the three months ended January 2, 2022.

~~F-14~~F-13

The fair value of the warrant liabilities presented below were measured using a Black Scholes Merton (BSM) valuation model. Significant inputs into the respective model at the reporting period measurement dates are as follows:
Schedule of ~~Fair Value~~ Warrant Liabilities Assumptions Used
Valuation Assumptions
Period ended
September 29, 2019

Period ended
September 27, 2020

Period ended
June 28, 2020

Period ended
June 27, 2021

Period
ended
September 27,
2020

Period
ended
December 27,
2020

Exercise Price ⁽¹⁾ $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
Warrant Expiration Date ⁽¹⁾ 8/26/2021 8/26/2021 8/26/2021 8/26/2021 8/26/2021 8/26/2021
Stock Price ⁽²⁾ $ 1.56 $ 1.96 $ 1.90 $ 1.53 $ 1.96 $ 1.73
Interest Rate (annual) ⁽³⁾ 1.63 % 0.12 % 0.17 % 0.06 % 0.12 % 0.11 %
Volatility (annual) 53.66 % 51.67 % 52.82 % 44.35 % 51.67 % 44.77 %
Time to Maturity (Years) 1.9 0.9 1.2 0.2 0.9 0.7
Calculated fair value per share $ 0.49 $ 0.62 $ 0.62 $ 0.13 $ 0.62 $ 0.37

(1) Based on the terms provided in the warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26, 2016.
(2) Based on the trading value of common stock of Optex Systems Holdings, Inc. as of each presented period ~~ended~~end date.
(3) Interest rate for U.S. Treasury Bonds as each presented period ended date, as published by the U.S. Federal Reserve.
The warrants outstanding and fair values at each of the respective valuation dates are summarized below:
Summary of Warrants Outstanding and Fair Values
Warrant Liability
Warrants
Outstanding

Fair Value
per Share

Fair Value
(000’s)

Fair Value as of period ended 9/29/2019 4,125,200 $ 0.49 $ 2,036
Loss on Change in Fair Value of Warrant Liability 504
Fair Value as of period ended 6/28/2020 4,125,200 $ 0.62 2,540

Fair Value as of period ended 9/27/2020 4,125,200 $ 0.62 $ 2,544
Gain on Change in Fair Value of Warrant Liability (2,025 )
Fair Value as of period ended 6/27/2021 4,125,200 $ 0.13 $ 519
Warrant Liability
Warrants
Outstanding

Fair Value
per Share

Fair Value
(000’s)

Fair Value as of period ended 9/27/2020 4,125,200 $ 0.62 $ 2,544
Gain on Change in Fair Value of Warrant Liability (1,027 )
Fair Value as of period ended 12/27/2020 4,125,200 $ 0.37 1,517

Fair Value as of period ended 10/3/2021 - $ - $ -
Gain on Change in Fair Value of Warrant Liability -
Fair Value as of period ended 1/2/2022 - $ - $ -

During the three ~~and nine~~ months ended ~~June~~January 2, 2022 and December 27, ~~2021 and June 28,~~ 2020, there were no0 new issues or exercises of existing warrants.

The warrant liabilities ~~are~~were considered Level 3 liabilities on the fair value hierarchy as the determination of fair value ~~includes~~included various assumptions about future activities and the Company’s stock prices and historical volatility as inputs.

Note 7-Stock Based Compensation

Stock Options issued to Employees, Officers and Directors

The Optex Systems Holdings 2009 Stock Option Plan provides for the issuance of up to 75,000 shares to the Company’s officers, directors, employees and to independent contractors who provide services to Optex Systems Holdings as either incentive or non-statutory stock options determined at the time of grant. There were 0no new grants of stock options during the three months ended ~~June 27, 2021.~~January 2, 2022. As of ~~June 27, 2021,~~January 2, 2022, there are zero stock options outstanding.

~~F-15~~F-14

Restricted Stock and Restricted Stock Units issued to Officers and Employees

The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units, with the latter granted under the Company’s 2016 Restricted Stock Unit Plan:

Schedule of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted

Restricted
Stock Units

Weighted
Average
Grant Date
Fair Value

Restricted
Shares

Weighted
Average
Grant Date
Fair Value
Restricted Stock Units Weighted Average Grant Date Fair Value Restricted Shares Weighted Average Grant Date Fair Value
Outstanding at September 29, 2019 216,500 $ 1.29 — —
Granted 50,000 $ 2.13 300,000 $ 1.75
Vested (84,500 ) $ 1.25 — —
Forfeited - — — —
Outstanding at September 27, 2020 182,000 $ 1.54 300,000 $ 1.75 182,000 $ 1.54 300,000 1.75
Granted — — — — — — — —
Vested (83,000 ) $ 1.49 (60,000 ) $ 1.75 (83,000 ) $ 1.49 (60,000 ) $ 1.75
Forfeited — — — — — — — —
Outstanding at June 27, 2021 99,000 $ 1.59 240,000 $ 1.75
Outstanding at October 3, 2021 99,000 $ 1.59 240,000 $ 1.75
Granted — — — —
Vested (33,000 ) 1.73 (60,000 ) 1.75
Forfeited — — — —
Outstanding at January 2, 2022 66,000 $ 1.52 180,000 $ 1.75
On January 2, 2019, the Company granted 150,000 and 50,000 restricted stock units with a January 2, 2019 grant date to Danny Schoening and Karen Hawkins, respectively, vesting as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34% in year one, and 33% each year thereafter. The stock price at grant date was $1.32 per share. Effective December 1, 2021, the vesting terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Events – D. Schoening Employment Agreement,” which disclosure is incorporated by reference herein. The Company amortizes the grant date fair value of $264 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019. As of January 2, 2022, there was no unrecognized compensation cost relating to this award.
The Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021. The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,” that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.
As of the December 1, 2021 modification date related to the third and final vesting date of the 49,500 unvested restricted stock units held by Danny Schoening, there was no change in the fair value of the modified award as compared to the original award immediately prior to the modification date. The restricted stock units were certain to vest on January 1, 2022, but due to the modification, they are less certain to vest, contingent on a “change in control date” occurring prior to March 13, 2023. As of the modification date, there was $5 thousand of unrecognized compensation cost associated with the original award. As a matter of expediency, the unrecognized compensation expense as of the modification date was fully expensed through January 2, 2022. There is no additional compensation expense associated with the modification of the restricted stock unit agreement.
F-15

On February 17, 2020, the Company granted 50,000 restricted stock units to Bill Bates, General Manager of the Applied Optics Center. The restricted stock units vest as of January 1 each year subsequent to the grant date over a three-year period at a rate of 3434%% in year one, and 3333%% each year thereafter. The stock price at grant date was $2.13 per share. The Company will amortize the grant date fair ~~market~~ value of $107 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February 17, 2020.

On January ~~7, 2020, the Company issued~~ ~~59,447~~ ~~common shares to one director and two officers, net of tax withholding of $~~54 ~~thousand, in settlement of~~ ~~84,500~~ ~~restricted stock units which vested on January 1, 2020.~~
~~On January~~ 2, 2021, the Company issued 58,392 common shares to directors and officers, net of tax withholding of $4443 thousand, in settlement of 83,000 restricted stock units which vested on January 1, 2021.
On January 4, 2022, the Company issued 23,216 common shares to directors and officers, net of tax withholding of $19 thousand, in settlement of 33,000 restricted stock units which vested on January 1, 2022.

On April 30, 2020, the Optex Systems Holdings, Inc. Board of Directors held a meeting and voted to increase the annual board compensation for the three independent directors from $22,000 to $36,000 with an effective date of January 1, 2020, in addition to granting 100,000 restricted shares to each independent director which shall vest at a rate of 20%20% per year (20,000 shares) each January 1^st, over the next five years,, through January 1, 2025. The total market value for the 300,000 shares is $525 thousand based on the stock price of $1.75 as of April 30, 2020. The Company will amortize the grant date fair ~~market~~ value to stock compensation expense on a straight-line basis across the five-year vesting period beginning on April 30, 2020. On January 1, 2021 and January 1, 2022, 60,000 of the restricted director shares vested.

Stock Based Compensation Expense

Equity compensation is amortized based on a straight-line basis across the vesting or service period as applicable. The recorded compensation costs for options and shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized in the table below:

Schedule of Unrecognized Compensation Costs
Stock Compensation
(thousands)
Recognized Compensation Expense
Unrecognized Compensation
Expense

Three months ended Nine months ended As of period ended
June 27, 2021 June 28, 2020 June 27, 2021 June 28, 2020 June 27, 2021 September 27,
2020

Restricted Shares $ 26 $ 31 $ 79 $ 31 $ 368 $                    446
Restricted Stock Units 31 32 92 89 96 188
Total Stock Compensation $ 57 $ 63 $ 171 $ 120 $ 464 $ 634
~~F-16~~
Stock Compensation
(thousands)
Recognized Compensation Expense Unrecognized Compensation Expense
Three months ended As of period ended
January 2, 2022 December 27, 2020 January 2, 2022 October 3, 2021

Restricted Shares $ 26 $ 26 $ 315 $ 341
Restricted Stock Units 31 31 35 66
Total Stock Compensation $ 57 $ 57 $ 350 $ 407
Note 8 Stockholders’ Equity

Dividends

As of the ~~nine~~three months ended ~~June 27, 2021~~January 2, 2022 and the twelve months ended ~~September 27, 2020,~~October 3, 2021, there were no0 declared or outstanding dividends payable.

F-16
Common stock

On June 8, 2020 the Company announced authorization ~~for~~of a $1 million stock repurchase program. As of September 27, 2020 there were 105,733 shares held in treasury purchased under the June 2020 stock repurchase program. The Company purchased a total of 519,266 shares against the program through April 2021, which were subsequently cancelled in June 2021.
On September 22, 2021 the Company announced authorization of an additional $1 million stock repurchase program. The shares authorized to be repurchased under the ~~new~~ repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. ~~During the nine months ended June 27,~~As of October 3, 2021, there were ~~413,533~~35,555 shares held in treasury purchased under the September 2021 stock repurchase program.
During the three months ended January 2, 2022, there were 37,238 common shares repurchased ~~through~~under the program at a cost of $~~800~~74 thousand. ~~As of June 27, 2021, the Company has repurchased~~ ~~519,266~~ ~~shares at a total cost of $1.0~~ ~~million against the stock repurchase plan, with a remaining balance of zero.~~ The shares have been returned to the ~~treasury and were cancelled on June 14, 2021.~~Treasury. A summary of the purchases under the ~~plan~~program follows:

~~(Thousands, except share and price per share data)~~
Summary of Purchases Under Plan
Fiscal Period
Total number of shares
purchased
Total purchase cost
Average price
paid per share
(with commission)

Maximum dollar
value that may
yet be purchased
under the plan
Total number of shares purchased Total purchase cost Average price paid per share (with commission) Maximum dollar value that may yet be purchased under the plan
May 24, 2020 through June 28, 2020 34,243 $ 63 $ 1.84 $ 937
June 29, 2020 through July 26, 2020 6,806 13 1.89 924
July 27, 2020 through August 23, 2020 10,688 21 1.96 903
August 23, 2020 through September 27, 2020 53,996 103 1.90 800
Total shares repurchases as of September 27, 2020 105,733 $ 200 1.89 800
-
September 28, 2020 through October 25, 2020 20,948 42 2.01 758 20,948 42 2.01 758
October 26, 2020 through November 22, 2020 129,245 265 2.05 493 129,245 265 2.05 493
November 23, 2020 through December 27, 2020 58,399 109 1.86 384 58,399 109 1.86 384
December 28, 2020 through January 24, 2021 40,362 73 1.80 312 40,362 73 1.80 311
January 25, 2021 through February 21, 2021 52,180 101 1.94 211 52,180 101 1.94 210
February 22, 2021 through March 28, 2021 73,800 140 1.90 70 73,800 140 1.90 70
March 29, 2021 through April 19, 2021 38,599 70 1.82 - 38,599 70 1.82 -
Total shares repurchased as of June 27, 2021 519,266 $ 1,000 $ 1.93 $ -
September 23, 2021 through October 1, 2021 35,555 $ 69 $ 1.93 $ 931

Total shares repurchased for year ended October 3, 2021 449,088 $ 869 $ 1.93 $ -

October 4, 2021 through October 31, 2021 18,265 37 2.01 894
November 1, 2021 through November 28, 2021 4,415 9 2.04 885
November 29, 2021 through January 2, 2022 14,558 28 1.93 857
Total shares repurchased for three months ended January 2, 2022 37,238 $ 74 $ 1.98 $ 857

As of ~~September 27, 2020,~~October 3, 2021, and ~~June 27, 2021,~~January 2, 2022, the total outstanding common shares were ~~8,690,136~~8,488,149 and ~~8,334,995~~8,474,127, respectively. As of October 3, 2021, and January 2, 2022, there were 35,555 and 72,793 shares held in Treasury, respectively.

