UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~January 1,~~ December 31, 2023

☐	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~~001-41644

90-0609531

(State or other jurisdiction

~~of incorporation)~~

(Commission

~~File Number)~~

(IRS Employer

of incorporation)

File Number)

Identification No.)

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

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

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.~~Common Stock, $0.001 par value		OPXS		The Nasdaq Stock Market LLC

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 ☒ No ☐

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 ☒ 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. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of February ~~13, 2023:~~12, 2024: ~~6,763,070~~ 6,823,693shares of common stock.

OPTEX SYSTEMS HOLDINGS, INC.

FORM 10-Q

For the period ended ~~January 1,~~December 31, 2023

INDEX

PART I— FINANCIAL INFORMATION		F-1

Item 1.	Unaudited Condensed Consolidated Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1413
Item 4.	Controls and Procedures	1413
PART II— OTHER INFORMATION		1413
Item 1.	Legal Proceedings	1413
Item 1A.	Risk Factors	1413
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	1413
Item 3.	Defaults Upon Senior Securities	1413
Item 4.	Mine Safety Disclosures	1413
Item 6.	Exhibits	1513
SIGNATURE		1614

Part 1. Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

OPTEX SYSTEMS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~AS OF JANUARY 1, 2023~~

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF ~~JANUARY 1,~~DECEMBER 31, 2023 (UNAUDITED) AND OCTOBER ~~2, 2022~~1, 2023	F-2

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED ~~JANUARY 1,~~DECEMBER 31, 2023 (UNAUDITED) AND THE THREE MONTHS ENDED JANUARY ~~2, 2022~~1, 2023 (UNAUDITED)	F-3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED ~~JANUARY 1,~~DECEMBER 31, 2023 (UNAUDITED) AND THE THREE MONTHS ENDED JANUARY ~~2, 2022~~1, 2023 (UNAUDITED)	F-4

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED ~~JANUARY 1,~~DECEMBER 31, 2023 (UNAUDITED) AND THE THREE MONTHS ENDED JANUARY ~~2, 2022~~1, 2023 (UNAUDITED)	F-5

CONDENSED CONSOLIDATED FINANCIAL STATEMENT FOOTNOTES (UNAUDITED)	F-6

F-1

Optex Systems Holdings, Inc.

Condensed Consolidated Balance Sheets

							December 31, 2023			October 1, 2023
	(Thousands, except share and per share data)						(Thousands, except share and per share data)
	January 1, 2023			October 2, 2022			December 31, 2023 (Unaudited)			October 1, 2023
	(Unaudited)
ASSETS

Cash and Cash Equivalents	$	1,280		$	934		$	2,373		$	1,204
Accounts Receivable, Net		1,605			2,908			2,430			3,624
Inventory, Net		10,798			9,212			12,685			12,153
Contract Asset		336			-			258			336
Prepaid Expenses		249			328			154			219

Current Assets		14,268			13,382			17,900			17,536

Property and Equipment, Net		977			968			964			998

Other Assets
Deferred Tax Asset		1,001			942			887			922
Right-of-use Asset		3,104			3,222			2,615			2,740
Security Deposits		23			23			23			23

Other Assets		4,128			4,187			3,525			3,685

Total Assets	$	19,373		$	18,537		$	22,389		$	22,219

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts Payable	$	1,433		$	706		$	1,796		$	810
Operating Lease Liability		608			604			625			620
Federal Income Taxes Payable		331			331			326			247
Accrued Expenses		977			958			992			1,265
Accrued Selling Expense		336			-			280			336
Accrued Warranty Costs		229			169			48			75
Contract Loss Reserves		282			289			308			243
Customer Advance Deposits		326			311			481			481

Current Liabilities		4,522			3,368			4,856			4,077

Other Liabilities
Credit Facility								-			1,000
Operating Lease Liability, net of current portion		2,646			2,761			2,156			2,282

Other Liabilities		2,646			2,761			2,156			3,282

Total Liabilities		7,168			6,129			7,012			7,359

Commitments and Contingencies								-

Stockholders’ Equity
Common Stock – ($0.001 par, 2,000,000,000 authorized, 6,763,070 and 6,716,638 shares issued, and 6,763,070 and 6,716,638 shares outstanding, respectively)		7			7
Additional Paid in capital		21,116			21,096
Common Stock – ($0.001 par, 2,000,000,000 authorized, 6,823,693 and 6,763,070 shares issued and outstanding, respectively)								7			7
Additional Paid in Capital								21,371			21,285
Accumulated Deficit		(8,918	)		(8,695	)		(6,001	)		(6,432	)

Stockholders’ Equity		12,205			12,408			15,377			14,860

Total Liabilities and Stockholders’ Equity	$	19,373		$	18,537		$	22,389		$	22,219

The accompanying notes are an integral part of these condensed consolidated financial statements

F-2

Optex Systems Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

							December 31, 2023			January 1, 2023
	(Thousands, except share and per share data)						(Thousands, except share and per share data)
	Three months ended						Three months ended
	January 1, 2023			January 2, 2022			December 31, 2023			January 1, 2023

Revenue	$	4,040		$	4,340		$	6,968		$	4,040

Cost of Sales		3,323			3,517			5,284			3,323

Gross Profit		717			823			1,684			717

General and Administrative Expense		999			808			1,131			999

Operating (Loss) Income		(282	)		15
Operating Income (Loss)								553			(282	)

Other Expense		-			-			(7	)		-

(Loss) Income Before Taxes		(282	)		15
Income (Loss) Before Taxes								546			(282	)

Income Tax Benefit	$	(59	)	$	(14	)
Income Tax Expense (Benefit)							$	115		$	(59	)

Net (loss) income	$	(223	)	$	29
Basic (loss) income per share	$	(0.03	)	$	0.00
Net Income (Loss)							$	431		$	(223	)
Basic income (loss) per share							$	0.06		$	(0.03	)

Weighted Average Common Shares Outstanding - basic		6,537,808			8,228,980			6,666,290			6,537,808

Diluted (loss) income per share	$	(0.03	)	$	0.00
Diluted income (loss) per share							$	0.06		$	(0.03	)

Weighted Average Common Shares Outstanding - diluted		6,537,808			8,281,841			6,721,661			6,537,808

The accompanying notes are an integral part of these condensed consolidated financial statements

F-3

Optex Systems Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	(Thousands)						December 31, 2023			January 1, 2023
	Three months ended						(Thousands) Three months ended
	January 1, 2023			January 2, 2022			December 31, 2023			January 1, 2023

Cash Flows from Operating Activities:
Net (Loss) Income	$	(223	)	$	29
Net Income (Loss)							$	431		$	(223	)

Adjustments to Reconcile Net (Loss) Income to Net Cash provided by Operating Activities:
Adjustments to Reconcile Net Income (Loss) to Net Cash provided by Operating Activities:
Depreciation and Amortization		81			72			92			81
Stock Compensation Expense		35			57			113			35
Deferred Tax		(59	)		(14	)		35			(59	)
Accounts Receivable		1,303			1,173			1,194			1,303
Inventory		(1,586	)		(335	)		(532	)		(1,586	)
Contract Asset		(336	)		-			78			(336	)
Prepaid Expenses		79			11			65			79
Leases		8			55			4			8
Accounts Payable and Accrued Expenses		745			457			713			745
Federal Income Taxes Payable								79			-
Accrued Warranty Costs		60			44			(27	)		60
Accrued Selling Expense		336			-			(56	)		336
Customer Advance Deposits		15			-			-			15
Accrued Contract Losses		(7	)
Contract Loss Reserves								65			(7	)
Total Adjustments		674			1,520			1,823			674
Net Cash provided by Operating Activities		451			1,549			2,254			451

Cash Flows used in Investing Activities
Purchases of Property and Equipment		(90	)		(90	)		(58	)		(90	)
Net Cash used in Investing Activities		(90	)		(90	)		(58	)		(90	)

Cash Flows used in Financing Activities
Payments to Credit Facility								(1,000	)		-
Cash Paid for Taxes Withheld on Net Settled Restricted Stock Unit Shares Issued		(15	)		-			(27	)		(15	)
Common Stock Repurchase		-			(74	)

Net Cash used in Financing Activities		(15	)		(74	)		(1,027	)		(15	)

Net Increase in Cash and Cash Equivalents		346			1,385			1,169			346
Cash and Cash Equivalents at Beginning of Period		934			3,900			1,204			934
Cash and Cash Equivalents at End of Period	$	1,280		$	5,285		$	2,373		$	1,280

Supplemental Cash Flow Information
Cash Paid for Interest							$	7		$	-

The accompanying notes are an integral part of these condensed consolidated financial statements

F-4

Optex Systems Holdings, Inc.

Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity

~~(Unaudited)~~

(Thousands, except share data)

(Unaudited)

Three months ended January 1, 2023
Common Additional Total
Shares Treasury Common Treasury Paid in Retained Stockholders
Issued Shares Stock Stock Capital Earnings Equity
Balance at October 2, 2022 6,716,638      - $      7 $      - $ 21,096 $ (8,695 ) $ 12,408
Stock Compensation Expense - - - - 35 - 35
Vested Restricted Stock Units, net of withheld taxes 46,432 - - - (15 ) - (15 )
Net loss - - - - - (223 ) (223 )

Balance at January 1, 2023 6,763,070 - $ 7 $ - $ 21,116 $ (8,918 ) $ 12,205

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
Net income (loss) - - - - - 29 29

Balance at January 2, 2022 8,546,920 72,793 $ 9 $ (143 ) $ 25,809 $ (9,949 ) $ 15,726
Ending balance 8,546,920 72,793 $ 9 $ (143 ) $ 25,809 $ (9,949 ) $ 15,726
Issued Stock Capital Earnings Equity
Three months ended December 31, 2023
Common Additional Total
Shares Common Paid in Accumulated Stockholders
Issued Stock Capital Deficit Equity
Balance at October 1, 2023 6,763,070 $ 7 $ 21,285 $ (6,432 ) $ 14,860
Stock Compensation Expense - - 113 - 113
Vested Performance Based Shares net of withheld taxes⁽¹⁾ 60,623 - (27 ) - (27 )
Net Income - - - 431 431

Balance at December 31, 2023 6,823,693 $         7 $ 21,371 $ (6,001 ) $ 15,377
Three months ended January 1, 2023
Common Additional Total
Shares Common Paid in Accumulated Stockholders
Issued Stock Capital Deficit Equity
Balance at October 2, 2022 6,716,638 $ 7 $ 21,096 $ (8,695 ) $ 12,408
Stock Compensation Expense - - 35 - 35
Vested Restricted Stock Units, net of withheld taxes⁽²⁾ 46,432 - (15 ) - (15 )
Net loss - - - (223 ) (223 )
Net Income (loss) - - - (223 ) (223 )

Balance at January 1, 2023 6,763,070 $        7 $ 21,116 $ (8,918 ) $ 12,205

(1) ~~Common~~Performance based shares ~~repurchased in the open market during the three months ended January 2, 2022. The shares were held as treasury stock using the cost method and subsequently cancelled as of~~vested October 2, ~~2022.~~2023, December 22, 2023 and December 29, 2023 issued net of tax withheld. Shares were vested based on reaching 30-day VWAP of $3.70, $4.45 and $5.35 on the respective vesting dates.
(2) Restricted stock units vested January 1, 2023 issued net of tax withheld.

The accompanying notes are an integral part of these condensed consolidated 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 for the three months ended ~~January 1,~~December 31, 2023 were derived from the U.S. government (2216%), ~~one~~three major U.S. defense ~~contractor~~contractors (1428%), 9%, and 5%, respectively), one major commercial customer (3718%), and all other customers (2724%). Approximately 9591% of the total company revenue is generated from domestic customers and 59% is derived from foreign ~~customers, primarily in Canada.~~customers. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of ~~January 1,~~December 31, 2023, Optex Systems Holdings operated with 92105 full-time equivalent employees.

Note 2 - Accounting Policies

Basis of Presentation

Principles of ~~Consolidation:~~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.

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 October ~~2, 2022~~1, 2023 and other reports filed with the SEC.

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.

Inventory: As of ~~January 1,~~December 31, 2023 and October ~~2, 2022,~~1, 2023, inventory included:
Schedule of Inventory
January 1, 2023 October 2, 2022
(Thousands) (Thousands)
January 1, 2023 October 2, 2022 December 31, 2023 October 1, 2023
Raw Materials $ 6,240 $ 6,953
Raw Material $ 8,483 $ 8,211
Work in Process 4,822 2,722 4,628 4,460
Finished Goods 547 348 581 489
Gross Inventory $ 11,609 $ 10,023 $ 13,692 $ 13,160
Less: Inventory Reserves (811 ) (811 ) (1,007 ) (1,007 )
Net Inventory $ 10,798 $ 9,212 $ 12,685 $ 12,153

Concentration of Credit Risk:Optex Systems Holdings’ accounts receivables as of ~~January 1,~~December 31, 2023 ~~consist~~consisted of U.S. government agencies (309%), ~~three~~six major U.S. defense contractors (1225%, 127%, 7%, 5%, 5%, and 75%, respectively), one ~~major~~ commercial customer (3218%), one foreign military customer (10%) and all other customers (79%). The Company does not believe that this concentration results in undue credit risk because of the financial strength of the customers and the Company’s long history with these customers.