As of ~~September 27, 2020,~~October 3, 2021, and ~~June 27, 2021,~~January 2, 2022, the total issued common shares were ~~8,795,869~~8,523,704 and ~~8,334,995~~8,546,920, respectively.

Note 9 Subsequent Events

~~July 2021 Ransomware Attack~~
On July 13, 2021, the Company experienced a ransomware attack. The Company isolated the source of the attack and restored normal operations with no material day-to-day impact to the Company or the Company’s ability to access its data. Sensitive data may have been breached, and the Company’s investigation of the attack is ongoing with assistance from outside experts and the Company is also working with the appropriate US Government officials.None.

~~On August 10, 2021, the Company issued~~ ~~148,300~~ ~~common shares to an investor on the excercise of warrants at $1.50~~ ~~per share. The total amount of the transaction was $222,450~~.
F-17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis ~~or Plan~~of Financial Condition and Results of Operations
~~This MD&A~~ (MD&A) is intended to supplement and complement our audited condensed consolidated financial statements and notes thereto for the fiscal year ended ~~September 27, 2020~~October 3, 2021 and our ~~reviewed but~~ unaudited consolidated financial statements and ~~footnotes~~notes thereto for the quarter ended ~~June 27, 2021,~~January 2, 2022, 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 ~~measures are~~measure is used in this MD&A, ~~they are~~it is clearly identified as a non-GAAP ~~measures~~measure and reconciled to the most closely corresponding GAAP measure.

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Special cautionary statement concerning forward-looking statements” and “Risk factors” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not significantly affected by inflation.
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q, in particular the MD&A, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Quarterly Report on Form 10-Q and other reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”), in our press releases, presentations to securities analysts or investors, or in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements.
These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding growth strategy; product and development programs; financial performance (including revenue and net income); backlog; follow-on orders; the impact of the COVID-19 pandemic; supply chain challenges; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the defense industry.
We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Some of these risks and uncertainties are identified in “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K and you are urged to review those sections. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.
We do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.
3

Background

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 today’s revenue is related to the resale of products substantially manufactured by others. In this case, the product would likely be a simple replacement part of a larger system previously produced by Optex Systems, Inc. (Delaware).

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

By way of background, the Federal Acquisition Regulation is the principal set of regulations that govern the acquisition process of government agencies and contracts with the U.S. government. In general, parts of the Federal Acquisition Regulation are incorporated into government solicitations and contracts by reference as terms and conditions effecting contract awards and pricing solicitations.

Many of our contracts are prime or subcontracted directly with the Federal government and, as such, are subject to Federal Acquisition Regulation Subpart 49.5, “Contract Termination Clauses” and more specifically Federal Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the Government (Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for default”. These clauses are standard clauses on our prime military contracts and generally apply to us as subcontractors. It has been our experience that the termination for convenience is rarely invoked, except where it is mutually beneficial for both parties. We are currently not aware of any pending terminations for convenience or for default on our existing contracts.
3

In the event a termination for convenience were to occur, Federal Acquisition Regulation clause 52.249-2 provides for full recovery of all contractual costs and profits reasonably occurred up to and as a result of the terminated contract. In the event a termination for default were to occur, we could be liable for any excess cost incurred by the government to acquire supplies from another supplier similar to those terminated from us. We would not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Company as defined by Federal Acquisition Regulation clause 52.249-8.

In addition, some of our contracts allow for government contract financing in the form of contract progress payments pursuant to Federal Acquisition Regulation 52.232-16, “Progress Payments”. As a small business, and subject to certain limitations, this clause provides for government payment of up to 90% of incurred program costs prior to product delivery. To the extent our contracts allow for progress payments, we intend to utilize this benefit, thereby minimizing the working capital impact on Optex Systems Holdings for materials and labor required to complete the contracts.

We may be at risk as a result of the current COVID-19 pandemic. Risks that could affect our business include the duration and scope of the COVID-19 pandemic and the impact on the demand for our products; actions by governments, businesses and individuals taken in response to the pandemic; the length of time of the ~~COVID-19~~ pandemic and the possibility of its reoccurrence; the timing required to develop and implement effective ~~treatments and to distribute effective vaccines to~~treatments; the ~~general population;~~success of global vaccination efforts; the eventual impact of the pandemic and actions taken in response to the pandemic on global and regional economies; and the pace of recovery when the ~~COVID-19~~ pandemic subsides.

~~Due~~Beginning in April 2020 through October 3, 2021, we experienced a significant reduction in new orders and ending customer backlog in our Optex Richardson segment, resulting in an overall decrease in backlog of 40% between September 29, 2019 and October 3, 2021. We attribute the lower orders to ~~the~~a combination of factors including a COVID-19 driven slow-down of contract awards for both U.S. military sales and foreign military sales (FMS), combined with significant ~~level of uncertainty surrounding~~shifting in defense spending budget allocations in US military sales and FMS away from Army ground system vehicles toward other military agency applications. In addition, the pandemic ~~and its impact to our customers and~~has caused several program delays throughout the defense supply chain ~~we are unable to ascertain~~as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supply chain issues.
4
While the ~~impact further delays~~Applied Optics Center segment experienced a significant decline in ~~contract awards and customer~~ orders ~~may have on our total fiscal year 2021 revenues. We have realized a reduction of 29.6% in revenue volume~~ during the ~~first nine months~~second half of fiscal year 2020, the segment saw a sizable increase in new orders during the fiscal year ended October 3, 2021 as a result of increased military spending in Army infantry optical equipment, a larger customer base and higher customer demand for commercial optical assemblies. As of October 3, 2021, the Applied Optics Center segment backlog had increased by 153% as compared to the ~~first nine months~~level on September 29, 2019. As a result of this significant shift in orders and backlog between segments, we anticipate corresponding shifts in revenue during the 2022 fiscal year, ~~2020. We have experienced a recent increase in proposal requests,~~with revenue from the Optex Richardson segment decreasing, and ~~anticipate an increase in orders over~~revenue from the next six to twelve months, however the timing and nature of new orders in the near term cannot be determined. Any continued delays in customer orders over the next three months could further impact our total fiscal year 2021 revenue and profitability during the last quarter. We have implemented several cost-saving initiatives during the first and second quarters, including reductions in force, employee compensation and cuts in discretionary spending. We are reviewing additional cost reductions during the next sixty to ninety days as required to further minimize the impact of any sustained delays in customer orders beyond the three quarters of fiscal year 2021.
Optex Systems Holdings, Inc. is defined as essential critical infrastructure as a defense contractor under the guidance of the federal, state and local authorities for both our Optex Systems (Richardson, TX), and Applied Optics Center (Dallas, TX) operating segments. As such, the Company continued to remain open during the COVID-19 shelter in place orders and closures. To date, we have experienced minimal workforce disruption as a result of the pandemic.segment increasing.

Recent Events

D. Schoening Employment ~~Agreements~~Agreement

WeThe Company entered into an ~~updated~~amended and restated employment agreement with Danny Schoening dated ~~October 15, 2020.~~December 1, 2021. The term of the agreement commenced as of ~~October 15, 2020~~December 1, 2021 and the current term ends on November 30, ~~2021.~~2022. Mr. Schoening’s base salary ~~continues to be $284,645~~is $296,031 per annum. Mr. Schoening will be eligible for a performance bonus ~~which is~~ based upon a rolling three-year operating plan adopted by ~~our~~the Company’s Board of ~~Directors.~~Directors (the “Board”). The bonus will be ~~tied to~~based on operating metrics decided annually by our ~~board against the three-year plan,~~Board and ~~such metrics will be decided annually and tie~~tied to ~~the~~such three-year plan. The target bonus equates to 30% of Mr. Schoening’s base salary. Our ~~board~~Board will have discretion in good faith to alter the performance bonus upward or downward by 20% ~~based on its good faith discretion.~~.
The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,” that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which No “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.

The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by usthe Company for cause (including conviction of a felony, commission of fraudulent acts, willful misconduct by Mr. Schoening, continued failure to perform duties after written notice, violation of securities laws and breach of the employment agreement), (iii) termination by the Company without cause ~~by us~~ and (iv) termination by Mr. Schoening for good reason (including breach by usthe Company of its obligations under the agreement, the requirement for Mr. Schoening to move more than 100 miles away for his employment without consent, and merger or consolidation that results in more than 66% of the combined voting power of the Company’s then outstanding securities or those of ~~us or our~~its successor changing ownership or a sale of all or substantially all of ~~our~~its assets, without the surviving entity assuming the obligations under the agreement). For a termination by usthe Company for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening ~~shall~~will be paid salary and for a termination due to his death or permanent disability, also any bonus earned through the date of termination. For a termination by usthe Company without cause or by Mr. Schoening with good reason, Mr. Schoening ~~shall~~will also be paid ~~nine~~six months’ base salary in ~~effect.~~effect and, if such termination occurs prior to a change of control, Mr. Schoening will not forfeit the unvested RSUs until and unless the change of control does not occur by March 13, 2023.

45
On December 15, 2020, the Company’s Board of Directors approved executive bonuses for Danny Schoening, CEO, of $48 thousand which was paid in January, 2021, and Karen Hawkins, CFO, of $37 thousand which was paid in December 2020.
On February 1, 2021, the employment agreement for Karen Hawkins, CFO, auto-renewed for an additional 18-month period, expiring on June 30, 2022. The contract automatically renews for subsequent 18-month periods unless Ms. Hawkins or the Company give notice of termination at least 90 days before the end of the term then in effect.
~~Board Changes~~Recent Stock Repurchases

On April 30, 2020, the Optex Systems Holdings, Inc. Board of Directors held a meeting and voted to increase the annual board compensation for the three independent directors from $22,000 to $36,000 with an effective date of January 1, 2020, in addition to granting 100,000 restricted shares to each independent director which shall vest at a rate of 20% per year (20,000 shares) each January 1st, over the next five years, through January 1, 2025. The total market value for the 300,000 shares is $525 thousand based on the stock price of $1.75 as of April 30, 2020. On January 1,September 22, 2021, ~~60,000 of the restricted shares were vested.~~
~~Stock & Warrant Repurchases~~
~~On June 8, 2020~~ the Company announced authorization ~~for~~of a $1 million stock repurchase program. The shares authorized to be repurchased under ~~the new~~this repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. During the ~~year~~three months ended ~~September 27, 2020, there were 105,733~~January 2, 2022, 37,238 common shares were repurchased ~~through~~under the September 2021 repurchase program at aan aggregate cost of ~~$200 thousand. During the nine months ended June 27, 2021, there were 413,533 common shares repurchased through the program at a cost of $800~~$74 thousand. As of ~~June 27,~~January 2, 2022, 72,793 shares repurchased under the September 2021 ~~the Company has repurchased 519,266 shares at a total cost of $1.0 million against the~~ stock repurchase ~~plan, with a remaining balance of zero. The shares have been returned to the Treasury and subsequently cancelled on June 14, 2021.~~program were held in Treasury.
~~July 2021 Ransomware Attack~~
On July 13, 2021, Optex Systems Holdings, Inc. (the “Company”) experienced a ransomware attack. The Company isolated the source of the attack and restored normal operations with no material day-to-day impact to the Company or the Company’s ability to access its data. Sensitive data may have been breached, and the Company’s investigation of the attack is ongoing with assistance from outside experts and the Company is also working with the appropriate US Government officials.
~~Recent Orders~~
● On November 12, 2019, the Company announced a multi-year Indefinite Delivery Indefinite Quantity (IDIQ) award from Defense Logistics Agency Land and Maritime for periscopes for up to $2.3 Million over a five-year period.
● On December 3, 2019 the Company announced a shared award for a maximum of $35 Million for Improved Commander Weapon System (ICWS) periscopes under a three-year Indefinite Delivery - Indefinite Quantity (IDIQ) contract with two additional optional years. Optex and another recipient have been awarded this shared award from Defense Logistics Agency, Land and Maritime. Each company’s portion of the award will depend on price and performance over the ordering periods.
5
● On January 22, 2020, the Company announced it has been awarded a $1.1 Million order as part of a multi-year strategic supplier agreement with a domestic manufacturer of premium optical devices. The products will be manufactured at the Applied Optics Center (AOC) Division of Optex Systems, Inc.
● On January 27, 2020, the Company announced a multi-year Indefinite Delivery Indefinite Quantity (IDIQ) award from Defense Logistics Agency Land and Maritime for periscopes for up to $3.6 million over a five-year period.
● On February 18, 2020, the Company announced a multi-year Indefinite Delivery Indefinite Quantity (IDIQ) award from Defense Logistics Agency Land and Maritime for periscopes for up to $9.2 million over a five-year period.
● ~~On August 3, 2020, the Company announced a $2.0 Million order from a U. S. prime contractor for optical subassemblies for shipments starting in 2021.~~
● On January 11, 2021, the Company announced a contract for Laser Protected Periscopes for a base period of three years plus two one-year option years, not to exceed $14.4 million pursuant to an Indefinite Delivery - Indefinite Quantity (IDIQ) contract.
● ~~On August 3, 2021, the Company announced a contract award of $8.4 million as part of a twenty-four-month purchase order for laser filters manufactured at the (AOC) Division of Optex Systems, Inc.~~

Results of Operations

Non-GAAP Adjusted EBITDA

We use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the performance of our business as “net income” includes the significant impact of noncash valuation gains and losses on warrant liabilities, noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest expenses and federal income taxes. We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because it permits period-over-period comparisons of our ongoing core operations before the excluded ~~items.~~items, which we do not consider relevant to our operations. Adjusted EBITDA is a financial measure not required by, or presented in accordance with, ~~GAAP.~~U.S. generally accepted accounting principles (“GAAP”).