~~F-6~~
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 ~~January 1,~~December 31, 2023, and October ~~2, 2022,~~1, 2023, the Company had warranty reserve balances of $~~229~~48 ~~thousand~~ and $~~169~~75 thousand, respectively.
F-6
Schedule of Warranty Reserves

Three months ended Three months ended
January 1, 2023 January 2, 2022 December 31, 2023 January 1, 2023
Beginning balance $ 169 $ 78 $ 75 $ 169

Incurred costs for warranties satisfied during the period - (2 ) (32 ) -

Warranty expenses for new product shipped during the period⁽¹⁾ 60 46
Warranty Expenses:
Warranties reserved for new product shipped during the period⁽¹⁾ 52 60
Change in estimate for pre-existing warranty liabilities⁽²⁾ (47 ) -
Warranty Expense 5 60

Ending balance $ 229 $ 122 $ 48 $ 229

(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 recognized in cost of sales associated with: the period end customer returned warranty backlog, or the actual costs of repaired/replaced warranty units which were shipped to the customer during the current period.

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, accounts payable and accrued liabilities are carried at, or approximate, fair value as of the reporting date because of their short-term nature. The credit facility is reported at fair value as it bears market rates of interest.

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

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

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

~~F-7~~
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 relates to optimized weapon system support (OWSS) and includes ongoing program maintenance, repairs and spare inventory support for the customer’s existing fleet units in service during the duration of the contract. Revenue recognition for this program has been recorded by the Company, and compensated by the customer, at fixed monthly increments over time, consistent with the defined contract maintenance period. During the three months ended December 31, 2023 and January 1, 2023, ~~and January 2, 2022,~~ there was $~~112~~ 115thousand and $~~120~~112 thousand in service contract revenue recognized over time.

F-7
During the ~~three-month periods~~three months ended December 31, 2023 and January 1, 2023, ~~and January 2, 2022,~~ there waszero and $29 thousand ~~and~~ ~~zero~~of revenue recognized ~~respectively,~~ from customer deposit liabilities (deferred contract revenue). As of ~~January 1,~~December 31, 2023, ~~there~~customer deposit liabilities were $~~326~~481 ~~thousand in customer deposit liabilities.~~thousand.

~~For the three months ended January~~As of December 31, 2023 and October 1, 2023, there ~~were~~was $280 and $336 thousand in accrued selling expenses and $258 and $336 thousand in contract assets related to a ~~new~~ $3.4 million contract booked in November 2022. During the three months ended December 31, 2023, the contract was reduced from $3.4 million to $3.1 million and selling expenses were reduced by 1% as a result of contract price negotiations which resulted in a reduction of contract assets and accrued selling expenses of $56 thousand. The costs will be amortized against the revenue for the contract deliveries which began in the first quarter of fiscal year 2024 and are expected to ~~begin in April 2023 and~~ extend through ~~the following 10-15 months into~~ fiscal year ~~2024.~~2025. During the three months ended December 31, 2023, we booked $22 thousand of selling expenses against the contract asset for shipments against the contract.

Contract Loss Reserves: The Company records loss provisions in the event that the current estimated total revenue against a contract and the total estimated cost remaining to fulfill the contract indicate a loss upon completion. When the estimated costs indicate a loss, we record the entire value of the loss against the contract loss reserve in the period the determination is made. The Company has several long-term fixed price contracts that are currently indicative of a loss condition due to recent inflationary pressures on material and labor, combined with increased manufacturing overhead costs. Some of these long-term contracts have option year ordering periods ending in February 2025 with deliveries that may extend into February 2026. As of ~~the three months ended January 1,~~December 31, 2023 and October ~~2, 2022,~~1, 2023, the accrued contract loss reserves were $~~282~~ 308thousand and $~~289~~243 thousand, respectively.
During the three months ended December 31, 2023, the Company recognized $90 thousand in loss reserves on new contract awards and made shipments resulting in reductions of $25 thousand against existing loss reserves. During the three months ended January 1, 2023, the Company recognized ~~additional expenses for contract loss reserves of~~ $51 thousand in loss reserves on new ~~task~~contract awards ~~against the long-term fixed contracts~~ and ~~applied~~made shipments resulting in reductions of $58 thousand ~~of the reserves~~ against ~~revenues booked during the period.~~existing loss reserves.

Income Tax/Deferred Tax: As of ~~January 1,~~December 31, 2023 and October ~~2, 2022,~~1, 2023, Optex Systems, Inc. has a deferred tax asset valuation allowance of ($0.8) million against deferred tax assets of $~~1.8~~1.7 million, for a net deferred tax asset of $0.9 million. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2011 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control. ~~During the three months ended January 1, 2023, our deferred tax assets increased by $~~59 ~~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.

The Company has potentially dilutive securities outstanding, which include unvested restricted stock units and ~~stock options.~~unvested shares of restricted stock. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Unvested restricted stock units and shares of restricted stock ~~options~~ that are anti-dilutive are excluded from the calculation of diluted earnings per common share.
For the three months ended December 31, 2023, 120,000 shares of unvested restricted stock and 39,000 restricted stock units (which convert to an aggregate of 55,371 incremental shares) were included in the diluted earnings per share calculation and 54,000 performance shares were excluded from diluted earnings per share as they were below the target share price.

For the three months ended January 1, 2023, 120,000 unvested shares of restricted stock (which convert to an aggregate of 36,045 incremental shares) were excluded from the diluted earnings per share calculation as antidilutive due to the net loss for the period. ~~For the three months ended January 2, 2022,~~ ~~66,000~~ ~~unvested restricted stock units and~~ ~~180,000~~ ~~shares of unvested restricted stock (which convert to an aggregate of~~ ~~52,861~~ ~~incremental shares) were included in the diluted earnings per share calculation.~~
F-8

Note 3 – Recent Accounting Pronouncements
In June 2, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASC 326 provides guidance on how an entity should measure credit losses on financial instruments. The new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The new guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The update is effective for smaller reporting entities for fiscal years beginning after December 15, 2022, including interim periods within those years, as such the Company adopted ASU 2016-13 and (ASC Topic 326) on fiscal year beginning October 2, 2023 with no material impact to Optex Systems Holdings’ financial statements.
Note 34 - Segment Reporting

The Company’s two reportable segments, Applied Optics Center and Optex Systems – Richardson (“Optex Systems”), are strategic businesses offering similar products to similar markets and customers; however, ~~the companies~~they 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”)~~Systems segment. Intersegment sales and transfers are accounted for at annually agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general and administrative costs, but exclude profits that would apply to third party external customers.

Optex Systems (OPX) – Richardson, Texas

Optex Systems revenues are primarily in support of prime and subcontracted military customers. ~~Approximately~~Military sales to prime and subcontracted customers represented approximately 86100% and sales to commercial customers represented less than 1% of the external segment revenue for the three months ended December 31, 2023. The Optex Systems segment revenue is comprised of ~~domestic military customers,~~approximately 1281% ~~is comprised of foreign~~domestic military customers and 219% ~~is comprised of commercial~~foreign military customers. For the three months ended December 31, 2023, Optex Systems ~~segment revenue is derived from the U.S. government, representing~~represented 19~~%, and one major U.S. defense contractor representing~~ 1449% of the Company’s total consolidated ~~revenue.~~revenue and consisted of revenue from one major defense contractor (24%), the U.S. Government (11%) and all other customers (14%).

Optex Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of ~~January 1,~~December 31, 2023, the Richardson facility operated with 5058 full time equivalent employees in a single shift ~~operation.~~operation which includes 9 home office support employees. The facilities at Optex Systems, Richardson ~~serves~~serve 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~~represented approximately 6535% and military sales to prime and subcontracted customers ~~represent~~represented approximately 3565% of the ~~total~~external segment ~~revenue.~~revenue for the three months ended December 31, 2023. Approximately 95% of the AOC revenue iswas derived from external customers and approximately 5% iswas related to intersegment sales to Optex Systems in support of military contracts. For the three months ended ~~January 1,~~December 31, 2023, ~~the~~ AOC ~~segment revenue from one major commercial customer represents approximately~~represented 3751% of the Company’s total consolidated ~~revenue.~~revenue and consisted of revenue from two major defense contractors (9% and 5%), one commercial customer (18%), and all other customers (19%).

The Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of ~~January 1,~~December 31, 2023, AOC operated with 4247 full time equivalent employees in a single shift operation.
F-9

The financial tables below present information on the reportable segments’ profit or loss for each period, as well as segment assets as of each period end. The Company does not allocate interest expense, income taxes or unusual items to segments.
Schedule of Segment Reporting Information
~~F-9~~

Reportable Segment Financial Information
(thousands)

As of and for the three months ended December 31, 2023

Optex Systems
Richardson

Applied Optics Center
Dallas

Other
(non-allocated costs and intersegment eliminations)

Consolidated
Total

Revenues from external customers $ 3,394 $ 3,574 $ - $ 6,968
Intersegment revenues - 187 (187 ) -
Total revenue $ 3,394 $ 3,761 $ (187 ) $ 6,968

Depreciation and amortization $ 10 $ 82 $ - $ 92

Interest expense $ - - $ 7 $ 7

Income (loss) before taxes $ 15 $ 651 $ (120 ) $ 546

Other significant noncash items:
Allocated home office expense $ (343 ) $ 343 $ - $ -
Stock compensation expense $ - $ - $ 113 $ 113
Warranty expense $ - $ 5 $ - $ 5

Segment assets $ 14,336 $ 8,053 $ - $ 22,389
Expenditures for segment assets $ 33 $ 25 $ - $ 58

Reportable Segment Financial Information
(thousands)
Reportable Segment Financial Information
(thousands)

As of and for the three months ended January 1, 2023 As of and for the three months ended January 1, 2023
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 $ 1,619 $ 2,421 $ - $ 4,040 $ 1,619 $ 2,421 $ - $ 4,040
Intersegment revenues - 116 (116 ) - - 116 (116 ) -
Total Revenue $ 1,619 $ 2,537 $ (116 ) $ 4,040
Total revenue $ 1,619 $ 2,537 $ (116 ) $ 4,040

Depreciation and Amortization $ 11 $ 70 $ - $ 81
Depreciation and amortization $ 11 $ 70 $ - $ 81

(Loss) income before taxes $ (424 ) $ 177 $ (35 ) $ (282 )
Income (loss) before taxes $ (424 ) $ 177 $ (35 ) $ (282 )

Other significant noncash items:
Allocated home office expense $ (280 ) $ 280 $ - $ - $ (280 ) $ 280 $ - $ -
Stock compensation expense $ - $ - $ 35 $ 35 $ - $ - $ 35 $ 35
Warranty expense $ - $ 60 $ - $ 60 $ - 60 - 60
$ $ - $
Segment Assets $ 11,745 $ 7,628 $ - $ 19,373
Segment assets $ 11,745 $ 7,628 $ - $ 19,373
Expenditures for segment assets $ 23 $ 67 $ - $ 90 $ 23 $ 67 $ - $ 90
Reportable Segment Financial Information
(thousands)
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

Revenues from external customers $ 1,857 $ 2,483 $ - $ 4,340
Intersegment revenues - 180 (180 ) -
Total Revenue $ 1,857 $ 2,663 $ (180 ) $ 4,340

Depreciation and Amortization $ 10 $ 62 $ - $ 72

Income (loss) before taxes $ (216 ) $ 288 $ (57 ) $ 15

Other significant noncash items:
Allocated home office expense $ (236 ) $ 236 $ - $ -
Stock compensation expense $ - $ - $ 57 $ 57
Warranty expense $ - $ 46 $ - $ 46

Segment Assets $ 14,267 $ 7,088 $ - $ 21,355
Expenditures for segment assets $ 25 $ 65 $ - $ 90

F-10

Note 45 - Commitments and Contingencies

Non-cancellable Operating Leases

Optex Systems Holdings leases its office and manufacturing facilities for the Optex Systems, Inc., Richardson location and the Applied Optics Center Dallas location. The Company also leases certain office equipment under non-cancellable operating leases.

The facility leased ~~facility under~~by Optex Systems Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months, commencing on April 1, 2021 and ending on May 31, ~~2028.~~2028. The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each year ~~thereafter~~thereafter.. The initial term included 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately $~~11.9~~ 13.1thousand for additional Common Area Maintenance fees and taxes (“CAM”), to be adjusted annually based on actual expenses incurred by the landlord.

The facility leased ~~facility under the~~by Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of44,867 square feet of space at the premises. The previous lease term for this location expired on October 31, 2021 and the monthly base rent was $21.9 thousand through the end of the lease. On January 11, 2021 the Company executed a first amendment extending the terms of the lease for eighty-six (86) months, commencing on November 1, 2021 and ending on December 31, ~~2028.~~2028. The initial base rent is set at $23.6 thousand as of January 1, 2022 and escalates 2.75% on January 1 each year thereafter. The initial term included 2 months of rent abatement for November and December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing rental rate” or the then current base rental rate. Our obligations to make payments under the lease are secured by a $125,000 standby letter of ~~credit~~credit. . The monthly rent includes approximately $~~8.6~~9.3 thousand for additional CAM, to be adjusted annually based on actual expenses incurred by the landlord.

~~The Company had one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of~~ 39 months. The lease cost for the equipment was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November 18, 2021 for an additional 48 months at a cost of $1.2 thousand per month. The start of the lease was delayed until April 2022 due to temporary equipment shortages. The lease renewal resulted in the recognition of an additional right of use asset and a lease liability of $51 thousand, respectively during the twelve months ended October 2, 2022.
As of ~~January 1,~~December 31, 2023, the remaining minimum lease and estimated CAM payments under the non-cancelable facility space leases are as follows:
Schedule of Non-cancellable Operating Leases Minimum Payments
~~Non-cancellable Operating Leases Minimum Payments~~

Fiscal Year Facility Lease Payments Facility Lease Payments Lease Payments Total Lease
Payments Total Variable
CAM Estimate

(Thousands) (Thousands)
Optex
Richardson Applied Optics
Center Office
Equipment Consolidated 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 Facility Lease Payments Facility Lease Payments Lease Payments Total Lease Payments Total Variable CAM Estimate
2023 Base year lease $ 239 $ 218 $ 11 $ 468 $ 188
2024 Base year lease 327 296 15 638 256 $ 246 $ 224 $ 11 $ 481 $ 225
2025 Base year lease 336 305 15 656 261 336 305 15 656 306
2026 Base year lease 346 313 3 662 266 346 313 3 662 312
2027 Base year lease 357 322 - 679 272 357 322 - 679 318
2028 Base year lease 242 330 - 572 198 242 330 - 572 249
2029 Base year lease - 83 - 83 30 - 83 - 83 43
Total base lease payments $ 1,847 $ 1,867 $ 44 $ 3,758 $ 1,471 $ 1,527 $ 1,577 $ 29 $ 3,133 $ 1,453
Imputed interest on lease payments ⁽¹⁾ (238 ) (263 ) (3 ) (504 ) (163 ) (188 ) (1 ) (352 )
Total Operating Lease Liability⁽³⁾ $ 1,609 $ 1,604 $ 41 $ 3,254
Total Operating Lease Liability⁽²⁾ $ 1,364 $ 1,389 $ 28 $ 2,781

Right-of-use Asset⁽²⁾ $ 1,527 $ 1,536 $ 41 $ 3,104
Right-of-use Asset⁽³⁾ $ 1,275 $ 1,312 $ 28 $ 2,615

(1) Assumes a discount borrowing rate of 5.0% on the new lease amendments effective as of January 11, 2021.
(2) Includes $~~150~~166 thousand of unamortized deferred rent.
(3) Short-term and Long-term portion of Operating Lease Liability is $~~608~~625 thousand and $~~2,646~~2,156 thousand, respectively.

Total facilities rental and CAM expense ~~for~~under both facility lease agreements ~~as of~~for the three months ended December 31, 2023 and January 1, 2023 was $217and ~~January 2, 2022 was~~ $214 thousand, ~~and $209~~ ~~thousand,~~ respectively.
Total office equipment rentals included in operating expenses was $5 and $45 thousand for the three months ended ~~January 1,~~December 31, 2023 and January ~~2, 2022,~~1, 2023, respectively.

F-11

Note 56 - 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. (collectively, the ~~“Borrower”~~“Borrowers”), entered into a line of credit facility (the ~~“Facility”~~“PNC Facility”) with BBVA, USA. In June 2021, PNC Bank completed its acquisition of BBVA, USA and the bank name changed to PNC Bank (“PNC”). The substantive terms ~~are~~were as follows:

● The principal amount of the PNC Facility was $2.25 million. The PNC Facility matured on April 15, 2022. The interest rate was variable based on PNC’s ~~Prime Rate plus a margin of~~prime rate minus ~~-0.250~~0.25%, initially set at 3% at loan origination, and all accrued and unpaid interest was payable monthly in arrears starting on May 15, 2020; and the principal amount was due in full with all accrued and unpaid interest and any other fees on April 15, 2022.

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

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

● The PNC Facility was secured by a first lien on all of the assets of ~~Borrower.~~Borrowers.

On April 12, 2022, the ~~Company and its subsidiary, Optex Systems, Inc. (collectively with the Company, the “Borrowers”),~~Borrowers entered into an Amended and Restated Loan Agreement (the ~~“Loan~~“PNC Loan Agreement”) with PNC, ~~Bank, National Association, successor to BBVA USA (the “Lender”),~~ pursuant to which the ~~Borrowers’ existing revolving line of credit facility~~PNC Facility was decreased from $2.25 million to $1.125 million, and the maturity date was extended from April 15, 2022 to April 15, ~~2023. The Company intends to replace or renew the Loan Agreement by April 15,~~ 2023.
~~F-12~~
~~The Loan Agreement requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1~~.

On November 21, 2022, the Borrowers issued an Amended and Restated Revolving Line of Credit Note (the ~~“Line~~“PNC Line of Credit Note”) to ~~the Lender~~PNC in connection with an increase of the ~~Borrowers’ revolving line of credit facility under the Loan Agreement~~PNC Facility from $1.125million to $2.0 million. ~~The maturity date remains April 15, 2023~~. Obligations outstanding under the ~~credit facility will accrue~~PNC Facility accrued interest at a rate equal to ~~the Lender’s~~PNC’s prime rate minus 0.25%.

The PNC Line of Credit Note and PNC Loan Agreement ~~contain~~contained customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The PNC Facility was secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the PNC Facility were subject to acceleration upon the occurrence of an event of default as defined in the PNC Line of Credit Note and PNC Loan Agreement.
For the three months ended January 1, 2023, the interest expense under the PNC Facility was zero. The PNC Facility was replaced by the Texas Capital Facility on March 22, 2023.
F-12
Credit Facility — Texas Capital Bank
On March 22, 2023, the Borrowers entered into a Business Loan Agreement (the “Loan Agreement”) with Texas Capital Bank (the “Lender”), pursuant to which the Lender makes available to the Borrowers a revolving line of credit ~~facility~~in the principal amount of $3 million (the “Texas Capital Facility”). The Texas Capital Facility replaced the $2 million PNC Facility.
The commitment period for advances under the Texas Capital Facility is twenty-six months expiring on May 22, 2025. We refer to the expiration of that time period as the “Maturity Date.” Outstanding advances under the Texas Capital Facility will accrue interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. As of December 31, 2023 the interest rate was 8.1% per annum.
The Loan Agreement contains customary events of default (including a 25% change in ownership) and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes (including changes in management), investments, and restricted payments (including cash dividends). The Loan Agreement also requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1 and a total leverage ratio of 3.00:1. The Texas Capital Facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the ~~credit facility~~Texas Capital Facility are subject to acceleration upon the occurrence of an event of default as defined in the ~~Line~~Loan Agreement. The Loan Agreement further provides for a $125,000 Letter of Credit ~~Note and Loan Agreement.~~sublimit.

The outstanding balance onunder the ~~facility~~Texas Capital Facility was zero as of ~~January 1,~~December 31, 2023 and $1.0 million as of October ~~2, 2022.~~ 1, 2023.
For the three months ended ~~January 1,~~December 31, 2023, ~~and January 2, 2022,~~ the ~~total~~ interest expense ~~against~~under the ~~outstanding line of credit balance~~Texas Capital Facility was $~~zero~~7. thousand.

Note 6-7 - 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 no new grants of stock options during the three months ended January 1, 2023. As of January 1, 2023, there are ~~zero~~ ~~stock options outstanding.~~
Restricted Stock, Performance Shares and Restricted Stock Units issued to Directors, Officers and Employees

The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units, ~~with the latter granted under the Company’s 2016 Restricted Stock Unit Plan:~~and performance shares:
Schedule of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted and Performance Shares
Restricted Stock Units Weighted Average Grant Date Fair Value Restricted Shares Weighted Average Grant Date Fair Value Restricted Stock Units Weighted Average Grant Date Fair Value Restricted Shares Weighted Average Grant Date Fair Value Performance Shares Weighted Average Grant Date Fair Value
Outstanding at October 3, 2021 99,000 $ 1.59 240,000 $ 1.75
Granted - - - -
Vested (33,000 ) $ 1.73 (60,000 ) $ 1.75
Forfeited - - - -
Outstanding at October 2, 2022 66,000 $ 1.52 180,000 $ 1.75 66,000 $ 1.52 180,000 $ 1.75 - $ -
Granted - - - - 42,000 3.05 40,000 3.09 135,000 2.37
Vested (66,000 ) $ 1.52 (60,000 ) $ 1.75 (66,000 ) 1.52 (60,000 ) 1.75 - -
Forfeited - - - - (3,000 ) 3.00 (40,000 ) 1.75 - -
Outstanding at January 1, 2023 - $ - 120,000 $ 1.75
Outstanding at October 1, 2023 39,000 $ 3.06 120,000 $ 2.20 135,000 $ 2.37
Granted - - - - - -
Vested - - - - (81,000 ) 2.57
Forfeited - - - - - -
Outstanding at December 31, 2023 39,000 $ 3.06 120,000 $ 2.20 54,000 $ 2.06
F-13

On January 2, 2019, the Company granted 150,000and 50,000 restricted stock units with a January 2, 2019 grant date to Danny Schoening and Karen Hawkins, respectively, vesting as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34% in year one, and 33% each year thereafter. The stock price at grant date was $1.32 per share. Effective December 1, 2021, the vesting terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described below. The Company amortizes the grant date fair value of $264 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019. As of ~~January~~October 1, 2023, there was no unrecognized compensation cost relating to this award.

~~F-13~~
On February 17, 2020, the Company granted 50,000 restricted stock units to Bill Bates, General Manager of the Applied Optics Center. The restricted stock units vest as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34% in year one, and 33% each year thereafter. The stock price at grant date was $2.13 per share. The Company amortized the grant date fair value of $107 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February 17, 2020.
On April 30, 2020, the Board of Directors held a meeting and voted to increase the annual board compensation for the three independent directors from $22,000 to $36,000 with an effective date of January 1, 2020, in addition to granting 100,000 shares of restricted stock to each independent director which vest at a rate of 20% per year (20,000 shares) each January 1^st through January 1, 2025.The total fair value for the 300,000 shares was $525 thousand based on the stock price of $1.75 as of April 30, 2020. On each of January 1, 2021, January 1, 2022, and January 1, 2023, 60,000 of the restricted director shares vested. On February 16, 2023, 40,000 of the unvested restricted shares were forfeited and cancelled when one of the independent directors departed the Board. On May 9, 2023, the Board of Directors approved a grant of 40,000 shares of restricted stock to independent board member Dayton Judd. The shares vest 50% on each of January 1, 2024 and January 1, 2025. As of the grant date, the fair value of the shares was $124 thousand, to be amortized on a straight-line basis through December 31, 2024. The Company amortizes the grant date fair value to stock compensation expense on a straight-line basis across the five-year and two-year vesting periods beginning on April 30, 2020 and May 9, 2023, respectively. As of October 1, 2023, there were 120,000 unvested restricted shares outstanding.

The Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021.The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date for the restricted stock units granted under such agreement from January 1, 2022 to the “change of control date,” that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.

As of the December 1, 2021 modification date related to the third and final vesting date of the 49,500 unvested restricted stock units held by Danny Schoening, there was no change in the fair value of the modified award as compared to the original award immediately prior to the modification date. The restricted stock units initially were certain to vest on January 1, 2022, but due to the modification, they were less certain to vest, contingent on a “change in control” occurring, which change in control, in case Mr. Schoening iswas terminated by the Company without cause or he resigns with good reason prior to such change in control, was required to occur prior to March 13, 2023. As of the modification date, there was $5 thousand of unrecognized compensation cost associated with the original award. As a matter of expediency, the unrecognized compensation expense as of the modification date was fully expensed through January 1, 2022. There is no additional compensation expense associated with the modification of the restricted stock unit agreement.

On November 28, 2022, the Company entered into a new employment agreement with Danny Schoening which amended Mr. Schoening’s RSU Agreement, dated January 2, 2019, which had been previously amended as of December 1, 2021, by changing the third and final vesting date for the restricted stock units granted under such agreement from the “change of control date” to January 1, 2023.