Adjusted EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative measure.

The ~~tables~~table below ~~summarize~~summarizes our ~~three and nine-month~~three-month operating results for the periods ended ~~June~~January 2, 2022 and December 27, ~~2021 and June 28,~~ 2020, 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 ~~have a “complete picture” of~~evaluate our overall performance.

(Thousands)
Three months ended Nine months ended
June 27, 2021 June 28, 2020 June 27, 2021 June 28, 2020

Net Income (Loss) (GAAP) $ 1,374 $ (95 ) $ 1,859 $ 1,170
Add:
(Gain) Loss on Change in Fair Value of Warrants (1,167 ) 585 (2,025 ) 504
Federal Income Tax (Benefit) Expense (154 ) 131 (122 ) 435
Depreciation 67 61 195 185
Stock Compensation 57 63 171 120
Interest Expense 4 5 9 17
Adjusted EBITDA - Non GAAP $ 181 $ 750 $ 87 $ 2,431
6
Three months ended
January 2, 2022 December 27, 2020

Net Income - (GAAP) $ 29 $ 1,087
Add:
Gain on Change in Fair Value of Warrants - (1,027 )
Federal Income Tax (Benefit) Expense (14 ) 16
Depreciation 72 63
Stock Compensation 57 57
Interest Expense - 3
Adjusted EBITDA – Non-GAAP $ 144 $ 199

Our ~~adjusted EBITDA~~net income decreased by $1.1 million to ~~$0.2~~$0.0 million ~~during~~for the three months ended ~~June 27, 2021~~January 2, 2022, as compared to ~~$0.7~~$1.1 million ~~during~~for the three months ended ~~June 28,~~December 27, 2020. ~~Adjusted~~Our adjusted EBITDA ~~for the nine-month period ended June 27, 2021~~ decreased by $0.1 million to $0.1 million ~~from $2.4~~for the three months ended January 2, 2022, as compared to $0.2 million infor the ~~prior year nine-month period.~~three months ended December 27, 2020. The decrease in the ~~three and nine-month periods~~three-month period is primarily driven by lower revenue and ~~gross margin across both~~ operating ~~segments.~~profit in the Optex Richardson segment as compared to the prior year. Operating segment performance is discussed in greater detail throughout the following sections.

6
During the three months ended ~~June~~January 2, 2022, we did not recognize either a gain or a loss on the change in fair value of warrants, as the warrants had expired on August 26, 2021 in accordance with their terms. By comparison, during the three months ended December 27, ~~2021,~~2020, we recognized a gain on the change in fair value of warrants of $1.2 million as compared to a loss of $0.6 million in the prior year three-month period. During the nine months ended June 27, 2021, we recognized a gain on the change in fair value of warrants of $2.0 million as compared to a loss of $0.5 million in the prior year nine-month period.($1.0) million. As this iswas a non-cash ~~(gain) loss~~gain driven by ~~the current~~then-current fair market value of our outstanding warrants and unrelated to our core business operating performance, the change in fair value losses and gains have historically been excluded from our adjusted EBITDA calculations presented above. Further discussion regarding the changes in fair value of the warrants and the related warrant liability can be found ~~under “Other (Expense) Income” in the three months comparative narratives of this report, as well as~~ in Item 1, “Consolidated Financial Statements, Note 6 - Warrant Liabilities”.

Segment Information

We have presented the operating results by segment to provide investors with an additional tool to evaluate our operating results and to have a better understanding of the overall performance of each business ~~segment and its ability to perform in subsequent periods.~~segment. Management of Optex Systems Holdings uses the selected financial measures by segment internally to evaluate its ongoing segment operations and to allocate resources within the organization accordingly. Segments are determined based on differences in products, location, internal reporting and how operational decisions are made. Management has determined that the Optex Systems, Richardson plant and the Applied Optics Center, Dallas plant are separately managed, organized, and internally reported as separate business segments. The table below provides a summary of selective statement of operations data by operating segment for the three ~~and nine~~ months ended ~~June~~January 2, 2022 and December 27, ~~2021 and June 28,~~ 2020 reconciled to the Condensed Consolidated Results of Operations as presented in Item 1, “Condensed Consolidated Financial Statements.”

Results of Operations Selective Financial Info
(Thousands)

Three months ended
June 27, 2021 June 28, 2020

Optex
Richardson

Applied Optics Center
Dallas

Other
(non-allocated costs and eliminations)
Consolidated
Optex
Richardson

Applied Optics Center
Dallas

Other
(non-allocated costs and eliminations)
Consolidated

Revenue from External Customers $ 3,126 $ 1,307 $ - $ 4,433 $ 3,851 $ 1,998 $ - $ 5,849
Intersegment Revenues - 41 (41 ) - - 421 (421 ) -
Total Segment Revenue 3,126 1,348 (41 ) 4,433 3,851 2,419 (421 ) 5,849

Total Cost of Sales 2,436 1,292 (41 ) 3,687 3,271 1,518 (421 ) 4,368

Gross Margin 690 56 - 746 580 901 - 1,481
Gross Margin % 22.1 % 4.2 % - 16.8 % 15.1 % 37.2 % - 25.3 %

General and Administrative Expense 539 93 57 689 653 139 63 855
Segment Allocated G&A Expense (177 ) 177 - - (170 ) 170 - -
Net General & Administrative Expense 362 270 57 689 483 309 63 855

Operating Income (Loss) 328 (214 ) (57 ) 57 97 592 (63 ) 626
Operating Income (Loss) % 10.5 % (15.9 %) - 1.3 % 2.5 % 24.5 % - 10.7 %

(Loss) Gain on Change in Fair Value of Warrants - - 1,167 1,167 - - (585 ) (585 )
Interest Expense - - (4 ) (4 ) - - (5 ) (5 )

Net Income (Loss) before taxes $ 328 $ (214 ) $ 1,106 $ 1,220 $ 97 $ 592 $ (653 ) $ 36
Net Income (Loss) % 10.5 % (15.9 %) - 27.5 % 2.5 % 24.5 % - 0.6 %
7
Nine months ended Three months ended
June 27, 2021 June 28, 2020 January 2, 2022 December 27, 2020

Optex
Richardson

Applied Optics Center
Dallas

Other
(non-allocated costs and eliminations)
Consolidated
Optex
Richardson

Applied Optics Center
Dallas

Other
(non-allocated costs and eliminations)
Consolidated
Optex
Richardson
Applied Optics Center Dallas Other (non-allocated costs and eliminations) Consolidated Optex Richardson Applied Optics Center Dallas Other (non-allocated costs and eliminations) Consolidated

Revenue from External Customers $ 8,958 $ 4,191 $ - $ 13,149 $ 11,917 $ 6,765 $ - $ 18,682 $ 1,857 $ 2,483 $ - $ 4,340 $ 3,029 $ 1,442 $ - $ 4,471
Intersegment Revenues - 937 (937 ) - - 1,202 (1,202 ) - - 180 (180 ) - - 366 (366 ) -
Total Segment Revenue 8,958 5,128 (937 ) 13,149 11,917 7,967 (1,202 ) 18,682 1,857 2,663 (180 ) 4,340 3,029 1,808 (366 ) 4,471

Total Cost of Sales 7,438 4,689 (937 ) 11,190 9,390 5,926 (1,202 ) 14,114 1,667 2,030 (180 ) 3,517 2,443 1,559 (366 ) 3,636

Gross Margin 1,520 439 - 1,959 2,527 2,041 - 4,568 190 633 - 823 586 249 - 835
Gross Margin % 17.0 % 8.6 % - 14.9 % 21.2 % 25.6 % - 24.5 % 10.2 % 23.8 % - 19.0 % 19.3 % 13.8 % - 18.7 %

General and Administrative Expense 1,699 368 171 2,238 1,889 433 120 2,442 642 109 57 808 573 126 57 756
Segment Allocated G&A Expense (530 ) 530 - - (510 ) 510 - - (236 ) 236 - - (200 ) 200 - -
Net General & Administrative Expense 1,169 898 171 2,238 1,379 943 120 2,442 406 345 57 808 373 326 57 756

Operating Income (Loss) 351 (459 ) (171 ) (279 ) 1,148 1,098 (120 ) 2,126 (216 ) 288 (57 ) 15 213 (77 ) (57 ) 79
Operating Income (Loss) % 3.9 % (9.0 %) - (2.1 %) 9.6 % 13.8 % - 11.4 % (11.6 )% 10.8 % - 0.3 % 7.0 % (4.3 )% - 1.8 %

(Loss) Gain on Change in Fair Value of Warrants - - 2,025 2,025 - - (504 ) (504 ) - - - - - - 1,027 1,027
Interest Expense - - (9 ) (9 ) - - (17 ) (17 ) - - - - - - (3 ) (3 )

Net Income (Loss) before taxes $ 351 $ (459 ) $ 1,845 $ 1,737 $ 1,148 $ 1,098 $ (641 ) $ 1,605 $ (216 ) $ 288 $ (57 ) $ 15 $ 213 $ (77 ) $ 967 $ 1,103
Net Income (loss) before taxes % 3.9 % (9.0 %) - 13.2 % 9.6 % 13.8 % - 8.6 %
Net Income before taxes % (11.6 )% (10.8 )% - 0.3 % 7.0 % (4.3 )% - 24.7 %

Our total revenues decreased by ~~$1.4 and $5.5 million~~$131 thousand, or ~~24.2% and 29.6% during~~2.9%, comparing the three ~~and nine~~ months ended ~~June 27, 2021, respectively, as compared to~~January 2, 2022 with the three ~~and nine~~ months ended ~~June 28,~~December 27, 2020. ~~Decreased~~The decrease in revenue ~~during the three and nine months~~ was primarily driven by ~~decreased~~a $1.2 million decrease in external revenue ~~of $0.7 and $3.0 million~~ at the Optex Richardson segment and ~~$0.7 and $2.5~~a $1.1 million increase in external revenue at the Applied Optics Center segment, respectively, over the prior year ~~period. We have experienced~~period. During the year ended October 3, 2021, we realized a ~~reduction~~significant increase in customer ~~demand driven by~~orders and backlog for the ~~pandemic, combined with shifting priorities in domestic and foreign military spending. While we are optimistic that our customer orders will return~~Applied Optics Center segment. We expect revenue for the Applied Optics Center to ~~pre-pandemic levels~~increase over the ~~next twelve months, we currently anticipate a 30-32% reduction in our total~~course of the 2022 fiscal year ~~performance in 2021~~ as compared to the ~~fiscal~~prior year ~~performance of 2020.~~periods consistent with the recent increases in customer demand for optical assemblies and laser filter units.
7

Consolidated gross margin for the three months ended January 2, 2022 decreased by ~~$0.7 million and $2.6 million,~~$12 thousand, or ~~49.6% and 57.1%~~1.4%, ~~respectively during the three and nine-months ending June 27, 2021 as~~ compared to the prior year period. The ~~decreased~~decrease in margin ~~during the three and nine-month periods is~~was primarily attributable ~~lower~~to a decrease in consolidated revenue ~~across both segments,~~and changes in ~~product~~revenue mix ~~toward less profitable product groups, and unfavorable manufacturing overhead adjustments on reduced production volume. Optex Systems-Richardson, and~~between the Applied Optics Center-Dallas, have substantial fixed manufacturing costs that are not easily adjusted as production levels decline. We have implemented cost reduction measures during the first and second quarters of fiscal year 2021, but do not expect to mitigate the impact of the revenue reductions on the operating gross margin for the year.segments.