~~On February 17, 2020, the Company granted~~ ~~50,000~~ ~~restricted stock units to Bill Bates, General Manager of the Applied Optics Center. The restricted stock units vest as of January 1 each year subsequent to the grant date over a~~ ~~three-year~~ ~~period at a rate of~~ 34~~% in year one, and~~ 33~~% each year thereafter. The stock price at grant date was $2.13~~ ~~per share. The Company will amortize the grant date fair value of $107~~ ~~thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February 17, 2020.~~
~~On April 30, 2020, the 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 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 amortizes the grant date fair value to stock compensation expense on a straight-line basis across the~~ ~~five-year~~ ~~vesting period beginning on April 30, 2020. On each of January 1, 2021, January 1, 2022, and January 1, 2023,~~ ~~60,000of the restricted director shares vested. As of January 1, 2023, there were~~ ~~120,000~~ ~~unvested restricted shares.~~
F-14

On January 4, 2022, the Company issued 23,216 common shares to Karen Hawkins, CFO, and Bill Bates (AOC GM), net of tax withholding of $19 thousand, in settlement of 33,000 restricted stock units which vested on January 1, 2022.

On November 28, 2022, the Company entered into a new employment agreement with Danny Schoening which amended Mr. Schoening’s RSU Agreement, dated January 2, 2019, which had been previously amended as of December 1, 2021, by changing the third and final vesting date for the restricted stock units granted under such agreement from the “change of control date” to January 1, 2023.
On January 4, 2023, the Company issued 46,432 common shares to Danny Schoening, CEO, and Bill Bates (AOC GM), net of tax withholding of $1558 thousand, in settlement of 66,000 restricted stock units which vested on January 1, 2023.
On May 1, 2023, the Company granted an aggregate of 39,000 restricted stock units to eleven employees under its 2023 Equity Incentive Plan. As of ~~January~~the grant date, assuming a 23.1% forfeiture rate based on expected turnover across the three years, the aggregate value of the restricted stock units is $90 thousand which will be amortized across the three-year period on a straight-line basis. During the twelve months ended October 1, 2023, there ~~are~~were ~~zero~~3,000 restricted stock units forfeited. On August 14, 2023 there was an additional grant of 3,000 restricted stock units to one new employee with a fair value of $11 thousand. The restricted stock units will vest at a rate of 33.33% annually on the anniversary date of the grant and any unvested restricted stock units will be forfeited if employment terminates prior to the relevant vesting date. As of October 1, 2023 there were 39,000 unvested restricted stock units outstanding.

On May 3, 2023, the Board of Directors approved a grant of 100,000 and 35,000 performance shares to Danny Schoening, CEO, and Karen Hawkins, CFO, respectively. Each performance share represents a contingent right to receive one share of common stock. The performance shares vest in five equal increments if, in each case and during a five-year performance period beginning on October 2, 2023, the average VWAP per share of common stock over a 30 consecutive trading day period equals or exceeds $3.70, $4.45, $5.35, $6.40, or $7.70. The fair value of the shares, as of the grant date, is $320 thousand and will be amortized through December 31, 2025 based on the derived service periods using a Monte Carlo simulation valuation model.
On October 2, 2023, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 1. The Company issued a total of 21,060 shares on October 24, 2023 in settlement of the vested shares, net of tax withheld of $27 thousand.
On December 22, 2023 and December 29, 2023, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 2 and Tranche 3. On January 8, 2024 the Company issued a total of 39,563 shares in settlement of the vested shares, net of tax withheld of $91 thousand. Tax withholding for the share settlement occurred on January 8, 2024 and as such will be reported during the next three-month period ending March 31, 2024.
The assumptions and results for the Monte Carlo simulation are as follows:
Schedule of Assumptions and Results for the Monte Carlo Simulation
Assumptions
Performance Period Start 10/2/2023
Performance Period End 10/1/2028
Term of simulation ⁽¹⁾ 5.42 years
Time steps in simulation 1,365
Time steps per year 252
Common share price at valuation date ⁽²⁾ $ 3.04
Volatility (annual) ⁽⁴⁾ 50.0 %
Risk-free rate (annual) ⁽⁵⁾ 3.37 %
Cost of equity ⁽⁶⁾ 11.5 %
Dividend yield ⁽³⁾ 0.0 %
~~F-14~~F-15

Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5
Number of performance shares in the Tranche ⁽¹⁾ 27,000 27,000 27,000 27,000 27,000
Fair Value of One Performance share ⁽⁷⁾ $ 2.75 $ 2.58 $ 2.39 $ 2.18 $ 1.93
Total Fair Value of Tranche $ 74,345 $ 69,742 $ 64,446 $ 58,819 $ 52,238
Derived Service Period (Years) ⁽⁷⁾ 0.71 1.13 1.60 2.06 2.48
(1) Based on the terms of the Performance Shares agreement issued by the Company on May 3, 2023.
(2) Closing price of OPXS shares on the Valuation Date, as obtained via S&P Capital IQ.
(3) Expected dividends provided by management.
(4) Based on historical volatility of OPXS and comparable public companies.
(5) Interest rate for US Treasury commensurate with the Performance Shares holding period, as of the Valuation Date, as obtained via S&P Capital IQ.
(6) Estimated cost of equity for OPXS as of the Valuation Date.
(7) Based on Monte Carlo simulation.
Stock Based Compensation Expense

Equity compensation is amortized based on a straight-line basis across the vesting or service period as applicable. The recorded compensation costs for ~~options and~~restricted shares granted and restricted stock units and performance shares awarded as well as the unrecognized compensation costs are summarized in the table below:
Schedule of Unrecognized Compensation Costs
Stock Compensation Stock Compensation
(thousands) (thousands)
Recognized Compensation Expense Unrecognized Compensation Expense Recognized Compensation Expense Unrecognized Compensation Expense
Three months ended As of Three months ended As of
January 1, 2023 January 2, 2022 January 1, 2023 October 2, 2022 December 31, 2023 January 1, 2023 December 31, 2023 October 1, 2023

Restricted Shares $ 26 $ 26 $ 210 $ 236 $ 41 $ 26 $ 132 $ 173
Performance Based Shares 64 - 148 212
Restricted Stock Units 9 31 - 9 8 9 80 88
Total Stock Compensation $ 35 $ 57 $ 210 $ 245 $ 113 $ 35 $ 360 $ 473

Note 78 - Stockholders’ Equity

Dividends

~~As of~~No dividends were declared or paid during the three months ended ~~January 1,~~December 31, 2023 ~~and~~or the twelve months ended October ~~2, 2022, there were~~ no ~~declared or outstanding dividends payable.~~1, 2023.
F-16

Common stock
~~On June 8, 2020 the Company announced authorization for 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~~ ~~common shares against the program through April 2021, which were subsequently cancelled in June 2021.~~

On September 22, 2021, the Company announced authorization ~~for an additional~~of a $1 million stock repurchase program. The shares authorized to be repurchased under the repurchase program may be purchased from time to time at prevailing market prices, through open market transactions or in negotiated transactions, depending upon market conditions and subject to Rule 10b-18 as promulgated by the SEC.

~~F-15~~
During the three months ended December 31, 2023 and January 1, 2023, there were zero common shares repurchased under the program.

During the three months ended ~~January 1,~~December 31, 2023, ~~there were zero common shares repurchased under the program. All shares purchased have been cancelled. A summary of the purchases under the program follows:~~
~~Summary of Purchases Under Plan~~
Fiscal Period
Total number
of shares
purchased

Total
purchase cost

Average price
paid per
share
(with
commission)

Maximum
dollar
value that
may
yet be
purchased
under the
plan

October 4, 2021 through October 31, 2021 18,265 $ 37 $ 2.01 $ 894
November 1, 2021 through November 28, 2021 4,415 9 2.04 885
November 29, 2021 through January 2, 2022 14,558 28 1.93 857
January 3, 2022 through January 30, 2022 15,585 29 1.89 828
January 31, 2022 through February 27, 2022 27,618 49 1.75 779
February 28, 2022 through April 3, 2022 35,530 70 1.98 709
April 4, 2022 through May 1, 2022 12,304 27 2.22 682
May 2, 2022 through May 29, 2022 10,482 22 2.11 660
May 30, 2022 through July 3, 2022 49,657 95 1.90 565
July 4, 2022 through July 25,2022 610 1 2.10 564
July 26, 2022 through August 13, 2022 1,930 4 2.09 560
Total shares repurchased for twelve months ended October 2, 2022 190,954 $ 371 $ 1.94 $ 560
~~Furthermore, on August 18, 2022,~~ the Company ~~announced~~issued 60,623 shares to Danny Schoening and Karen Hawkins in settlement of 81,000 performance shares which vested during the ~~commencement of a tender offer to purchase up to $4.25~~three months million in value of shares of its common stock. On September 15, 2022, the Company’s “modified Dutch auction” tender offer expired. In accordance with the terms and conditions of the tender offer, the Company accepted for purchase ~~1,603,773~~ ~~shares of common stock at a price of $2.65~~ ~~per share, for an aggregate cost of approximately $4.25~~ ~~million, excluding fees and expenses relating to the tender offer. The transaction cost associated with the tender offer was $111~~ ~~thousand.~~. The shares were ~~immediately cancelled upon completion~~issued net of ~~the transaction.~~20,377
shares withheld for taxes. As of ~~October 2, 2022,~~December 31, 2023 and ~~January~~October 1, 2023, the total issued and outstanding common shares were ~~6,716,638~~6,823,693 and 6,763,070, respectively. ~~As of October 2, 2022, and January 1, 2023 there were zero shares held in Treasury.~~

Note 89 - Subsequent Events

~~None.~~On January 1, 2024, 60,000 restricted shares issued to the independent board members were vested.
On January 8, 2024, $76 thousand and $56 thousand was paid to Danny Schoening, CEO and Karen Hawkins, CFO, respectively for incentive bonuses calculated in accordance with a formula previously approved by the Board of Directors’ Compensation Committee for performance against the fiscal year 2023 measurement targets.
On January 18, 2024, Optex Systems Holdings, Inc., through its wholly-owned subsidiary Optex Systems, Inc. (collectively, the “Company”), entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. (“RUB”). Under the agreements, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line, which is primarily used for firearm projectile speed detection, measuring and tracking. RUB will continue to manufacture Speedtracker Mach products on behalf of the Company. The Company acquired the assets using $1 million in cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement is one year, subject to additional one-year renewal terms to which both parties must agree.
The acquisition is deemed as a non-significant asset acquisition of intangible assets based on the guidance of U.S. GAAP ACS 805 and does not meet the significance test pursuant to SEC Rule 3-05.

~~F-16~~F-17

~~ITEM~~Item 2. ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to supplement and complement our audited consolidated financial statements and notes thereto for the fiscal year ended October ~~2, 2022~~1, 2023 and our unaudited condensed consolidated financial statements and notes thereto for the quarter ended ~~January 1,~~December 31, 2023, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to review our condensed consolidated financial statements in conjunction with your review of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial results as supplemental information, as we believe their use provides more insight into our performance. When a non-GAAP measure is used in this MD&A, it is clearly identified as a non-GAAP measure and reconciled to the most closely corresponding GAAP measure.

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. 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 and financial condition (including revenue, net income, profit margins and ~~net income)~~working capital); orders and backlog; expected timing of ~~shipments;~~contract deliveries to customers and corresponding revenue recognition; increases in the cost of materials and labor; costs remaining to fulfill contracts; contract loss reserves; labor shortages; 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. Such risks and uncertainties include, but are not limited to, continued funding of defense programs and military spending, the timing of such funding, general economic and business conditions, including unforeseen weakness in the Company’s markets, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in the U.S. Government’s interpretation of federal procurement rules and regulations, changes in spending due to policy changes in any new federal presidential administration, market acceptance of the Company’s products, shortages in components, production delays due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, changes in the market for microcap stocks regardless of growth and value and various other factors beyond our control. Some of these risks and uncertainties are identified in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the section “Risk Factors” in 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.

3
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.

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).
3

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

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.

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.