Our operating income for the three months ended January 2, 2022 decreased by ~~$0.5 million and $2.4 million in the three and nine months ended June 27, 2021,~~$64 thousand to ~~income of $0.1 million and a loss of ($0.3) million,~~$15 thousand, as compared to the prior year period operating income of ~~$0.6 million and $2.1 million, respectively.~~$79 thousand. The ~~decreased three and nine-month~~decrease in operating income iswas primarily driven by lower ~~revenue and lower~~ gross margin ~~during the quarter with slightly lower~~and increased general and administrative ~~costs of $0.2 during~~spending.
Backlog
During the ~~current~~three months ended January 2, 2022 and December 27, 2020 the Company booked $3.5 million and $3.2 million, respectively, in new orders, representing a 9.4% increase over the prior year ~~three and nine-month~~period. The increase in orders is primarily attributable to an increase in Applied Optics Center orders over the prior year period.

~~Backlog~~The orders for the most recently completed quarter consist of $2.6 million for our Optex Richardson segment and $0.9 million attributable to the Applied Optics Center. The following table depicts the new customer orders for the three months ending January 2, 2022 as compared to the three-month period ending December 27, 2020 in millions of dollars:
(Millions)
Product Line Q1
2022 Q1
2021 Variance % Chg
Periscopes $ 2.2 $ 2.6 $ (0.4 ) (15.4 )%
Sighting Systems 0.1 - 0.1 100.0 %
Howitzer - - - - %
Other 0.3 - 0.3 100.0 %
Optex Systems – Richardson 2.6 2.6 - - %
Optical Assemblies 0.2 - 0.2 100.0 %
Laser Filters - 0.1 (0.1 ) (100.0 )%
Day Windows - - - - %
Other 0.7 0.5 0.2 40.0 %
Applied Optics Center – Dallas 0.9 0.6 0.3 50.0 %
Total Customer Orders $ 3.5 $ 3.2 $ 0.3 9.4 %

Backlog as of ~~June 27, 2021,~~January 2, 2022, was ~~$12.9~~$26.5 million as compared to a backlog of ~~$16.3~~$27.3 million as of ~~September 27, 2020,~~October 3, 2021, representing a decrease of ~~$3.4~~$0.8 million or ~~20.9%~~2.9%. ~~During~~The following table depicts the ~~nine months ended June 27, 2021 the Company booked $9.8 million in new orders~~January 2, 2022 backlog as compared ~~to $14.0 million during~~ the ~~nine months ended June 28, 2020.~~prior year end period.

We have experienced a recent increase in proposal requests, and anticipate an increase in orders over the next three to six months. Subsequent to the period ended June 27, 2021, the Company has booked an additional $11.7 million in customer orders, including a new contract award of $8.4 million announced on August 3, 2021, as part of a twenty-four-month purchase order for laser filters manufactured at the Applied Optics Center segment.
Product Line Total Backlog
1/2/2022 Total Backlog
10/3/2021 Variance % Chg
Periscopes $ 6.9 $ 5.6 $ 1.3 23.2 %
Sighting Systems 1.5 1.7 (0.2 ) (11.8 )%
Howitzer 2.3 2.3 - - %
Other 1.0 1.4 (0.4 ) (28.8 )%
Optex Systems - Richardson 11.7 11.0 0.7 6.4 %
Optical Assemblies 4.1 5.0 (1.1 ) 22.0 %
Laser Filters 9.0 9.9 (0.9 ) (9.1 )%
Day Windows 0.9 1.1 (0.2 ) (18.2 )%
Other 0.8 0.3 0.5 166.7 %
Applied Optics Center - Dallas 14.8 16.3 (1.5 ) (9.2 )%
Total Backlog $ 26.5 $ 27.3 $ (0.8 ) (2.9 )%

8

Backlog as of January 2, 2022, was $26.5 million as compared to a backlog of $15.0 million as of December 27, 2020, representing an increase of $11.5 million or 76.7%. The following table depicts the current expected delivery by period of all contracts awarded as of ~~June 27, 2021~~January 2, 2022 in millions of dollars:

(Millions) (Millions)
Product Line
2021
Delivery

2022+
Delivery

Total Backlog
6/27/2021

Total Backlog
9/27/2020
Variance % Chg Q2
2022 Q3
2022 Q4
2022 2022
Delivery 2023+
Delivery Total Backlog
1/2/2022 Total Backlog
12/27/2020 Variance % Chg
Periscopes $ 2.2 $ 1.9 $ 4.1 $ 5.3 $ (1.2 ) (22.6 )% $ 1.6 $ 2.5 $ 1.0 $ 5.1 $ 1.8 $ 6.9 $ 5.9 $ 1.0 16.9 %
Sighting Systems 0.2 1.1 1.3 2.9 (1.6 ) (55.2 )% 0.2 0.1 0.1 0.4 1.1 1.5 1.9 (0.4 ) (21.1 )%
Howitzer - 2.3 2.3 2.5 (0.2 ) (8.0 )% - 0.1 0.2 0.3 2.0 2.3 2.4 (0.1 ) (4.2 )%
Other 0.7 0.3 1.0 2.5 (1.5 ) (60.0 )% 0.4 - 0.1 0.5 0.5 1.0 2.4 (1.3 ) (54.2 )%
Optex Systems - Richardson 3.1 5.6 8.7 13.2 (4.5 ) (34.1 )% 2.2 2.7 1.4 6.3 5.4 11.7 12.6 (0.9 ) (7.1 )%
Optical Assemblies 0.7 0.9 0.9 2.4 1.7 4.1 0.4 3.7 925.0 %
Laser Filters 1.5 1.4 1.3 4.2 4.8 9.0 0.4 8.6 2,150.0 %
Day Windows 0.4 0.2 0.1 0.7 0.2 0.9 1.1 (0.2 ) (18.2 )%
Other 0.1 - 0.6 0.8 - 0.8 0.5 0.3 60.0 %
Applied Optics Center - Dallas 1.6 2.6 4.2 3.1 1.1 35.5 % 2.7 2.5 2.9 8.1 6.7 14.8 2.4 12.4 516.7 %
Total Backlog $ 4.7 $ 8.2 $ 12.9 $ 16.3 $ (3.4 ) (20.9 )% $ 4.9 $ 5.2 $ 4.3 $ 14.4 $ 12.1 $ 26.5 $ 15.0 $ 11.5 76.7 %

~~During the last 15 months, we experienced a significant reduction in new orders and ending customer~~Optex Systems Richardson backlog ~~across all but one~~as of ~~our product lines. We attribute the lower orders~~January 2, 2022, was $11.7 million as compared to a ~~combination~~backlog of ~~factors including~~$12.6 million as of December 27, 2020, representing a ~~COVID-19 driven slow-down~~decrease of contract awards for both U.S. military sales and foreign military sales (FMS), combined with some shifting in defense spending budget allocations in US military sales and FMS away from Army ground system vehicles toward other military agency applications. Due to the pandemic, we have experienced a significant slowdown in the U.S. government procurement process increasing the cycle time from contract bid proposal requests to final contract award by three to nine months. We believe many of the delays are process driven as government agencies adapt to new remote work environments, combined with constraints created by travel restrictions, impeding product testing, inspection and overall program management coordination. In addition, the pandemic has caused several program delays throughout the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supplier issues.$0.9 million or 7.1%.

~~We have experienced~~Applied Optics Center backlog as of January 2, 2022, was $14.8 million as compared to a ~~reduction~~backlog of ~~29.6% in revenue volume during~~$2.4 million as of December 27, 2020, representing an increase of $12.4 million, or 516.7%. During the ~~first nine months~~fourth quarter of the fiscal year ~~2021,~~ended October 3, 2020, we booked significant new orders in both commercial optical assemblies and laser filter units including a significant new defense contract customer.
As a result of the significant backlog increases in our Applied Optics Center, we have expanded our presentation of backlog, order and revenue data to include comparative period product line information for the segment. Furthermore, the period end backlog is now presented as compared to the ~~first nine months~~prior year period end backlog in addition to the previous fiscal year-end backlog as we believe it provides a better indication of ~~fiscal year 2020,~~the twelve-month market trends by product line and expect this trend to continue through the fourth quarter. We have implemented several cost-saving initiatives during the first and second quarters, including reductions in force and employee compensation combined with cuts in other discretionary spending. We are reviewing additional cost reductions during the next sixty to ninety days as required to further minimize the impact of any sustained delays in customer orders at the Optex Richardson segment beyond the first three quarters of fiscal year 2021.segment.

Please refer to “—~~Optex Systems - Richardson:~~Background
~~During the nine months ended June 27, 2021,~~” above or “Liquidity and Capital Resources” below for more information on recent developments and trends with respect to our orders and backlog, ~~for the Optex Systems Richardson segment decreased~~which information is incorporated herein by $4.5 million, or 34.1%, to $8.7 million from the fiscal year-end backlog of $13.2 million. Decreased backlog in sighting systems, howitzers, and other product groups is primarily driven by shipments against several of our long running Commander Weapon Sighting Systems “CWSS”, Digital Day and Night Sighting Systems “DDAN” and Muzzle Reference Sensor Collimator Assembly “MRS” contracts. Decreases in the periscope backlog is primarily driven by shipments against our ICWS glass periscope order during the current fiscal year, completing the contract.
During the nine months ended June 27, 2021 we booked new periscope orders of $4.1 million, as compared to $5.9 million booked during the prior year nine-month period ended June 28, 2020. On January 11, 2021, the Company announced a contract for Laser Protected Periscopes for a base period of three years plus two one-year option years, not to exceed $14.4 million pursuant to an Indefinite Delivery - Indefinite Quantity (IDIQ) contract. We anticipate additional periscope contracts in addition to task order awards against our existing nine active IDIQ contracts for delivery in 2022 and beyond.
9
~~During the nine months ended June 27, 2021, there was $0.5 in new orders booked for sighting systems and other products, as compared to $3.0 million booked during the nine months ended June 28, 2020.~~
~~Applied Optics Center – Dallas~~
During the nine months ended June 27, 2021, the Applied Optics Center backlog increased by $1.1 million, or 35.5%, to $4.2 million from the fiscal year end level of $3.1 million. During the nine months ended June 27, 2021, the Applied Optics Center booked new orders of $5.2 million as compared to $5.1 million in the prior year nine- month period. We are seeing increases in demand and proposal activity for both laser coated filters and optical assemblies and anticipate additional order bookings for both our commercial and military products for deliveries beginning in fiscal year 2022. Subsequent to the fiscal period ended June 27, 2021, the Applied Optics Center has booked additional orders of $9.9 million, inclusive of the new $8.4 million award announced on August 3, 2021.reference.

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.

Three Months Ended ~~June 27, 2021~~January 2, 2022 Compared to the Three Months Ended ~~June 28,~~December 27, 2020

Revenues. InFor the three months ended ~~June 27, 2021,~~January 2, 2022, revenues decreased by ~~$1.4 million~~$131 thousand or ~~24.2% from~~2.9% compared to the ~~respective~~ prior ~~period in fiscal~~ year ~~2020~~period as set forth in the table below:

Three months ended
(Thousands)
Product Line June 27, 2021 June 28, 2020 Variance % Chg
Periscopes $ 1,686 $ 2,929 $ (1,243 ) (42.4 )
Sighting Systems 789 185 604 326.5
Howitzers - - - -
Other 650 737 (87 ) (11.8 )
Optical Systems - Richardson 3,126 3,851 (725 ) (18.8 )
Applied Optics Center - Dallas 1,307 1,998 (691 ) (34.6 )
Total Revenue $ 4,433 $ 5,849 $ (1,417 ) (24.2 )
9
Three months ended
(Thousands)
Product Line January 2, 2022 December 27, 2020 Variance % Chg
Periscopes $ 1,065 $ 1,953 $ (888 ) (45.5 )
Sighting Systems 274 778 (504 ) (64.8 )
Howitzers - 106 (106 ) (100.0 )
Other 518 192 326 169.8
Optex Systems - Richardson 1,857 3,029 (1,172 ) (38.7 )
Optical Assemblies 1,145 197 948 481.2
Laser Filters 937 899 38 4.2
Day Windows 220 227 (7 ) (3.1 )
Other 181 119 62 52.1
Applied Optics Center - Dallas 2,483 1,442 1,041 72.2
Total Revenue $ 4,340 $ 4,471 $ (131 ) (2.9 )

~~Revenue on our periscope line~~Optex Systems Richardson revenue decreased by $1.2 million or ~~42.4% on lower customer demand during~~38.7% for the three months ended ~~June 27, 2021~~January 2, 2022 as compared to the three months ended ~~June 28, 2020.~~
~~Sighting~~December 27, 2020 on lower customer demand for periscopes, sighting systems revenue for the three months ending June 27, 2021 increased by $0.6 million or 326.5% from revenues in the prior year period on shipments against our CWSS programs not in the prior year three-month period.
~~Other product revenue decreased by $0.1 million, or 11.8% during the three months ending June 27, 2021~~and howitzers as compared to the prior year ~~period due~~period. We anticipate higher revenues on the periscope product line during the next three quarters and the full twelve month revenue to ~~lower contract demand~~approximate the prior year level. Deliveries against our howitzer program have been delayed by our customer pending resolution of issues related to customer furnished materials. Sighting systems and other products are expected to be below our prior year levels for the remainder of the fiscal year as several previous contracts have completed or are nearing completion. We anticipate future awards for these programs, however at reduced levels based on ~~MRS collimators and cell assemblies.~~the most recent U.S. defense budget for ground systems programs, more specifically reductions in government spending on the Abrams tank platform.