~~Recent Developments~~
~~NASDAQ Listing Application~~
On December 7, 2022 the Company submitted an application to list its common stock on the NASDAQ Capital Market. There are no assurances (1) that the Company will continue to meet the initial listing criteria throughout the pendency of the application (including with respect to its share price), (2) that NASDAQ will approve the application or (3) relating to the timing of any such approval. If and when listed on NASDAQ, there are no assurances that the Company will continue to meet NASDAQ’s continued listing requirements.
~~Amended and Restated Employment Agreement for Danny Schoening~~
On November 28, 2022, the Company entered into a new employment agreement with Danny Schoening. Pursuant to the agreement, which is dated as of December 1, 2022, Mr. Schoening will continue to serve as the Company’s President and Chief Executive Officer through November 30, 2025. Mr. Schoening’s base salary initially is $304,912 per annum, and will be increased to $314,060 on December 1, 2023 and $323,481 on December 1, 2024. Mr. Schoening will be eligible for a performance bonus based on a one-year operating plan adopted by the Company’s Board of Directors (the “Board”). The bonus will be based on financial and/or operating metrics decided annually by the Board or the Compensation Committee and tied to such one-year plan. The target bonus will equate to 30% of Mr. Schoening’s base salary. The Board will have discretion in good faith to alter the performance bonus upward or downward by 20%.
4

The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, which had been previously amended as of December 1, 2021, by changing the third and final vesting date for the restricted stock units granted under such agreement from the “change of control date” to January 1, 2023.
The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by the Company for cause (including conviction of a felony, commission of fraudulent, illegal or dishonest acts, certain willful misconduct or gross negligence by Mr. Schoening, continued failure to perform material duties or cure material breach after written notice, violation of securities laws and material breach of the employment agreement), (iii) termination by the Company without cause and (iv) termination by Mr. Schoening for good reason (including continued breach by the Company of its material obligations under the agreement after written notice, 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 its successor changing ownership or a sale of all or substantially all of its assets, without the surviving entity assuming the obligations under the agreement). For a termination by the Company for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening will be paid accrued and unpaid salary and any bonus earned through the date of termination. For a termination by the Company without cause or by Mr. Schoening with good reason, Mr. Schoening will also be paid six months’ base salary in effect.Recent Events

~~New Loan Agreement~~January 2024 Asset Acquisition

On ~~April 12, 2022, the Company and~~January 18, 2024, Optex Systems Holdings, Inc., through its wholly-owned subsidiary Optex Systems, Inc. (collectively, ~~with~~ the ~~Company, the “Borrowers”~~“Company”), entered into an ~~Amended~~asset purchase agreement and ~~Restated Loan Agreement (the “Loan Agreement”)~~a contract manufacturing agreement with ~~PNC Bank, National Association, successor~~RUB Aluminium s.r.o. (“RUB”). Under the agreements, the Company acquired certain intellectual property and technical and marketing information relating to ~~BBVA USA (the “Lender”), pursuant~~the Speedtracker Mach product line, which is primarily used for firearm projectile speed detection, measuring and tracking. RUB will continue to manufacture Speedtracker Mach products on behalf of the Company. The Company acquired the assets using $1 million in cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement is one year, subject to additional one-year renewal terms to which ~~the Borrowers’ existing revolving line of credit facility was decreased from $2.25 million to $1.125 million, and the maturity date was extended from April 15, 2022 to April 15, 2023.~~both parties must agree.

~~The Loan Agreement requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1.~~
On November 21, 2022, the Borrowers issued an Amended and Restated Revolving Line of Credit Note (the “Line of Credit Note”) to the Lender in connection with an increase of the Borrowers’ revolving line of credit facility under the Loan Agreement from $1.125 million to $2.0 million. The maturity date remains April 15, 2023. Obligations outstanding under the credit facility will accrue interest at a rate equal to the Lender’s prime rate minus 0.25%.
The Line of Credit Note and Loan Agreement contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The credit facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the credit facility are subject to acceleration upon the occurrence of an event of default as defined in the Line of Credit Note and Loan Agreement.
~~Election of New Director~~
On October 19, 2022, the Board of Directors of the Company expanded the size of the Board from four to five members and elected Mr. Dayton Judd as a director, to hold office until the Company’s next annual meeting of shareholders and until his successor has been elected and qualified.
5
Material Trends
Recent supply chain disruptions have strained our suppliers and extended supplier delivery lead times, affecting their ability to sustain operations. We anticipate market wide material shortages for paint and resin products as well as critical epoxies and chemicals used in our manufacturing process. In addition, we are seeing substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected our net income in the ~~first three months of fiscal~~ year ended October 1, 2023 and the quarter ended December 31, 2023, and is expected to continue to have a negative effect on the margins expected to be generated under our long-term fixed contracts over the next three years. See also “Item 1A. Risk Factors – Risks Related to Our Business - Certain of our products are dependent on specialized sources of supply potentially subject to disruption which could have a material, adverse impact on our business” in our Annual Report on Form 10-K for the year ended October 1, 2023.

We have experienced significant material shortages during the ~~three months~~year ended October ~~2, 2022~~1, 2023 and extending into the first three months of fiscal year ~~2023~~2024 from ~~two~~several significant suppliers of our periscope covers and housings. These shortages affect several of our periscope products at the Optex Richardson segment. The delays in key components, combined with labor shortages during the year ended October 1, 2023 and continuing into the first ~~quarter~~three months of fiscal year ~~2023~~2024, have negatively impacted our production levels and ~~have pushed the~~continue to push back expected delivery ~~dates into the second and third quarters of fiscal year 2023.~~dates. We are aggressively seeking alternative sources and actively expediting our current suppliers for these components as well as increasing employee recruitment initiatives and overtime to attempt to mitigate any continuing risks to the periscope line. ~~In addition, one of~~We are seeing some recent improvements in the local labor market and are adding to our ~~major customers~~direct labor force in concert with improvements in our supplier delivery performance. While we are encouraged by improvements in supplier performance for the ~~Applied Optics Center has requested a significant schedule delay pushing their laser filter unit~~Optex Richardson segment periscope line which yielded increased revenue performance during fiscal year 2023 and into the first three months of fiscal 2024, our suppliers have yet to ramp up deliveries sufficiently to keep pace with our current customer demands. As such, we cannot give any assurances that expected customer delivery ~~schedules~~dates for our periscope products will not experience further delays.
In March 2023, we moved our line of credit from PNC Bank to Texas Capital Bank and increased our available line of credit to $3.0 million from the ~~first half into~~previous $2.0 million line with PNC. The increase in credit limit helps us meet our working capital requirements in light of the ~~second half~~increased backlog and delay of revenues from the fiscal year 2023.

In November 2022, we increased our line of credit to $2.0 million from $1.125 million to facilitate our working capital requirements due to the delays and increased backlog. As supplier issues and labor shortages abate, we anticipate increased revenue beginning in the second quarter and increased working capital during the second half of fiscal year 2023 with a recovery expected by fiscal year end 2023. Based on our current backlog, we anticipate an overall increase for fiscal year 2023 revenues as compared to the 2022 levels.
We refer also to “Item 1. Business – Market Opportunity: U.S. Military” in our ~~annual report~~Annual Report on Form 10-K for the year ended October ~~2, 2022~~1, 2023 for a description of current trends in U.S. government military spending and its potential impact on Optex, which may be material, including particularly the tables included in that section and disclosure on the significant reduction in spending for ~~U.S~~U.S. ground system military programs, which has a direct impact on the Optex Systems Richardson segment revenue, all of which is incorporated herein by reference.

65

Results of Operations
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. 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 months ended ~~January 1,~~December 31, 2023 and January ~~2, 2022~~1, 2023 reconciled to the Condensed Consolidated Results of Operations as presented in Item 1, “Condensed Consolidated Financial Statements.”

~~Results of Operations Selective Financial Information~~
~~(Thousands)~~

Results of Operations Selective Financial Information
(Thousands)

Three months ended Three months ended
January 1, 2023 January 2, 2022 December 31, 2023 January 1, 2023

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 $ 1,619 $ 2,421 $ - $ 4,040 $ 1,857 $ 2,483 $ - $ 4,340 $ 3,394 3,574 - 6,968 $ 1,619 $ 2,421 $ - $ 4,040
Intersegment Revenues - 116 (116 ) - - 180 (180 ) - - 187 (187 ) - - 116 (116 ) -
Total Segment Revenue 1,619 2,537 (116 ) 4,040 1,857 2,663 (180 ) 4,340 3,394 3,761 (187 ) 6,968 1,619 2,537 (116 ) 4,040

Total Cost of Sales 1,460 1,979 (116 ) 3,323 1,667 2,030 (180 ) 3,517 2,841 2,630 (187 ) 5,284 1,460 1,979 (116 ) 3,323

Gross Profit 159 558 - 717 190 633 - 823 553 1,131 - 1,684 159 558 - 717
Gross Margin % 9.8 % 22.0 % - 17.7 % 10.2 % 23.8 % - 19.0 % 16.3 % 30.1 % - 24.2 % 9.8 % 22.0 % - 17.7 %

General and Administrative Expense 863 101 35 999 642 109 57 808 881 137 113 1,131 863 101 35 999
Segment Allocated G&A Expense (280 ) 280 - - (236 ) 236 - - (343 ) 343 - - (280 ) 280 - -
Net General & Administrative Expense 583 381 35 999 406 345 57 808 538 480 113 1,131 583 381 35 999

Operating (Loss) Income (424 ) 177 (35 ) (282 ) (216 ) 288 (57 ) 15
Operating (Loss) Income % (26.2 )% 7.0 % - (7.0 )% (11.6 )% 10.8 % - 0.3 %
Operating Income (Loss) 15 651 (113 ) 553 (424 ) 177 (35 ) (282 )
Operating Income (Loss) % 0.4 % 17.3 % - 7.9 % (26.2 )% 7.0 % - (7.0 )%

Net (Loss) Income before taxes $ (424 ) $ 177 $ (35 ) $ (282 ) $ 213 $ (77 ) $ 967 $ 1,103
Net (Loss) Income before taxes % (26.2 )% 7.0 % - (7.0 )% (11.6 )% 10.8 % - 0.3 %
Interest Expense - - (7 ) (7 ) - - - -

Net Income (Loss) before taxes $ 15 651 (120 ) 546 (424 ) $ 177 $ (35 ) $ (282 )
Net Income (Loss) % 0.4 % 17.3 % - 7.8 % (26.2 )% 7.0 % - (7.0 )%

76

~~Our total revenues decreased by $300 thousand, or 6.9%, comparing~~For the three months ended ~~January 1,~~December 31, 2023, ~~with~~our total revenues increased by $2.9 million, or 72.5%, compared to the ~~three months ended January 2, 2022.~~prior year period. The ~~decrease~~increase in revenue was ~~primarily~~ driven by ~~a $238 thousand decrease~~increased customer demand in ~~external revenue~~both operating segments, combined with improved supplier performance and higher production levels at the Optex Richardson segment ~~and a $62 thousand decrease in external revenue at~~during the ~~Applied Optics Center segment, respectively, over~~most recent three months as compared to the prior year ~~period~~. ~~The decrease in revenue was due to supply chain issues, labor shortage and customer schedule delays across the segments.~~period.

Consolidated gross profit for the three months ended ~~January 1,~~December 31, 2023 ~~decreased~~increased by ~~$106 thousand,~~$1.0 million, or ~~12.9%~~134.9%, compared to the prior year period. ~~The decrease~~We realized significantly higher gross margins in ~~profit was primarily attributable to a decrease in consolidated~~both operating segments with increased fixed cost absorption against the higher revenue ~~across a relatively fixed overhead cost~~ base, combined with favorable changes in ~~revenue~~product mix between the ~~segments, and inflationary material and labor pressure against our long-term fixed price contracts.~~segments.

Our operating income for the three months ended ~~January 1,~~December 31, 2023 ~~decreased~~increased by ~~$297 thousand to a loss of $282 thousand, as~~$0.8 million compared to the prior year ~~period operating income of $15 thousand.~~period. The ~~decrease~~increase in operating income was primarily driven by ~~lower~~increased revenue and gross profit, ~~combined with an increase in~~which were partially offset by higher general and administrative ~~spending.~~costs during the period.

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

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 table below summarizes our three-month operating results for the periods ended ~~January 1,~~December 31, 2023 and January ~~2, 2022,~~1, 2023, in terms of both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both measures allows the reader better to evaluate our overall performance.

Three months ended
(thousands)

January 1, 2023 January 2, 2022

Net (Loss) Income (GAAP) $ (223 ) $ 29
Add:
Depreciation and Amortization 81 72
Federal Income Tax Benefit (59 ) (14 )
Stock Compensation 35 57
Adjusted EBITDA – Non-GAAP $ (166 ) $ 144
8

(Thousands)
Three months ended

December 31, 2023 January 1, 2023

Net Income (Loss) (GAAP) $ 431 $ (223 )
Add:
Depreciation and Amortization 92 81
Federal Income Tax Expense (Benefit) 115 (59 )
Stock Compensation 113 35
Interest Expense 7 -
Adjusted EBITDA - Non GAAP $ 758 $ (166 )

Our net income ~~decreased~~increased by ~~$252 thousand~~$0.6 million to ~~a loss of $223 thousand~~$0.4 million for the three months ended ~~January 1,~~December 31, 2023, as compared to ~~income~~net loss of ~~$29 thousand~~$(0.2) million for the prior year period. Our adjusted EBITDA increased by $0.9 million to $0.8 million for the three months ended ~~January 2, 2022. Our adjusted EBITDA decreased by $310 thousand to a loss of $166 thousand for the three months ended January 1,~~December 31, 2023, as compared to ~~income of $144 thousand~~($0.2) million for the ~~three months ended January 2, 2022.~~ prior year period.
The ~~decrease in the three-month period ended January 1, 2023~~increase is primarily driven by ~~lower~~higher revenue and ~~operating~~gross profit during the period as compared to the prior ~~year.~~year period. Operating segment performance is discussed in greater detail throughout the ~~previous and~~ following sections.