Applied Optics Center revenue ~~decreased $0.7~~increased by $1.1 million or ~~34.6% during~~72.2% for the three months ended ~~June 27, 2021~~January 2, 2022 as compared to the three months ended ~~June 28,~~December 27, 2020. The ~~lower~~ revenue ~~was~~increase is primarily ~~driven by lower~~attributable to increased customer demand for commercial optical assemblies as compared to the prior year period. Based on our backlog, we are anticipating higher revenue over the remaining fiscal year period for optical assemblies, laser filters and other products. Day window revenues are projected at rates comparable to the year ended October 3, 2021, with the current orders ~~across coated filter and optical assembly lines.~~expected to be completed in the first fiscal quarter of 2023. We anticipate additional orders for delivery in 2023.

Gross Margin. The gross margin during the three-month period ~~ending June 27, 2021~~ended January 2, 2022 was ~~16.8%~~19.0% of revenue as compared to a gross margin of ~~25.3%~~18.7% of revenue for the period ~~ending June 28,~~ended December 27, 2020. The gross margin decreased ~~margin during~~by $12 thousand to $823 thousand for the ~~three-month period~~three months ended January 2, 2022 as compared to $835 thousand in the prior year three months. The decrease in gross margin is primarily attributable to lower consolidated revenue ~~across both segments~~partially offset by changes in mix between products and ~~unfavorable manufacturing overhead adjustments on reduced production volume.~~operating segments. Cost of sales decreased to ~~$3.7~~$3.5 million for the current period as compared to the prior year period of ~~$4.4~~$3.6 million on lower period revenue.

G&A Expenses. During the three months ended ~~June~~January 2, 2022 and December 27, ~~2021 and June 28,~~ 2020, we recorded operating expenses of ~~$689~~$808 thousand and ~~$855~~$756 thousand, respectively. Operating expenses ~~decreased~~increased by ~~19.4%~~6.9% between the respective periods primarily due to increased labor costs, office expenses, and legal & audit fees.
Operating Income. During the three months ended January 2, 2022, we recorded operating income of $15 thousand, as compared to operating income of $79 thousand during the three months ended December 27, 2020. The $64 thousand decrease in operating income for the current year period from the prior year period is primarily due to increased general and administrative costs combined with lower ~~spending~~revenue and gross margin in ~~salaries and office supplies.~~the current year quarter as compared to the prior year quarter.

10
~~Operating (Loss) Income~~. During the three months ended June 27, 2021, we recorded operating income of $57 thousand, as compared to operating income of $626 thousand during the three months ended June 28, 2020. The $569 million decrease in operating income in the current year period over the prior year period is primarily due to decreased revenue and gross margin.
Other (Expense) Income. During the three months ended ~~June 27, 2021,~~January 2, 2022, we ~~recognized~~did not recognize either a ~~$1.2 million~~ gain or a loss on the change in ~~the~~ fair value of warrants, as ~~compared to a $0.6 million loss~~the warrants had expired on August 26, 2021 in accordance with their terms. By comparison, during the three months ~~ending June 28, 2020. The current period~~ended December 27, 2020, we recognized a gain on the change in ~~the~~ fair value of warrants ~~is primarily attributable to~~of ($1.0) million. Further discussion regarding the changes in fair value of the ~~common stock volatility, US treasury rates, stock price~~warrants and ~~remaining~~the related warrant ~~term from the prior period end. Additional information related to the change~~liability can be found in ~~valuation is discussed under~~ Item 1, “Consolidated Financial Statements, Note 6 –- Warrant ~~Liability”~~Liabilities”.

Net (Loss) Income applicable to common shareholders. During the three months ended June 27, 2021, we recorded net income applicable to common shareholders of $0.9 million as compared to a net loss applicable to common shareholders of $0.1 million during the three months ended June 28, 2020. The change in net income of $1.0 million is primarily attributable to a reduction in operating profit of ($0.6) million, changes in the fair value of warrants of $1.8 million, decreased income tax expense of $0.3 million between the respective periods, offset by a reduction in deemed dividends on participating warrants of ($0.5) million not in the current year period. There were no deemed dividends in the prior year period due to the net loss.
~~Nine months Ended June 27, 2021 Compared to the Nine months Ended June 28, 2020~~
~~Revenues~~~~. In the nine months ended June 27, 2021, revenues decreased by $5.5 million or 29.6% from the respective prior period in fiscal year 2020 as set forth in the table below:~~
Nine months ended
(Thousands)
Product Line June 27, 2021 June 28, 2020 Variance % Chg
Periscopes $ 5,253 $ 8,257 $ (3,004 ) (36.4 )
Sighting Systems 1,973 560 1,413 252.3
Howitzers 200 - 200 100.0
Other 1,532 3,100 (1,568 ) (50.6 )
Optical Systems - Richardson 8,958 11,917 (2,959 ) (24.8 )
Applied Optics Center - Dallas 4,191 6,765 (2,574 ) (38.0 )
Total Revenue $ 13,149 $ 18,682 $ (5,533 ) (29.6 )
~~Revenue on our periscope line decreased by $3.0 million or 36.4% on lower customer demand during the nine months ended June 27, 2021 as compared to the nine months ended June 28, 2020.~~
Sighting systems revenue for the nine months ending June 27, 2021 increased by $1.4 million or 252.3% from revenues in the prior year period on shipments against our DDAN spares and CWSS programs not in the prior year nine-month period.
Other product revenue decreased by $1.6 million, or 50.6% during the nine months ending June 27, 2021 as compared to the prior year period due to lower contract demand on MRS collimators and cell assemblies.
11
Applied Optics Center revenue decreased $2.6 million or 38.0% during the nine months ended June 27, 2021 as compared to the nine months ended June 28, 2020. The lower revenue was primarily driven by lower customer orders across coated filter and optical assembly lines. We expect revenue for the Applied Optics Center to increase in the next quarter on higher customer demand for optical assemblies and laser filter units.
We have experienced a reduction in customer demand driven by the pandemic, combined with shifting priorities in domestic and foreign military spending. While we are optimistic that our customer orders will return to pre-pandemic levels over the next twelve months, we currently anticipate a 30-32% reduction in our total fiscal year performance in 2021 as compared to the fiscal year performance of 2020.
~~Gross Margin~~. The gross margin during the nine-month period ending June 27, 2021 was 14.9% of revenue as compared to a gross margin of 24.5% of revenue for the period ending June 28, 2020. The decreased margin during the nine-month period is primarily attributable lower revenue across both segments and unfavorable manufacturing overhead adjustments on reduced production volume. Cost of sales decreased to $11.2 million for the current period as compared to the prior year period of $14.1 million on lower period revenue.
~~G&A Expenses~~. During the nine months ended June 27, 2021 and June 28, 2020, we recorded operating expenses of $2.2 million and $2.4 million, respectively. Operating expenses decreased by 8.4% between the respective periods primarily due to lower spending in salaries and office supplies.
~~Operating (Loss) Income~~. During the nine months ended June 27, 2021, we recorded an operating loss of $0.3 million, as compared to operating income of $2.1 million during the nine months ended June 28, 2020. The $2.4 million decrease in operating income in the current year period over the prior year period is primarily due to decreased revenue and gross margin, offset by slightly lower general and administrative spending in the current year as compared to the prior year period.
~~Other (Expense) Income.~~ During the nine months ended June 27, 2021, we recognized a $2.0 million gain on change in the fair value of warrants as compared to a $0.5 million loss in the nine months ending June 28, 2020. The $2.5 million change in the fair value of warrants is primarily attributable to changes in the common stock volatility, US treasury rates, stock price and remaining warrant term from the prior period end. Additional information related to the change in valuation is discussed under Item 1, “Consolidated Financial Statements, Note 6 – Warrant Liability”.
~~Net Income applicable to common shareholders~~~~. During the nine months ended June 27, 2021,~~January 2, 2022, we recorded a net income applicable to common shareholders of ~~$1.2 million~~$29 thousand as compared to a net income applicable to common shareholders of ~~$0.8 million~~$726 thousand during the ~~nine~~three months ended ~~June 28,~~December 27, 2020. The ~~increase~~change in net income of ~~$0.4 million~~$697 thousand is primarily attributable to ~~a reduction in operating profit~~the expiration of ~~($2.4) million, changes in~~the warrants, which eliminated the fair value ~~of warrants of $2.5 million, decreased~~and deemed dividend impacts on net income ~~tax expense of $0.6 million between the respective periods and an increase in deemed dividends on participating warrants of ($0.3) million not in~~for the current year period.

Liquidity and Capital Resources

~~Optex Systems Holdings adopted~~As of January 2, 2022, the ~~provisions~~Company had working capital of ~~ASC Topic 842 “Leases”~~$12.9 million, as compared to $12.9 million as of October 3, 2021. Some of our contracts may allow for government contract financing in the form of contract progress payments pursuant to Federal Acquisition Regulation 52.232-16, “Progress Payments.” Subject to certain limitations, this clause provides for government payment of up to 90% of incurred program costs prior to product delivery for small businesses like us. To the extent any contracts allow for progress payments and the respective contracts would result in significant preproduction cash requirements for design, process development, tooling, material or other resources which could exceed our current working capital or line of credit availability, we intend to utilize this benefit to minimize any potential negative impact on working capital prior to receipt of payment for the associated contract deliveries.
Backlog as of January 2, 2022 has increased by $11.5 million or 76.7% to $26.5 million as compared to backlog of $15.0 million as of December 27, 2020.
The Company has historically funded its operations through operations, convertible notes, common and preferred stock offerings and bank debt. The Company’s ability to generate positive cash flows depends on a variety of factors, including the continued development and successful marketing of the Company’s products. At January 2, 2022, the Company had $5.3 million in cash and an outstanding payable balance of zero against its line of credit. The line of credit allows for borrowing up to a maximum of $2.3 million. We intend to renew or replace this line of credit, which expires on April 15, 2022. If adequate funds are not available on acceptable terms, or at all, we may be unable to finance our operations, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures.
As of January 2, 2022, our outstanding accounts receivable balance was $2.0 million. The Company currently expects to generate net income and positive cash flow from operating activities throughout fiscal ~~year beginning on September 30, 2019. Optex Systems Holdings has two significant operating facilities leases~~2022. To remain profitable, we need to maintain a level of revenue adequate to support the Company’s cost structure. Management intends to manage operations commensurate with its level of working capital and ~~one equipment lease which extends beyond~~line of credit during the next twelve months and ~~fall~~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.
On September 22, 2021, the Company announced authorization of a $1 million stock repurchase program. The shares authorized to be repurchased under this repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. During the three months ended January 2, 2022, 37,238 common shares were repurchased under the ~~guidance~~September 2021 repurchase program at an aggregate cost of ~~ASC Topic 842. Adoption~~$74 thousand. As of ~~ASC Topic 842 resulted~~January 2, 2022, 72,793 shares repurchased under the September 2021 stock repurchase program were held in Treasury.
On August 26, 2021, 3,936,391 outstanding warrants expired worthless, resulting in the elimination of the balance sheet ~~recognition~~warrant liability.
11
As of ~~a right-of-use asset of $1.8 million~~October 3, 2021, and corresponding operating lease liabilities of approximately ($1.9) million as of September 30, 2019, the beginning of the prior fiscal year, representing the present value of future lease payments for the term of the equipment leaseJanuary 2, 2022, there were no outstanding declared and ~~both segment facility leases and which assumes the exercise of a five-year renewal option at the Applied Optics Center as of November 1, 2021.~~unpaid dividends.