7
New Orders and Backlog

Product backlog represents the value of unfulfilled customer manufacturing orders yet to be recognized as revenue. While backlog is not a non-GAAP financial measure, it is also not defined by GAAP. Therefore, our methodology for calculating backlog may not be consistent with methodologies used by other companies. The booked backlog by period may also not be fully indicative of the predicted revenues for those periods as many of our orders provide for accelerated delivery without penalty and may additionally provide customers the option to adjust schedules to meet their most recent projected demand quantities. However, we provide customer order and backlog information as we believe it provides significant insight into forward demand, with some predictive power to short term future revenues.
During the three months ended ~~January 1,~~December 31, 2023, the Company booked ~~$11.2~~$10.1 million in new orders, representing a ~~220.0% increase~~9.8% decrease over the prior year period ~~new~~ orders of ~~$3.5~~$11.2 million. ~~Both segments experienced a sizeable growth in orders as compared to the prior year period.~~
The orders for the most recently completed ~~quarter~~three months consist of ~~$8.6~~$6.2 million for our Optex Richardson segment and ~~$2.6~~$3.9 million attributable to the Applied Optics ~~Center.~~ Center segment.
The following table depicts the new customer orders for the three months ending ~~January 1,~~December 31, 2023 as compared to the ~~three-month~~prior year period ~~ending January 2, 2022~~ in millions of dollars:

(Millions)
Product Line Q1
2023 Q1
2022 Variance % Chg
Periscopes $ 3.7 $ 2.2 $ 1.5 68.2 %
Sighting Systems 3.4 0.1 3.3 3300.0 %
Howitzer - - - - %
Other 1.5 0.3 1.2 400.0 %
Optex Systems – Richardson 8.6 2.6 6.0 230.8 %
Optical Assemblies 1.2 0.2 1.0 500.0 %
Laser Filters 1.3 - 1.3 100.0 %
Day Windows - - - - %
Other 0.1 0.7 (0.6 ) (85.7 )%
Applied Optics Center – Dallas 2.6 0.9 1.7 188.9 %
Total Customer Orders $ 11.2 $ 3.5 $ 7.7 220.0 %
9
(Millions)
Product Line Three months ended
December 31, 2023 Three months ended
January 1, 2023 Variance % Chg
Periscopes $ 4.9 $ 3.7 $ 1.2 32.4 %
Sighting Systems (0.3 ) 3.4 (3.7 ) (108.8 )%
Howitzer - - - - %
Other 1.6 1.5 0.1 6.7 %
Optex Systems – Richardson 6.2 8.6 (2.4 ) (27.9 )%
Optical Assemblies 0.9 1.2 (0.3 ) (25.0 )%
Laser Filters 2.4 1.3 1.1 84.6 %
Day Windows - - - - %
Other 0.6 0.1 0.5 500.0 %
Applied Optics Center – Dallas 3.9 2.6 1.3 50.0 %
Total Customer Orders $ 10.1 $ 11.2 $ (1.1 ) (9.8 )%

Orders for the Optex Richardson segment decreased by $2.4 million, or 27.9%, from the prior year period. The ~~Company has seen significant increases in orders for many of its defense and commercial products during the first three months of fiscal~~prior year period ended January 1, 2023 ~~inclusive of two new customers for our sighting systems and filter programs. On November 1, 2022, the Company announced it has been awarded~~included a $3.4 million order to repair and refurbish night vision equipment for the Government of Israel. The order represents a significant increase in our Optex Richardson sighting systems business base for a new customer and includes an additional potential award value with a 100% optional award quantity clause. In OctoberDuring the three months ended December 31, 2023, the ~~Company booked~~order value was reduced by $0.3 million based on a ~~$0.9 million award~~downward price negotiation resulting from lower anticipated material costs against the program. Orders for periscopes and other products increased as compared the prior year period.
Orders for the Applied Optics Center increased by $1.3 million, or 50.0%, from the prior year period with increased orders in laser ~~interface~~ filters ~~for a new defense customer in addition to increased purchase orders for our commercial optical assemblies for our existing customer.~~and other products.

Backlog as of ~~January 1,~~December 31, 2023 was ~~$40.1~~$45.0 million as compared to a backlog of ~~$26.5~~$40.1 million as of January ~~2, 2022,~~1, 2023, representing an increase of ~~$13.6 million or 51.3%~~12.2%. ~~Backlog as compared to October 2, 2022 increased by $7.2 million, or 21.9% from $32.9 million.~~ The following table depicts the current expected delivery by ~~period~~quarter of all contracts awarded as of December 31, 2023, as well as the December 31, 2023 backlog as compared to the backlog on January 1, ~~2023 in millions of dollars:~~2023.
(Millions)
Product Line Q2
2023 Q3
2023 Q4
2023 2023
Delivery 2024+
Delivery Total Backlog
1/1/2023 Total Backlog
1/2/2022 Variance % Chg
Periscopes $ 2.7 $ 2.8 $ 1.1 $ 6.7 $ 3.3 $ 10.0 $ 6.9 $ 3.1 44.9 %
Sighting Systems 0.2 1.2 0.9 2.3 2.6 4.9 1.5 3.4 226.7 %
Howitzer - 0.1 0.1 0.2 2.1 2.3 2.3 - - %
Other 1.2 0.6 0.9 2.7 2.1 4.8 1.0 3.8 380.0 %
Optex Systems - Richardson 4.1 4.7 3.0 11.9 10.1 22.0 11.7 10.3 88.0 %
Optical Assemblies 1.6 1.6 1.5 4.7 1.8 6.5 4.1 2.4 58.5 %
Laser Filters 1.2 2.4 3.1 6.8 2.6 9.4 9.0 0.4 4.4 %
Day Windows 0.1 0.2 0.1 0.4 1.4 1.8 0.9 0.9 100.0 %
Other 0.3 0.1 0.1 0.3 0.1 0.4 0.8 (0.4 ) (50.0 )%
Applied Optics Center - Dallas 3.2 4.3 4.8 12.2 5.9 18.1 14.8 3.3 22.3 %
Total Backlog $ 7.3 $ 9.0 $ 7.8 $ 24.1 $ 16.0 $ 40.1 $ 26.5 $ 13.6 51.3 %
8
(Millions)
Product Line Q2
2024 Q3
2024 Q4
2024 2024
Delivery 2025+
Delivery Total Backlog
12/31/2023 Total Backlog
1/1/2023 Variance % Chg
Periscopes $ 2.4 $ 4.3 $ 5.0 $ 11.7 $ 6.1 $ 17.8 $ 10.0 $ 7.8 78.0 %
Sighting Systems 0.3 0.3 0.3 0.9 3.1 4.0 4.9 (0.9 ) (18.4 )%
Howitzer - - - - 2.3 2.3 2.3 - - %
Other 1.4 0.7 0.6 2.7 2.5 5.2 4.8 0.4 8.3 %
Optex Systems - Richardson 4.1 5.3 5.9 15.3 14.0 29.3 22.0 7.3 33.2 %
Optical Assemblies 0.9 0.7 0.2 1.8 0.7 2.5 6.5 (4.0 ) (61.5 )%
Laser Filters 2.4 3.2 2.4 8.0 2.5 10.5 9.4 1.2 12.8 %
Day Windows 0.2 0.2 0.3 0.7 0.8 1.5 1.8 (0.3 ) (16.7 )%
Other 0.4 0.2 0.6 1.2 - 1.2 0.4 0.7 175.0 %
Applied Optics Center - Dallas 3.9 4.3 3.5 11.7 4.0 15.7 18.1 (2.4 ) (13.3 )%
Total Backlog $ 8.0 $ 9.6 $ 9.4 $ 27.0 $ 18.0 $ 45.0 $ 40.1 $ 4.9 12.2 %

Optex Systems Richardson backlog as of ~~January 1,~~December 31, 2023, was ~~$22.0~~$29.3 million as compared to a backlog of ~~$11.7~~$22.0 million as of January ~~2, 2022,~~1, 2023, representing an increase of ~~$10.3~~$7.3 million or ~~88.0%~~33.2%. The increased backlog for the Optex segment is primarily driven by higher periscope orders.

Applied Optics Center backlog as of ~~January 1,~~December 31, 2023, was ~~$18.1~~$15.7 million as compared to a backlog of ~~$14.8~~$18.1 million as of January ~~2, 2022,~~1, 2023, representing ~~an increase~~a decrease of ~~$3.3~~$2.4 million or ~~22.3%~~13.3%. The decrease in backlog for the Applied Optics Center is primarily driven by lower orders and demand for commercial optical assemblies. We anticipate new optical assembly orders in the second half of fiscal year 2024 with deliveries beginning in the fourth quarter.

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

The Company continues to ~~aggressively~~ pursue domestic, international and commercial opportunities in addition to maintaining its current footprint with U.S. vehicle ~~manufactures,~~manufacturers, with existing as well as new product lines. We ~~continue to review and seek~~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 ~~January 1,~~December 31, 2023 Compared to the Three Months Ended January ~~2, 2022~~1, 2023

~~Revenues~~Revenue. For the three months ended ~~January 1,~~December 31, 2023, ~~revenues decreased~~revenue increased by ~~$300 thousand~~$2.9 million or ~~6.9%~~72.5% compared to the prior year period as set forth in the table below:

Three months ended Three months ended
(Thousands) (Thousands)
Product Line January 1, 2023 January 2, 2022 Variance % Chg December 31, 2023 January 1
2023 Variance % Chg
Periscopes $ 1,325 $ 1,065 $ 260 24.4 $ 1,976 $ 1,325 $ 651 49.1 %
Sighting Systems 189 274 (85 ) (31.0 ) 359 189 170 89.9 %
Howitzers - - - - - - - -
Other 105 518 (413 ) (79.7 ) 1,059 105 954 908.6 %
Optex Systems – Richardson 1,619 1,857 (238 ) (12.8 )
Optex Systems - Richardson 3,394 1,619 1,775 109.6 %
Optical Assemblies 1,508 1,145 363 31.7 1,226 1,508 (282 ) (18.7 )%
Laser Filters 557 937 (380 ) (40.6 ) 1,837 557 1,280 229.8 %
Day Windows 161 220 (59 ) (26.8 ) 161 161 - -
Other 195 181 14 7.7 350 195 155 79.5 %
Applied Optics Center – Dallas 2,421 2,483 (62 ) (2.5 )
Applied Optics Center - Dallas 3,574 2,421 1,153 47.6 %
Total Revenue $ 4,040 $ 4,340 $ (300 ) (6.9 ) $ 6,968 $ 4,040 $ 2,928 72.5 %

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Optex Systems Richardson revenue ~~decreased~~increased by ~~$238 thousand~~$1.8 million or ~~12.8%~~109.6% for the three months ended ~~January 1,~~December 31, 2023 ~~as compared to the three months ended January 2, 2022 on lower customer demand for sighting system repairs and muzzle reference systems (other)~~ as compared to the prior year ~~period. In addition, shipments against existing periscope orders have been delayed into the next quarter due to supplier and manpower shortages. We anticipate~~period with higher revenue ~~beginning during~~across all product lines. Periscope revenues continue to increase with higher orders and backlog combined with improved supplier performance against our requirements. The Company has also experienced increased demand in our other product lines for mirrors, windows, beamsplitters and collimator assemblies. During the ~~second quarter and increasing through~~three months ended December 31, 2023, the ~~second half~~Company made its first delivery against the Government of ~~fiscal year 2023 as the supplier and labor shortages are resolved and the backlog has significantly increased on new orders. We anticipate additional periscope orders for delivery~~Israel sighting system contract awarded in ~~the last fiscal quarter of 2023.~~November 2022.

Applied Optics Center revenue ~~decreased~~increased by ~~$62 thousand~~$1.2 million or ~~2.5%~~47.6% for the three months ended ~~January 1,~~December 31, 2023 as compared to the ~~three months ended January 2, 2022.~~prior year period. The revenue ~~decrease~~increase is primarily attributable to ~~customer requested shipment delays~~increased demand for ~~our~~ laser filter units for a large defense contractor to accommodate their ongoing facility move. Based on current backlog and the post-move adjusted customer delivery schedule, we are anticipating revenue to begin increasingfilters during the ~~next quarter with more significant increases occurring during~~three months ended December 31, 2023 as compared to the ~~second half of the fiscal year.~~prior year period.

Gross ~~Profit~~Margin. The gross margin during the three-month period ended ~~January 1,~~December 31, 2023 was ~~17.7%~~24.2% of revenue as compared to a gross margin of ~~19.0%~~17.7% of revenue for the ~~period ended January 2, 2022. The gross profit decreased by $106 thousand to $717 thousand for the three months ended January 1, 2023 as compared to $823 thousand in the~~ prior year ~~three months.~~period. The ~~decrease~~increase in gross profit is primarily attributable to ~~lower~~increased revenue ~~spread across a relatively~~resulting in higher absorption of our fixed cost base, ~~changes~~combined with a favorable change in mix between ~~products and operating segments and material and labor inflationary pressure on our long-term contracts.~~segments. Cost of sales ~~decreased~~increased to ~~$3.3~~$5.3 million for the ~~current~~recently completed period as compared to the prior year period of ~~$3.5~~$3.3 million on ~~lower period revenue and increased cost.~~higher revenue.

G&A Expenses. During the three months ended ~~January 1,~~December 31, 2023 and January ~~2, 2022,~~1, 2023, we recorded operating expenses of ~~$999 thousand~~$1.1 million and ~~$808 thousand,~~$1.0 million, respectively. Operating expenses increased by ~~23.6% between~~13.2% over the ~~respective periods~~prior year period primarily due to increased stock compensation expense, selling expenses and labor ~~costs, office expenses, legal and audit fees.~~fringe costs.

Operating ~~(Loss)~~ Income. During the three months ended ~~January 1,~~December 31, 2023, we recorded operating income of $553 thousand, as compared to an operating loss of ($282) thousand ~~as compared to operating income of $15 thousand~~ during the three months ended January ~~2, 2022.~~1, 2023. The ~~$297 thousand decrease~~$0.8 million increase in operating income ~~for the current year period from the prior year period~~ is primarily due to ~~lower gross profit and increased general and administrative costs in the current year quarter as compared to the prior year quarter.~~
~~Net (Loss) Income applicable to common shareholders~~. During the three months ended January 1, 2023, we recorded a net loss applicable to common shareholders of ($223) thousand as compared to a net income applicable to common shareholders of $29 thousand during the three months ended January 2, 2022. The change in net income of $252 thousand is primarily attributable to lowerhigher revenue and gross profit, ~~combined with~~partially offset by increased ~~general and administrative costs.~~operating expenses.

Liquidity and Capital Resources

As of ~~January 1,~~December 31, 2023, the Company had working capital of ~~$9.7~~$13.0 million, as compared to ~~$10.0~~$13.5 million as of October ~~2, 2022.~~1, 2023.

During the three months ended ~~January 1,~~December 31, 2023, we generated operating cash ~~flow~~ of ~~$451 thousand~~$2.3 million, paid $1.0 million against our line of credit and spent ~~($90) thousand~~$0.1 million on acquisitions of property and equipment. During the period, our inventory increased $0.5 million in support of new program awards and increasing revenues anticipated over the next nine months.

11
The Company has capital commitments of ~~$209~~$90 thousand for the purchase of property and equipment consisting of an ~~ultrasonic aqueous system and a reflectometer device during the next ninety days.~~automated acrylic buffing system.

Backlog as of ~~January 1,~~December 31, 2023 was ~~$40.1~~$45.0 million as compared to a backlog of ~~$32.9~~$40.1 million as of January 1, 2023 and ~~$26.5~~$41.8 million as of October ~~2, 2022 and January 2, 2022, respectively, and~~1, 2023, representing an increase of ~~21.9%~~12.2% and ~~51.3%~~7.7%, respectively. For further details, see “Results of Operations – New Orders and Backlog” above.

The Company has historically funded its operations through cash from operations, convertible notes, common and preferred stock offerings and bank debt. The Company’s ability to generate positive cash flows depends on a variety of factors, including the continued development and successful marketing of the Company’s products.
At ~~January 1,~~December 31, 2023, the Company had ~~approximately $1.3~~$2.4 million in cash and an outstanding payable balance of zero against its ~~$2.0 million~~ line of credit. ~~As of January 1,~~At December 31, 2023, our outstanding accounts receivable balance was ~~$1.6~~$2.4 million. We expect the accounts to be collected during the second quarter of fiscal ~~2023.~~2024.

10
Recently experienced supplier delays, labor shortages, and customer schedule changes negatively impacted our revenue during the three months ended January 1, 2023 but are expected to abate during the second quarter of fiscal year 2023. As described in more detail below, in November 2022, we increased our line of credit to $2.0 million from $1.125 million, to facilitate our working capital requirements due
We refer to the ~~delays~~disclosure above under “Material Trends” with respect to recent supply chain disruptions and ~~increased backlog. We anticipate higher revenue beginning during the second quarter and increasing through the second half of fiscal year 2023 as the supplier and labor~~material shortages, ~~combined with customer schedule delays are resolved and the backlog has significantly increased on new orders.~~which disclosure is incorporated herein by reference.

In the short term, the Company plans to utilize its current cash, ~~open~~available line of credit and operating cash flow to fund inventory purchases in support of the backlog growth and higher anticipated revenue during the next ~~nine~~twelve months. Short term cash in excess of our working capital needs may be also be used to fund the purchase of product lines and other assets, including property and equipment required to maintain or meet our growing backlog, in addition to repurchasing common stock against our current stock repurchase plan. Longer term, excess cash beyond our operating needs may be used to fund new product development, company or product line acquisitions, or additional stock purchases as attractive opportunities present themselves.
On January 18, 2024, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line and entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. (“RUB”). The Company acquired the assets using $1 million in cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement is one year, subject to additional one-year renewal terms.

In some instances, new government contract awards may allow for contract financing in the form of 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. Currently none of our existing contracts allow for progress payments.

We refer to “Note 5 – Commitments and Contingencies – Non-cancellable Operating Leases” for a tabular depiction of our remaining minimum lease and estimated CAM payments under such leases as of December 31, 2023, which disclosure is incorporated herein by reference.
The Company expects to generate net income and positive cash flow from operating activities over the next ~~nine~~twelve months. To achieve and retain profitability, we need to maintain a level of revenue adequate to support our cost structure. Management intends to manage operations commensurate with its level of working capital and line of credit during the next ~~nine~~twelve months and beyond; however, uneven revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program delays associated with the pandemic, labor shortages and supply chain issues could create a working capital shortfall. In the event the Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.

On ~~April 12, 2022,~~March 22, 2023, the Company and its subsidiary, Optex Systems, Inc. ~~(collectively~~(“Optex”, and with the Company, the “Borrowers”), entered into ~~an Amended and Restated~~a Business Loan Agreement (the “Loan Agreement”) with ~~PNC~~Texas Capital Bank ~~National Association, successor to BBVA USA~~ (the “Lender”), pursuant to which the ~~Borrowers’ existing~~Lender will make available to the Borrowers a revolving line of credit ~~facility was decreased from $2.25~~in the principal amount of $3 million (the “Credit Facility”). The commitment period for advances under the Credit Facility is twenty-six months expiring on May 22, 2025. We refer to ~~$1.125 million, and~~ the ~~maturity date was extended from April 15, 2022~~expiration of that time period as the “Maturity Date.” Outstanding advances under the Credit Facility will accrue interest at a rate equal to ~~April 15, 2023.~~the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. The interest rate is currently at 8.1% per annum.

The Loan Agreement contains customary events of default (including a 25% change in ownership) and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes (including changes in management), investments, and restricted payments (including cash dividends). The Loan Agreement also requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1.
~~On November 21, 2022, the Borrowers issued an Amended~~1 and ~~Restated Revolving Line~~a total leverage ratio of 3.00:1. The Credit Note (the “Line of Credit Note”) to the Lender in connection with an increase of the Borrowers’ revolving line of credit facility under the Loan Agreement from $1.125 million to $2.0 million. The maturity date remains April 15, 2023. Obligations outstanding under the credit facility will accrue interest at a rate equal to the Lender’s prime rate minus 0.25%.
12
The Line of Credit Note and Loan Agreement contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The credit facilityFacility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the ~~credit facility~~Credit Facility are subject to acceleration upon the occurrence of an event of default as defined in the ~~Line~~Loan Agreement. The Loan Agreement further provides for a $125,000 Letter of Credit ~~Note and Loan Agreement.~~sublimit. As of December 31, 2023, there was zero borrowed under the Credit Facility. As of December 31, 2023, the Company is in compliance with all covenants under the Credit Facility.

11
~~We intend to renew or replace~~
The Credit Facility replaced the prior $2 million line of credit facility. 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.with PNC Bank, National Association.

On September 22, 2021 the Company announced authorization for an additional $1 million stock repurchase program. As of ~~January 1,~~December 31, 2023, there was an authorized balance of $560 thousand remaining to be spent against the repurchase program. During the three months ended ~~January 1,~~December 31, 2023, there were no stock repurchases against the plan.

Critical Accounting 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 October ~~2, 2022.~~1, 2023.

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~~in-house that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of ~~January 1,~~December 31, 2023, the Company had accrued warranty costs of ~~$229~~$48 thousand, as compared to ~~$169~~$75 thousand as of October ~~2, 2022.~~1, 2023. The primary reason for the ~~$60~~$27 thousand ~~increase~~decrease in reserve balances relates to ~~an increase~~lower shipments against our warranty covered optical assemblies, combined with a favorable change in ~~customer returned backlog pending~~estimate due to lower historical return trends and repair ~~or replacement to our customer during the preceding three-month period.~~costs.

As of ~~January 1,~~December 31, 2023 and October ~~2, 2022,~~1, 2023, we had ~~$282~~$308 thousand, and ~~$289~~$243 thousand, respectively, of contract loss reserves included in our balance sheet accrued expenses. These loss contracts are related to some of our older legacy periscope IDIQ contracts which were priced in 2018 through early 2020, prior to ~~COVID-19~~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. ~~Some of these long-term contracts have option year ordering periods ending in February 2025 with deliveries that may extend into February 2026.~~ During the three months ended ~~January 1,~~December 31, 2023, the Company recognized ~~additional expenses for contract~~$90 thousand in loss reserves ~~of $51 thousand~~ on new ~~task~~contract awards, ~~against the long-term fixed contracts and applied $58~~made shipments resulting in reductions of $25 thousand ~~of the reserves~~ against ~~revenues booked during the period. There is no way to reasonably estimate future inflationary impacts, or customer awards on the~~ existing loss ~~contracts.~~reserves.
13

As of ~~January 1,~~December 31, 2023 and October ~~2, 2022, our~~1, 2023, Optex Systems, Inc. has a deferred tax asset valuation allowance of ($0.8) million against deferred tax assets ~~consisted~~ of ~~$1.8~~$1.7 million, ~~partially offset by a valuation reserve of $0.8 million against those assets~~ for a net deferred tax asset of ~~$1.0~~$0.9 million. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2011 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control. The valuation allowance covers certain deferred tax assets where we believe we will be unlikely to recover those tax assets through future operations. The valuation reserve includes assumptions related to future taxable income which would be available to cover net operating loss carryforward amounts. Because of the uncertainties of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are subject to change over time. While we believe our current estimate to be reasonable, changing market conditions and profitability, changes in equity structure and changes in tax regulations may impact our estimated reserves in future periods.
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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 ~~January 1,~~December 31, 2023, 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 reports 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 ~~January 1,~~December 31, 2023, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the three months ended ~~January 1,~~December 31, 2023, 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.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not aware of any material litigation pending or threatened against us.

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 October ~~2, 2022.~~1, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales
None.

Issuer Purchases of Equity Securities

There were no purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) of its common stock under the Exchange Act) ~~of its common shares~~ during the three months ended ~~January 1,~~December 31, 2023. ~~As of January 1, 2023, the maximum dollar value that may yet be purchased against the Company’s stock repurchase plan is $560 thousand.~~

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable.
14

Item 6. Exhibits

Exhibit
No.
Description
~~10.1~~ Amended and Restated Line of Credit Note dated as of November 21, 2022 by and among Optex Systems Holdings, Inc., Optex Systems, Inc. and PNC Bank, National Association*
~~10.2~~
Employment Agreement of Danny Schoening, dated December 1, 2022*

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
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)

* Previously filed
1513

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: February ~~13, 2023~~12, 2024 By: /s/ Danny Schoening
Danny Schoening
Principal Executive Officer

OPTEX SYSTEMS HOLDINGS, INC.