On January 11, 2021, the Company executed amendments for each of ~~the~~its leased facilities extending the terms for eighty-six (86) months, commencing at the end of the current lease agreements. The Richardson lease amendment ~~commences~~commenced on April 1, 2021 for an eighty-six (86) month term ending on May 31, 2028. The Dallas lease amendment ~~commences~~commenced on November 1, 2021 for an eighty-six (86) month term ending on December 31, 2028. Each of the leases include two full months of rent abatement at the beginning of the commencement term. ~~Execution of the~~The new lease ~~amendments for the Dallas and Richardson facilities on January 11, 2021~~agreements resulted in the balance sheet recognition of a right-of-use asset of $3.7 million and corresponding operating lease liabilities of approximately ~~($3.7) million during the nine months ended June 27, 2021.~~
12
~~As of June 27, 2021, the Company had working capital of $12.3~~$3.7 million as ~~compared to $11.7 million as~~ of September 27, 2020. During the nine months ended June 27, 2021, the Company generated an operating loss of ($0.3) million as compared to operating income of $2.1 million for the nine-month period ending June 27, 2021. The Company’s adjusted EBITDA decreased by $2.3 million during the nine months ended June 27, 2021 from $2.4 million to ($0.1) million. Backlog as of June 27, 2021 has decreased by $3.4 million or 20.9% to $12.9 million as compared to a backlog of $16.3 million as of September 27, 2020. We believe the COVID-19 pandemic is a driving factor in lower contract awards and reduced backlog, as many customers and agencies adapt to remote work arrangements, limited travel and slower Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) responses to solicitations, price audits and contract awards. In addition, the most recent U.S. Department of Defense Budget Request reflects a shift in military priorities away from ground system vehicles to other military agencies. We have experienced a recent increase in proposal requests, and anticipate an increase in orders over the next three to six months. Subsequent to the period ended June 27, 2021, the Company has booked an additional $11.7 million in customer orders, including a new contract award of $8.4 million announced on August 3, 2021, as part of a twenty-four-month purchase order for laser filters manufactured at the Applied Optics Center segment.
Optex Systems Holdings, Inc. is defined as essential critical infrastructure as a defense contractor under the guidance of the federal, state and local authorities for both our Optex Systems (Richardson, TX), and Applied Optics Center (Dallas, TX) operating segments. As such, the Company continued to remain open during the COVID-19 shelter in place orders and closures. The Company remains fully operational with a complete workforce while practicing the CDC guidelines and required Dallas County mandates which require keeping a 6’ distance between employees, face coverings, and daily employee health screening. To date, we have experienced very limited workforce disruption associated with COVID-19 illnesses, COVID-19 quarantine or childcare leave related issues.
We have reached out to our customers, suppliers and service providers regarding any potential impacts to operating conditions due to COVID-19 and we will continue to monitor any changes to our operations on an ongoing basis during the crisis. As a large majority of our customers and suppliers are engaged in significant defense manufacturing, they also remain open and operational during the pandemic. The Company has experienced several short- term delays in the delivery of some production supplies and materials, in addition to a few customer delivery schedule revisions, however, the impact to our operations to date have been minimal, and we have taken additional steps to mitigate potential key supplier risks. In addition, we have experienced some minor disruptions in activities related to travel restrictions, conferences and trade show cancellations. Our customers continue to pay outstanding accounts receivable balances to terms and we continue to pay to our supplier terms without interruption during the crisis.
During the previous twelve months, we have experienced a significant reduction in new orders and ending customer backlog across all but one of our product lines. We attribute the lower orders to a combination of factors including a COVID-19 driven slow-down of contract awards for both U.S. military sales and foreign military sales (FMS), combined with some shifting in defense spending budget allocations in US military sales and FMS away from Army ground system vehicles toward other military agency applications. We experienced a 29.6% reduction in revenue volume during the first nine months of fiscal year 2021, as compared to the first nine months of fiscal year 2020. We have experienced a reduction in customer demand driven by the pandemic, combined with shifting priorities in domestic and foreign military spending. While we are optimistic that our customer orders will return to pre-pandemic levels over the next twelve months, we currently anticipate a 30-32% reduction in our total fiscal year performance in 2021 as compared to the fiscal year performance of 2020. We have experienced a recent increase in contract awards and proposal requests, and anticipate an increase in orders over the next six to twelve months, however the timing and nature of new orders in the near term cannot be determined. We have implemented several cost-saving initiatives during the first nine months, including reductions in force and employee compensation combined with cuts in other discretionary spending. We are reviewing additional cost reductions during the next sixty to ninety days as required to further minimize the impact of any sustained delays in customer orders at the Optex Richardson segment beyond the first three quarters of fiscal year 2021.
We have not received and are not presently seeking any financial assistance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or other COVID-19 related federal or state programs beyond the Families First Coronavirus Response Act (FFCRA) tax credit which is available to cover paid sick or family leave for our effected employees. Our current backlog and working capital position remain healthy with additional unused working capital available. On April 16, 2020, we executed a two-year $2.25 million revolving credit facility with BBVA USA, replacing the existing $2.25 million AvidBank line of credit which expired on April 21, 2020. Optex intends to use this revolving credit facility to support working capital for the Company’s continuing operations and growth needs during the next twelve months. While we anticipate the possibility of some additional unforeseen operational impacts related to the pandemic, we believe we are in a strong position to minimize any significant adverse impact to working capital during the next twelve months.
13
The Company has historically funded its operations through working capital, convertible notes, 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 June 27, 2021, the Company had approximately $4.8 million in cash and an outstanding payable balance of $0.4 million against our working line of credit. The line of credit allowed for borrowing up to a maximum of $2.25 million. As of June 27, 2021, our outstanding accounts receivable was $1.4 million. The Company anticipates an operating loss for the fiscal 2021 year, but is projecting a positive cash flow from operating activities through the last quarter of 2021. Successful transition to attaining and maintaining profitable operations is dependent upon maintaining a level of revenue adequate to support the Company’s cost structure. Management intends to manage operations commensurate with its level of working capital and facilities line of credit during the next twelve months; however, uneven revenue levels driven by changes in customer delivery demands, first article inspection requirements, COVID-19 or other program delays combined with increasing inventory and production costs required to support the backlog 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.
~~As of September 27, 2020, and June 27, 2021, there are no outstanding declared and unpaid dividends.~~
On June 8, 2020 the Company announced authorization for a $1 million stock repurchase program. The shares authorized to be repurchased under the new repurchase program may be purchased from time to time at prevailing market prices, through open market or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC. As of June 27, 2021, the Company has repurchased 519,266 common shares at a cost of $1 million. The shares were held in Treasury Stock at cost and cancelled in June 2021.

Cash Flows for the Period from ~~September 27, 2020~~October 3, 2021 through ~~June 27, 2021~~January 2, 2022

Cash and Cash Equivalents: As of ~~June 27,~~January 2, 2022, and October 3, 2021, ~~and September 27, 2020,~~ we had cash and cash equivalents of ~~$4.8~~$5.3 million and ~~$4.7~~$3.9 million, ~~representing a net increase of $0.1million.~~respectively.

Net Cash Provided by Operating Activities. Net cash provided by operating activities during the ~~nine~~three months from ~~September 27, 2020~~October 3, 2022 to ~~June 27, 2021~~January 2, 2022 totaled ~~$1.1~~$1.5 million. The primary sources of cash during the period relate to ~~collections of~~decreases in accounts receivable of ~~$1.6~~$1.2 million, ~~offset by decreases in~~increased accounts payable of ~~(0.6)~~$0.5 million, increased inventory of ($0.3) million and other changes in ~~other~~ working capital of $0.1 million.

Net Cash Used in Investing Activities. In the ~~nine~~three months ended ~~June 27, 2021,~~January 2, 2022, cash used in investing activities was ~~$0.2~~$0.1 million for purchases of ~~equipment.~~equipment and leasehold improvements.

Net Cash Used in Financing Activities. Net cash used in financing activities was ~~$0.84~~$0.1 million during the ~~nine~~three months ended ~~June 27, 2021~~January 2, 2022 and ~~relate~~relates to the repurchases of common stock of ~~$0.80 million~~ as part of our stock repurchase ~~plan and payments for taxes of $0.04 for net settled restricted stock units.~~program.

Critical ~~Policies and~~ Accounting ~~Pronouncements~~Estimates
A critical accounting estimate is an estimate that:
● is made in accordance with generally accepted accounting principles,
● involves a significant level of estimation uncertainty, and
● has had or is reasonably likely to have a material impact on the company’s financial condition or results of operation.

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 ~~September 27, 2020.~~October 3, 2021.
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 inhouse 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 January 2, 2022, the Company had accrued warranty costs of $122 thousand, as compared to $78 thousand as of October 3, 2021. The primary reason for the $44 thousand increase in reserve balances relates directly to increased revenues during the 90-day period preceding January 2, 2022 as compared to the 90-day period preceding October 3, 2021, combined with an increase in customer returned backlog pending repair or replacement to our customer.

1412

~~Cautionary Factors That May Affect Future Results~~As of January 2, 2022 and October 3, 2021, we had $50 thousand, and $51 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 January 2, 2022, there was no significant change to the accrued contract losses. There is no way to reasonably estimate future inflationary impacts, or customer awards on the existing loss contracts.

~~This Quarterly Report on Form 10-Q~~As of January 2, 2022 and ~~other written reports and oral statements made from time~~October 3, 2021, our deferred tax assets consisted of $2.1 million, partially offset by a valuation reserve of $0.8 million against those assets for a net deferred tax asset of $1.3 million. The valuation allowance covers certain deferred tax assets where we believe we will be unlikely to ~~time by Optex Systems Holdings may contain so-called “forward-looking statements,” all~~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 ~~which~~the uncertainties of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are subject to ~~risks~~change over time. While we believe our current estimate to be reasonable, changing market conditions and ~~uncertainties. You can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects”~~profitability, changes in equity structure and other words of similar meaning. You can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address Optex Systems Holdings’ growth strategy, financial results and product and development programs. You must carefully consider any such statement and should understand that many factors could cause actual results to differ from Optex Systems Holdings’ forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actualchanges in tax regulations may impact our estimated reserves in future ~~results may vary materially.~~periods.

Optex Systems Holdings does not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this Form 10-Q. In various filings Optex Systems Holdings has identified important factors that could cause actual results to differ from expected or historic results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by our Quarterly Report on Form 10-Q for the quarter ended ~~June 27, 2021,~~January 2, 2022, management performed, with the participation of our Principal Executive Officer and Principal Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Principal Executive Officer and our Principal Financial Officer, to allow timely decisions regarding required disclosures. Based upon the evaluation described above, our Principal Executive Officer and our Principal Financial Officer concluded that, as of ~~June 27, 2021,~~January 2, 2022, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the ~~nine~~three months ended ~~June 27, 2021,~~January 2, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ~~The Company has not experienced any significant disruptions in controls over financial reporting as a result of COVID-19.~~

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not aware of any material litigation pending or threatened against us.
13
Item 1A. Risk Factors

There have been no material changes in risk factors since the risk factors set forth in the Form 10-K filed for the year ended ~~September 27, 2020.~~October 3, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The table below sets forth information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of its common shares during the three months ended January 2, 2022.
Fiscal Period Total number of shares purchased Total purchase cost Average price paid per share (with commission) Maximum dollar value that may yet be purchased under the plan⁽¹⁾

October 4, 2021 through October 31, 2021 18,265 37 2.01 894
November 1, 2021 through November 28, 2021 4,415 9 2.04 885
November 29, 2021 through January 2, 2022 14,558 28 1.93 857
Total shares repurchased for three months ended January 2, 2022 37,238 $ 74 $ 1.98 $ 857
(1)
On September 22, 2021 the Company announced authorization for an additional $1 million stock repurchase program. As of October 3, 2021, there were 35,555 shares held in treasury purchased under the September 2021 stock repurchase program. The shares authorized to be repurchased under the repurchase program may be purchased from time to time at prevailing market prices, through open market or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures

Not applicable.

1514

Item 6. Exhibits

Exhibit
No.
Description

10.1 Employment Agreement of Danny Schoening, dated December 1, 2021
31.1 and 31.2

Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

32.1 and 32.2 Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

~~104~~
~~Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).~~
EX-101.INS Inline XBRL Instance Document
EX-101.SCH Inline XBRL Taxonomy Extension Schema Document
EX-101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
EX-101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
EX-101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
EX-101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

1615
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

OPTEX SYSTEMS HOLDINGS, INC.

Date: ~~August 16, 2021~~February 14, 2022 By: /s/ Danny Schoening
Danny Schoening
Principal Executive Officer

OPTEX SYSTEMS HOLDINGS, INC.

Date: ~~August 16, 2021~~February 14, 2022 By: /s/ Karen Hawkins

Karen Hawkins
Principal Financial Officer and
Principal Accounting Officer

1716

	June 27, 2021			June 28, 2020			June 27, 2021			June 28, 2020
	(Thousands, except share and per share data)
	Three months ended						Nine months ended
	June 27, 2021			June 28, 2020			June 27, 2021			June 28, 2020

Revenue	$	4,433		$	5,849		$	13,149		$	18,682

Cost of Sales		3,687			4,368			11,190			14,114

Gross Margin		746			1,481			1,959			4,568

General and Administrative Expense		689			855			2,238			2,442

Operating Income (Loss)		57			626			(279	)		2,126

Gain (Loss) on Change in Fair Value of Warrants		1,167			(585	)		2,025			(504	)

Interest Expense		(4	)		(5	)		(9	)		(17	)
Other Income (Expense)		1,163			(590	)		2,016			(521	)

Income Before Taxes		1,220			36			1,737			1,605

Income Tax Expense (Benefit), net	$	(154	)	$	131			(122	)		435

Net Income (Loss)	$	1,374		$	(95	)	$	1,859		$	1,170

Deemed dividends on participating securities		(464	)		-			(622	)		(372	)
Net income (loss) applicable to common shareholders	$	910		$	(95	)	$	1,237		$	798
Basic income (loss) per share	$	0.11		$	(0.01	)	$	0.15		$	0.09

Weighted Average Common Shares Outstanding - basic		8,101,223			8,491,803			8,204,994			8,472,739

Diluted income (loss) per share	$	0.11		$	(0.01	)	$	0.15		$	0.09

Weighted Average Common Shares Outstanding - diluted		8,138,106			8,491,803			8,292,544			8,596,745

		Jan 2 2022	Dec 27, 2020
	(Thousands, except share and per share data)
	Three months ended
	January 2, 2022			December 27, 2020

Revenue	$	4,340		$	4,471

Cost of Sales		3,517			3,636

Gross Margin		823			835

General and Administrative Expense		808			756

Operating Income		15			79

Gain on Change in Fair Value of Warrants		-			1,027

Interest Expense		-			(3	)
Other Income		-			1,024

Income Before Taxes		15			1,103

Income Tax (Benefit) Expense, net	$	(14	)	$	16

Net Income	$	29		$	1,087
Deemed dividends on participating securities		-			(361	)
Net income applicable to common shareholders	$	29		$	726
Basic income per share	$	0.00		$	0.09

Weighted Average Common Shares Outstanding - basic		8,228,980			8,299,278

Diluted income per share	$	0.00		$	0.09

Weighted Average Common Shares Outstanding - diluted		8,281,841			8,488,042

	June 27, 2021			June 28, 2020
	(Thousands)
	Nine months ended
	June 27, 2021			June 28, 2020

Cash Flows from Operating Activities:
Net Income	$	1,859		$	1,170

Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities:
Depreciation and Amortization		195			185
(Gain) Loss on Change in Fair Value of Warrants		(2,025	)		504
Stock Compensation Expense		171			120
Deferred Tax		(81	)		144
Accounts Receivable		1,570			89
Inventory		146			332
Prepaid Expenses		(95	)		69
Leases		23			(32	)
Accounts Payable and Accrued Expenses		(631	)		(782	)
Accrued Warranty Costs		(15	)		65
Customer Advance Deposits		(1	)		(3	)
Increase (Decrease) In Accrued Estimated Loss On Contracts		-			-
Total Adjustments		(743	)		691
Net Cash provided by Operating Activities		1,116			1,861

Cash Flows used in Investing Activities
Purchases of Property and Equipment		(214	)		(150	)
Net Cash used in Investing Activities		(214	)		(150	)

Cash Flows provided by (used in) Financing Activities
Cash Paid for Taxes Withheld On Net Settled Restricted Stock Unit Share Issue		(44	)		(54	)
Borrowings from Credit Facility		-			127
Stock Repurchase		(800	)		(64	)

Net Cash (used in) provided by Financing Activities		(844	)		9

Net Increase in Cash and Cash Equivalents		58			1,720
Cash and Cash Equivalents at Beginning of Period		4,700			1,068
Cash and Cash Equivalents at End of Period	$	4,758		$	2,788

Supplemental Cash Flow Information:

Non Cash Transactions:
Right-of-Use Asset	$	3,688		$	1,811
Operating Lease Liabilities		3,688			1,894
Treasury stock retired		1,000			-

Cash Transactions:
Cash Paid for Taxes		48			289
Cash Paid for Interest		9			16

		Jan 2022	Dec 2020
	(Thousands)
	Three months ended
	January 2, 2022			December 27, 2020

Cash Flows from Operating Activities:
Net Income	$	29		$	1,087

Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities:
Depreciation and Amortization		72			63
Gain on Change in Fair Value of Warrants		-			(1,027	)
Stock Compensation Expense		57			57
Deferred Tax		(14	)		16
Accounts Receivable		1,173			815
Inventory		(335	)		(557	)
Prepaid Expenses		11			62
Leases		55			(14	)
Accounts Payable and Accrued Expenses		457			(44	)
Accrued Warranty Costs		44			(34	)
Customer Advance Deposits		-			(1	)
Total Adjustments		1,520			(664	)
Net Cash provided by Operating Activities		1,549			423

Cash Flows used in Investing Activities
Purchases of Property and Equipment		(90	)		(81	)
Net Cash used in Investing Activities		(90	)		(81	)

Cash Flows used in Financing Activities
Common Stock Repurchase		(74	)		(415	)
Net Cash used in Financing Activities		(74	)		(415	)

Net Increase (Decrease) in Cash and Cash Equivalents		1,385			(73	)
Cash and Cash Equivalents at Beginning of Period		3,900			4,700
Cash and Cash Equivalents at End of Period	$	5,285		$	4,627

Supplemental Cash Flow Information:

Cash Transactions:
Cash Paid for Interest		-			3

	Issued			Shares			Stock			Stock			Capital			Earnings			Equity
	Three months ended June 27, 2021
	Common												Additional						Total
	Shares			Treasury			Common			Treasury			Paid in			Retained			Stockholders
	Issued			Shares			Stock			Stock			Capital			Earnings			Equity
Balance at March 28, 2021		8,854,261			480,667		$	9		$	(930	)	$	26,346		$	(11,624	)	$	13,801
Stock Compensation Expense		-			-			-			-			57			-			57
Common Stock Repurchase ⁽¹⁾		-			38,599			-			(70	)		-			-			(70	)
Cancellation of Treasury Shares		(519,266	)		(519,266	)		(1	)		1,000			(1,000	)		-			(1	)
Vested restricted stock units issued net of tax withholding
Vested restricted stock units issued net of tax withholding, shares
Restricted Board Shares Issued
Restricted Board Shares Issued, shares
Net income		-			-			-			-			-			1,374			1,374

Balance at June 27, 2021		8,334,995			-		$	8		$	-		$	25,403		$	(10,250	)	$	15,161

		Common		Treasury		Common S		Treasury			Additional		Retained
	Three months ended January 2, 2022
	Common									Additional					Total
	Shares		Treasury		Common		Treasury			Paid in		Retained			Stockholders
	Issued		Shares		Stock		Stock			Capital		Earnings			Equity
Balance at October 3, 2021		8,523,704		35,555	$	9	$	(69	)	$	25,752	$	(9,978	)	$	15,714
Stock Compensation Expense		-		-		-		-			57		-			57
Common Stock Repurchase⁽¹⁾		-		37,238		-		(74	)		-		-			(74	)
Vested Restricted Stock Units, net of withheld taxes		23,216		-		-		-			-		-			-
Net income		-		-		-		-			-		29			29

Balance at January 2, 2022		8,546,920		72,793	$	9	$	(143	)	$	25,809	$	(9,949	)	$	15,726

	Nine months ended June 27, 2021
	Common												Additional						Total
	Shares			Treasury			Common			Treasury			Paid in			Retained			Stockholders
	Issued			Shares			Stock			Stock			Capital			Earnings			Equity
Balance at September 27, 2020		8,795,869			105,733		$	9		$	(200	)	$	26,276		$	(12,109	)	$	13,976
Stock Compensation Expense		-			-			-			-			171			-			171
Vested restricted stock units issued net of tax withholding		58,392			-			-			-			(44	)		-			(44	)
Common Stock Repurchase ⁽¹⁾		-			413,533			-			(800	)		-			-			(800	)
Cancellation of Treasury Shares		(519,266	)		(519,266	)		(1	)		1,000			(1,000	)		-			(1	)
Net income		-			-			-			-			-			1,859			1,859

Balance at June 27, 2021		8,334,995			-		$	8		$	-		$	25,403		$	(10,250	)	$	15,161

	Three months ended June 28, 2020
	Common									Additional						Total
	Shares		Treasury		Common		Treasury			Paid in			Retained			Stockholders
	Issued		Shares		Stock		Stock			Capital			Earnings			Equity
Balance at March 29, 2020		8,495,869		-	$	8	$	-		$	26,137		$	(12,669	)		13,476
Stock Compensation Expense		-		-		-					63			-			63
Restricted Board Shares Issued ⁽²⁾		300,000		-		1		-			(1	)		-			-
Common Stock Repurchase ⁽¹⁾		-		34,243		-		(64	)		-			-			(64	)
Net loss		-		-		-					-			(95	)		(95	)

Balance at June 28, 2020		8,795,869		34,243	$	9	$	(64	)	$	26,199		$	(12,764	)	$	13,380

	Nine months ended June 28, 2020
	Common									Additional						Total
	Shares		Treasury		Common		Treasury			Paid in			Retained			Stockholders
	Issued		Shares		Stock		Stock			Capital			Earnings			Equity
Balance at September 29, 2019		8,436,422		-	$	8	$	-		$	26,134		$	(13,934	)		12,208
Stock Compensation Expense		-		-		-					120			-			120
Vested restricted stock units issued net of tax withholding		59,447		-		-					(54	)		-			(54	)
Restricted Board Shares Issued ⁽²⁾		300,000		-		1		-			(1	)		-			-
Common Stock Repurchase ⁽¹⁾		-		34,243		-		(64	)		-			-			(64	)
Common Stock Repurchase		-		34,243		-		(64	)		-			-			(64	)
Net income		-		-		-					-			1,170			1,170

Balance at June 28, 2020		8,795,869		34,243	$	9	$	(64	)	$	26,199		$	(12,764	)	$	13,380

	Three months ended December 27, 2020
	Common									Additional					Total
	Shares		Treasury		Common		Treasury			Paid in		Retained			Stockholders
	Issued		Shares		Stock		Stock			Capital		Earnings			Equity
Balance at September 27, 2020		8,795,869		105,733	$	9	$	(200	)	$	26,276	$	(12,109	)	$	13,976
Stock Compensation Expense		-		-		-		-			57		-			57
Common Stock Repurchase ⁽¹⁾		-		208,592		-		(415	)		-		-			(415	)
Net income		-		-		-		-			-		1,087			1,087

Balance at December 27, 2020		8,795,869		314,325	$	9	$	(615	)	$	26,333	$	(11,022	)	$	14,705

	Reportable Segment Financial Information (thousands)												Reportable Segment Financial Information (thousands)
	Three months ended June 27, 2021												As of and for the three months ended January 2, 2022
		Optex Systems Richardson			Applied Optics Center Dallas			Other (non-allocated costs and intersegment eliminations)			Consolidated Total		Optex Systems Richardson			Applied Optics Center Dallas		Other (non-allocated costs and intersegment eliminations)			Consolidated Total

Revenues from external customers	$	3,126		$	1,307		$	-		$	4,433		$	1,857		$	2,483	$	-		$	4,340
Intersegment revenues		-			41			(41	)		-			-			180		(180	)		-
Total Revenue	$	3,126		$	1,348		$	(41	)	$	4,433		$	1,857		$	2,663	$	(180	)	$	4,340

Interest expense	$	-		$	-		$	4		$	4

Depreciation and Amortization	$	10		$	57		$	-		$	67		$	10		$	62	$	-		$	72

Income (loss) before taxes	$	328		$	(214	)	$	1,106		$	1,220		$	(216	)	$	288	$	(57	)	$	15

Other significant noncash items:
Allocated home office expense	$	(177	)	$	177		$	-		$	-		$	(236	)	$	236	$	-		$	-
Gain on change in fair value of warrants	$	-		$	-		$	(1,167	)	$	(1,167	)
Stock compensation expense	$	-		$	-		$	57		$	57		$	-		$	-	$	57		$	57
Warranty Expense	$	-		$	9		$	-		$	9
Warranty expense													$	-		$	46	$	-		$	46

Segment Assets	$	14,690		$	6,498		$	-		$	21,188		$	14,267		$	7,088	$	-		$	21,355
Expenditures for segment assets	$	(3	)	$	89		$	-		$	86		$	25		$	65	$	-		$	90

Fiscal Year	Facility Lease Payments			Facility Lease Payments			Total Lease Payments			Total Variable CAM Estimate
	Non-cancellable Operating Leases (Thousands)
	Optex Richardson			Applied Optics Center			Consolidated
Fiscal Year	Facility Lease Payments			Facility Lease Payments			Total Lease Payments			Total Variable CAM Estimate
2022 Base year lease		232			212			444			175
2023 Base year lease		317			288			605			235
2024 Base year lease		327			296			623			240
2025 Base year lease		336			305			641			245
2026 Base year lease		346			313			659			249
2027 Base year lease		357			322			679			254
2028 Base year lease		242			330			572			184
2029 Base year lease		-			83			83			27
Total base lease payments		2,157		$	2,149			4,306		$	1,609
Imputed interest on lease payments ⁽¹⁾		(316	)		(341	)		(657	)
Total Operating Lease Liability⁽²⁾	$	1,841		$	1,808		$	3,649

Right-of-use Asset⁽³⁾	$	1,773		$	1,758		$	3,531

(3)	Short-term and Long-term portion of Operating Lease Liability is $~~$529~~579 thousand and $~~$3,254~~3,070 thousand, respectively.
~~(3)~~	~~Includes~~ ~~$62~~ ~~thousand of unamortized deferred rent.~~

	●	The principal amount of the Facility is $$2.25 million. The Facility matures on April 15, 2022. The interest rate is variable based on ~~BBVA’s~~PNC’s Prime Rate plus a margin of -~~-0.250%~~0.250%, initially set at 3% at loan origination, and all accrued and unpaid interest is payable monthly in arrears starting on May 15, 2020; and the principal amount is due in full with all accrued and unpaid interest and any other fees on April 15, 2022.

	●	There are commercially standard covenants including, but not limited to, covenants regarding maintenance of corporate existence, not incurring other indebtedness except trade debt, not changing more than 25% stock ownership of Borrower, and a Fixed Charge Coverage Ratio of 1.25:1, with the Fixed Charge Coverage Ratio defined as (earnings before taxes, amortization, depreciation, amortization and rent expense less cash taxes, distribution, dividends and fair value of warrants) divided by (current maturities on long term debt plus interest expense plus rent expense). As of ~~June 27, 2021,~~January 2, 2022, the Company was in compliance with the covenants.

	●	The Facility contains commercially standard events of default including, but not limited to, not making payments when due; incurring a judgment of $$10,000 or more not covered by insurance; not maintaining collateral and the like.

	●	The Facility is secured by a first lien on all of the assets of Borrower.

Valuation Assumptions	Period ended September 29, 2019			Period ended September 27, 2020			Period ended June 28, 2020			Period ended June 27, 2021			Period ended September 27, 2020			Period ended December 27, 2020
Exercise Price ⁽¹⁾	$	1.50		$	1.50		$	1.50		$	1.50		$	1.50		$	1.50
Warrant Expiration Date ⁽¹⁾		8/26/2021			8/26/2021			8/26/2021			8/26/2021			8/26/2021			8/26/2021
Stock Price ⁽²⁾	$	1.56		$	1.96		$	1.90		$	1.53		$	1.96		$	1.73
Interest Rate (annual) ⁽³⁾		1.63	%		0.12	%		0.17	%		0.06	%		0.12	%		0.11	%
Volatility (annual)		53.66	%		51.67	%		52.82	%		44.35	%		51.67	%		44.77	%
Time to Maturity (Years)		1.9			0.9			1.2			0.2			0.9			0.7
Calculated fair value per share	$	0.49		$	0.62		$	0.62		$	0.13		$	0.62		$	0.37

(1)	Based on the terms provided in the warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26, 2016.
(2)	Based on the trading value of common stock of Optex Systems Holdings, Inc. as of each presented period ~~ended~~end date.
(3)	Interest rate for U.S. Treasury Bonds as each presented period ended date, as published by the U.S. Federal Reserve.

Warrant Liability	Warrants Outstanding		Fair Value per Share		Fair Value (000’s)
Fair Value as of period ended 9/29/2019		4,125,200	$	0.49	$	2,036
Loss on Change in Fair Value of Warrant Liability						504
Fair Value as of period ended 6/28/2020		4,125,200	$	0.62		2,540

Fair Value as of period ended 9/27/2020		4,125,200	$	0.62	$	2,544
Gain on Change in Fair Value of Warrant Liability						(2,025	)
Fair Value as of period ended 6/27/2021		4,125,200	$	0.13	$	519

	Restricted Stock Units			Weighted Average Grant Date Fair Value		Restricted Shares			Weighted Average Grant Date Fair Value		Restricted Stock Units			Weighted Average Grant Date Fair Value		Restricted Shares			Weighted Average Grant Date Fair Value
Outstanding at September 29, 2019		216,500		$	1.29		—			—
Granted		50,000		$	2.13		300,000		$	1.75
Vested		(84,500	)	$	1.25		—			—
Forfeited		-			—		—			—
Outstanding at September 27, 2020		182,000		$	1.54		300,000		$	1.75		182,000		$	1.54		300,000			1.75
Granted		—			—		—			—		—			—		—			—
Vested		(83,000	)	$	1.49		(60,000	)	$	1.75		(83,000	)	$	1.49		(60,000	)	$	1.75
Forfeited		—			—		—			—		—			—		—			—
Outstanding at June 27, 2021		99,000		$	1.59		240,000		$	1.75
Outstanding at October 3, 2021												99,000		$	1.59		240,000		$	1.75
Granted												—			—		—			—
Vested												(33,000	)		1.73		(60,000	)		1.75
Forfeited												—			—		—			—
Outstanding at January 2, 2022												66,000		$	1.52		180,000		$	1.75

	Stock Compensation
	(thousands)
	Recognized Compensation Expense								Unrecognized Compensation Expense
	Three months ended				Nine months ended				As of period ended
	June 27, 2021		June 28, 2020		June 27, 2021		June 28, 2020		June 27, 2021		September 27, 2020

Restricted Shares	$	26	$	31	$	79	$	31	$	368	$	446
Restricted Stock Units		31		32		92		89		96		188
Total Stock Compensation	$	57	$	63	$	171	$	120	$	464	$	634

Fiscal Period	Total number of shares purchased		Total purchase cost		Average price paid per share (with commission)		Maximum dollar value that may yet be purchased under the plan		Total number of shares purchased		Total purchase cost		Average price paid per share (with commission)		Maximum dollar value that may yet be purchased under the plan
May 24, 2020 through June 28, 2020		34,243	$	63	$	1.84	$	937
June 29, 2020 through July 26, 2020		6,806		13		1.89		924
July 27, 2020 through August 23, 2020		10,688		21		1.96		903
August 23, 2020 through September 27, 2020		53,996		103		1.90		800
Total shares repurchases as of September 27, 2020		105,733	$	200		1.89		800
						-
September 28, 2020 through October 25, 2020		20,948		42		2.01		758		20,948		42		2.01		758
October 26, 2020 through November 22, 2020		129,245		265		2.05		493		129,245		265		2.05		493
November 23, 2020 through December 27, 2020		58,399		109		1.86		384		58,399		109		1.86		384
December 28, 2020 through January 24, 2021		40,362		73		1.80		312		40,362		73		1.80		311
January 25, 2021 through February 21, 2021		52,180		101		1.94		211		52,180		101		1.94		210
February 22, 2021 through March 28, 2021		73,800		140		1.90		70		73,800		140		1.90		70
March 29, 2021 through April 19, 2021		38,599		70		1.82		-		38,599		70		1.82		-
Total shares repurchased as of June 27, 2021		519,266	$	1,000	$	1.93	$	-
September 23, 2021 through October 1, 2021										35,555	$	69	$	1.93	$	931

Total shares repurchased for year ended October 3, 2021										449,088	$	869	$	1.93	$	-

October 4, 2021 through October 31, 2021										18,265		37		2.01		894
November 1, 2021 through November 28, 2021										4,415		9		2.04		885
November 29, 2021 through January 2, 2022										14,558		28		1.93		857
Total shares repurchased for three months ended January 2, 2022										37,238	$	74	$	1.98	$	857

●	On November 12, 2019, the Company announced a multi-year Indefinite Delivery Indefinite Quantity (IDIQ) award from Defense Logistics Agency Land and Maritime for periscopes for up to $2.3 Million over a five-year period.

●	On December 3, 2019 the Company announced a shared award for a maximum of $35 Million for Improved Commander Weapon System (ICWS) periscopes under a three-year Indefinite Delivery - Indefinite Quantity (IDIQ) contract with two additional optional years. Optex and another recipient have been awarded this shared award from Defense Logistics Agency, Land and Maritime. Each company’s portion of the award will depend on price and performance over the ordering periods.

●	On January 22, 2020, the Company announced it has been awarded a $1.1 Million order as part of a multi-year strategic supplier agreement with a domestic manufacturer of premium optical devices. The products will be manufactured at the Applied Optics Center (AOC) Division of Optex Systems, Inc.

●	On January 27, 2020, the Company announced a multi-year Indefinite Delivery Indefinite Quantity (IDIQ) award from Defense Logistics Agency Land and Maritime for periscopes for up to $3.6 million over a five-year period.

●	On February 18, 2020, the Company announced a multi-year Indefinite Delivery Indefinite Quantity (IDIQ) award from Defense Logistics Agency Land and Maritime for periscopes for up to $9.2 million over a five-year period.

●	~~On August 3, 2020, the Company announced a $2.0 Million order from a U. S. prime contractor for optical subassemblies for shipments starting in 2021.~~

●	On January 11, 2021, the Company announced a contract for Laser Protected Periscopes for a base period of three years plus two one-year option years, not to exceed $14.4 million pursuant to an Indefinite Delivery - Indefinite Quantity (IDIQ) contract.

●	~~On August 3, 2021, the Company announced a contract award of $8.4 million as part of a twenty-four-month purchase order for laser filters manufactured at the (AOC) Division of Optex Systems, Inc.~~

	(Millions)
Product Line	Q1 2022		Q1 2021		Variance			% Chg
Periscopes	$	2.2	$	2.6	$	(0.4	)		(15.4	)%
Sighting Systems		0.1		-		0.1			100.0	%
Howitzer		-		-		-			-	%
Other		0.3		-		0.3			100.0	%
Optex Systems – Richardson		2.6		2.6		-			-	%
Optical Assemblies		0.2		-		0.2			100.0	%
Laser Filters		-		0.1		(0.1	)		(100.0	)%
Day Windows		-		-		-			-	%
Other		0.7		0.5		0.2			40.0	%
Applied Optics Center – Dallas		0.9		0.6		0.3			50.0	%
Total Customer Orders	$	3.5	$	3.2	$	0.3			9.4	%

Product Line	Total Backlog 1/2/2022		Total Backlog 10/3/2021		Variance			% Chg
Periscopes	$	6.9	$	5.6	$	1.3			23.2	%
Sighting Systems		1.5		1.7		(0.2	)		(11.8	)%
Howitzer		2.3		2.3		-			-	%
Other		1.0		1.4		(0.4	)		(28.8	)%
Optex Systems - Richardson		11.7		11.0		0.7			6.4	%
Optical Assemblies		4.1		5.0		(1.1	)		22.0	%
Laser Filters		9.0		9.9		(0.9	)		(9.1	)%
Day Windows		0.9		1.1		(0.2	)		(18.2	)%
Other		0.8		0.3		0.5			166.7	%
Applied Optics Center - Dallas		14.8		16.3		(1.5	)		(9.2	)%
Total Backlog	$	26.5	$	27.3	$	(0.8	)		(2.9	)%

	●	is made in accordance with generally accepted accounting principles,

	●	involves a significant level of estimation uncertainty, and

	●	has had or is reasonably likely to have a material impact on the company’s financial condition or results of operation.

Exhibit
No.		Description

10.1		Employment Agreement of Danny Schoening, dated December 1, 2021

31.1 and 31.2		Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

32.1 and 32.2		Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

~~104~~		~~Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101).~~
EX-101.INS		Inline XBRL Instance Document
EX-101.SCH		Inline XBRL Taxonomy Extension Schema Document
EX-101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
EX-101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
EX-101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
EX-101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

	OPTEX SYSTEMS HOLDINGS, INC.

Date: ~~August 16, 2021~~February 14, 2022	By:	/s/ Danny Schoening
		Danny Schoening
		Principal Executive Officer

	OPTEX SYSTEMS HOLDINGS, INC.

Date: ~~August 16, 2021~~February 14, 2022	By:	/s/ Karen Hawkins
		Karen Hawkins
		Principal Financial Officer and
		Principal Accounting Officer