Date: February ~~13, 2023~~12, 2024 By: /s/ Karen Hawkins
Karen Hawkins
Principal Financial Officer and
Principal Accounting Officer

1614


	Three months ended January 1, 2023
	Common								Additional						Total
	Shares		Treasury		Common		Treasury		Paid in			Retained			Stockholders
	Issued		Shares		Stock		Stock		Capital			Earnings			Equity
Balance at October 2, 2022		6,716,638		-	$	7	$	-	$	21,096		$	(8,695	)	$	12,408
Stock Compensation Expense		-		-		-		-		35			-			35
Vested Restricted Stock Units, net of withheld taxes		46,432		-		-		-		(15	)		-			(15	)
Net loss		-		-		-		-		-			(223	)		(223	)

Balance at January 1, 2023		6,763,070		-	$	7	$	-	$	21,116		$	(8,918	)	$	12,205

	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
Net income (loss)		-		-		-		-			-		29			29

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

	(1)	~~Common~~Performance based shares ~~repurchased in the open market during the three months ended January 2, 2022. The shares were held as treasury stock using the cost method and subsequently cancelled as of~~vested October 2, ~~2022.~~2023, December 22, 2023 and December 29, 2023 issued net of tax withheld. Shares were vested based on reaching 30-day VWAP of $3.70, $4.45 and $5.35 on the respective vesting dates.
(2)	Restricted stock units vested January 1, 2023 issued net of tax withheld.

(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 recognized in cost of sales associated with: the period end customer returned warranty backlog, or the actual costs of repaired/replaced warranty units which were shipped to the customer during the current period.

	Reportable Segment Financial Information (thousands)
	As of and for the three months ended December 31, 2023
	Optex Systems Richardson			Applied Optics Center Dallas		Other (non-allocated costs and intersegment eliminations)			Consolidated Total

Revenues from external customers	$	3,394		$	3,574	$	-		$	6,968
Intersegment revenues		-			187		(187	)		-
Total revenue	$	3,394		$	3,761	$	(187	)	$	6,968

Depreciation and amortization	$	10		$	82	$	-		$	92

Interest expense	$	-			-	$	7		$	7

Income (loss) before taxes	$	15		$	651	$	(120	)	$	546

Other significant noncash items:
Allocated home office expense	$	(343	)	$	343	$	-		$	-
Stock compensation expense	$	-		$	-	$	113		$	113
Warranty expense	$	-		$	5	$	-		$	5

Segment assets	$	14,336		$	8,053	$	-		$	22,389
Expenditures for segment assets	$	33		$	25	$	-		$	58

	Reportable Segment Financial Information (thousands)											Reportable Segment Financial Information (thousands)
	As of and for the three months ended January 1, 2023											As of and for the three months ended January 1, 2023
	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	$	1,619		$	2,421	$	-		$	4,040		$	1,619		$	2,421	$	-		$	4,040
Intersegment revenues		-			116		(116	)		-			-			116		(116	)		-
Total Revenue	$	1,619		$	2,537	$	(116	)	$	4,040
Total revenue												$	1,619		$	2,537	$	(116	)	$	4,040

Depreciation and Amortization	$	11		$	70	$	-		$	81
Depreciation and amortization												$	11		$	70	$	-		$	81

(Loss) income before taxes	$	(424	)	$	177	$	(35	)	$	(282	)
Income (loss) before taxes												$	(424	)	$	177	$	(35	)	$	(282	)

Other significant noncash items:
Allocated home office expense	$	(280	)	$	280	$	-		$	-		$	(280	)	$	280	$	-		$	-
Stock compensation expense	$	-		$	-	$	35		$	35		$	-		$	-	$	35		$	35
Warranty expense	$	-		$	60	$	-		$	60		$	-			60		-			60
															$		$	-		$
Segment Assets	$	11,745		$	7,628	$	-		$	19,373
Segment assets												$	11,745		$	7,628	$	-		$	19,373
Expenditures for segment assets	$	23		$	67	$	-		$	90		$	23		$	67	$	-		$	90

Fiscal Year		Facility Lease Payments			Facility Lease Payments			Lease Payments			Total Lease Payments			Total Variable CAM Estimate

	(Thousands)														(Thousands)
	Optex Richardson			Applied Optics Center			Office Equipment			Consolidated					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	Facility Lease Payments			Facility Lease Payments			Lease Payments			Total Lease Payments			Total Variable CAM Estimate
2023 Base year lease	$	239		$	218		$	11		$	468		$	188
2024 Base year lease		327			296			15			638			256	$	246		$	224		$	11		$	481		$	225
2025 Base year lease		336			305			15			656			261		336			305			15			656			306
2026 Base year lease		346			313			3			662			266		346			313			3			662			312
2027 Base year lease		357			322			-			679			272		357			322			-			679			318
2028 Base year lease		242			330			-			572			198		242			330			-			572			249
2029 Base year lease		-			83			-			83			30		-			83			-			83			43
Total base lease payments	$	1,847		$	1,867		$	44		$	3,758		$	1,471	$	1,527		$	1,577		$	29		$	3,133		$	1,453
Imputed interest on lease payments ⁽¹⁾		(238	)		(263	)		(3	)		(504	)				(163	)		(188	)		(1	)		(352	)
Total Operating Lease Liability⁽³⁾	$	1,609		$	1,604		$	41		$	3,254
Total Operating Lease Liability⁽²⁾															$	1,364		$	1,389		$	28		$	2,781

Right-of-use Asset⁽²⁾	$	1,527		$	1,536		$	41		$	3,104
Right-of-use Asset⁽³⁾															$	1,275		$	1,312		$	28		$	2,615


(2)		Includes $~~150~~166 thousand of unamortized deferred rent.


(3)		Short-term and Long-term portion of Operating Lease Liability is $~~608~~625 thousand and $~~2,646~~2,156 thousand, respectively.

	●	The principal amount of the PNC Facility was $2.25 million. The PNC Facility matured on April 15, 2022. The interest rate was variable based on PNC’s ~~Prime Rate plus a margin of~~prime rate minus ~~-0.250~~0.25%, initially set at 3% at loan origination, and all accrued and unpaid interest was payable monthly in arrears starting on May 15, 2020; and the principal amount was due in full with all accrued and unpaid interest and any other fees on April 15, 2022.

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

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

	●	The PNC Facility was secured by a first lien on all of the assets of ~~Borrower.~~Borrowers.

	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		Performance Shares			Weighted Average Grant Date Fair Value
Outstanding at October 3, 2021		99,000		$	1.59		240,000		$	1.75
Granted		-			-		-			-
Vested		(33,000	)	$	1.73		(60,000	)	$	1.75
Forfeited		-			-		-			-
Outstanding at October 2, 2022		66,000		$	1.52		180,000		$	1.75		66,000		$	1.52		180,000		$	1.75		-		$	-
Granted		-			-		-			-		42,000			3.05		40,000			3.09		135,000			2.37
Vested		(66,000	)	$	1.52		(60,000	)	$	1.75		(66,000	)		1.52		(60,000	)		1.75		-			-
Forfeited		-			-		-			-		(3,000	)		3.00		(40,000	)		1.75		-			-
Outstanding at January 1, 2023		-		$	-		120,000		$	1.75
Outstanding at October 1, 2023												39,000		$	3.06		120,000		$	2.20		135,000		$	2.37
Granted												-			-		-			-		-			-
Vested												-			-		-			-		(81,000	)		2.57
Forfeited												-			-		-			-		-			-
Outstanding at December 31, 2023												39,000		$	3.06		120,000		$	2.20		54,000		$	2.06

	Assumptions
Performance Period Start		10/2/2023
Performance Period End		10/1/2028
Term of simulation ⁽¹⁾		5.42 years
Time steps in simulation		1,365
Time steps per year		252
Common share price at valuation date ⁽²⁾	$	3.04
Volatility (annual) ⁽⁴⁾		50.0	%
Risk-free rate (annual) ⁽⁵⁾		3.37	%
Cost of equity ⁽⁶⁾		11.5	%
Dividend yield ⁽³⁾		0.0	%

	Tranche 1		Tranche 2		Tranche 3		Tranche 4		Tranche 5
Number of performance shares in the Tranche ⁽¹⁾		27,000		27,000		27,000		27,000		27,000
Fair Value of One Performance share ⁽⁷⁾	$	2.75	$	2.58	$	2.39	$	2.18	$	1.93
Total Fair Value of Tranche	$	74,345	$	69,742	$	64,446	$	58,819	$	52,238
Derived Service Period (Years) ⁽⁷⁾		0.71		1.13		1.60		2.06		2.48

	(1)	Based on the terms of the Performance Shares agreement issued by the Company on May 3, 2023.
	(2)	Closing price of OPXS shares on the Valuation Date, as obtained via S&P Capital IQ.
	(3)	Expected dividends provided by management.
	(4)	Based on historical volatility of OPXS and comparable public companies.
	(5)	Interest rate for US Treasury commensurate with the Performance Shares holding period, as of the Valuation Date, as obtained via S&P Capital IQ.
	(6)	Estimated cost of equity for OPXS as of the Valuation Date.
	(7)	Based on Monte Carlo simulation.

	Stock Compensation								Stock Compensation
	(thousands)								(thousands)
	Recognized Compensation Expense				Unrecognized Compensation Expense				Recognized Compensation Expense				Unrecognized Compensation Expense
	Three months ended				As of				Three months ended				As of
	January 1, 2023		January 2, 2022		January 1, 2023		October 2, 2022		December 31, 2023		January 1, 2023		December 31, 2023		October 1, 2023

Restricted Shares	$	26	$	26	$	210	$	236	$	41	$	26	$	132	$	173
Performance Based Shares										64		-		148		212
Restricted Stock Units		9		31		-		9		8		9		80		88
Total Stock Compensation	$	35	$	57	$	210	$	245	$	113	$	35	$	360	$	473

Fiscal Period	Total number of shares purchased		Total purchase cost		Average price paid per share (with commission)		Maximum dollar value that may yet be purchased under the plan


October 4, 2021 through October 31, 2021		18,265	$	37	$	2.01	$	894
November 1, 2021 through November 28, 2021		4,415		9		2.04		885
November 29, 2021 through January 2, 2022		14,558		28		1.93		857
January 3, 2022 through January 30, 2022		15,585		29		1.89		828
January 31, 2022 through February 27, 2022		27,618		49		1.75		779
February 28, 2022 through April 3, 2022		35,530		70		1.98		709
April 4, 2022 through May 1, 2022		12,304		27		2.22		682
May 2, 2022 through May 29, 2022		10,482		22		2.11		660
May 30, 2022 through July 3, 2022		49,657		95		1.90		565
July 4, 2022 through July 25,2022		610		1		2.10		564
July 26, 2022 through August 13, 2022		1,930		4		2.09		560
Total shares repurchased for twelve months ended October 2, 2022		190,954	$	371	$	1.94	$	560

																									*Results of Operations Selective Financial Information* *(Thousands)*
	Three months ended																								Three months ended
	January 1, 2023												January 2, 2022												December 31, 2023												January 1, 2023
	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	$	1,619		$	2,421		$	-		$	4,040		$	1,857		$	2,483		$	-		$	4,340		$	3,394			3,574			-			6,968		$	1,619		$	2,421		$	-		$	4,040
Intersegment Revenues		-			116			(116	)		-			-			180			(180	)		-			-			187			(187	)		-			-			116			(116	)		-
Total Segment Revenue		1,619			2,537			(116	)		4,040			1,857			2,663			(180	)		4,340			3,394			3,761			(187	)		6,968			1,619			2,537			(116	)		4,040

Total Cost of Sales		1,460			1,979			(116	)		3,323			1,667			2,030			(180	)		3,517			2,841			2,630			(187	)		5,284			1,460			1,979			(116	)		3,323

Gross Profit		159			558			-			717			190			633			-			823			553			1,131			-			1,684			159			558			-			717
Gross Margin %		9.8	%		22.0	%		-			17.7	%		10.2	%		23.8	%		-			19.0	%		16.3	%		30.1	%		-			24.2	%		9.8	%		22.0	%		-			17.7	%

General and Administrative Expense		863			101			35			999			642			109			57			808			881			137			113			1,131			863			101			35			999
Segment Allocated G&A Expense		(280	)		280			-			-			(236	)		236			-			-			(343	)		343			-			-			(280	)		280			-			-
Net General & Administrative Expense		583			381			35			999			406			345			57			808			538			480			113			1,131			583			381			35			999

Operating (Loss) Income		(424	)		177			(35	)		(282	)		(216	)		288			(57	)		15
Operating (Loss) Income %		(26.2	)%		7.0	%		-			(7.0	)%		(11.6	)%		10.8	%		-			0.3	%
Operating Income (Loss)																										15			651			(113	)		553			(424	)		177			(35	)		(282	)
Operating Income (Loss) %																										0.4	%		17.3	%		-			7.9	%		(26.2	)%		7.0	%		-			(7.0	)%

Net (Loss) Income before taxes	$	(424	)	$	177		$	(35	)	$	(282	)	$	213		$	(77	)	$	967		$	1,103
Net (Loss) Income before taxes %		(26.2	)%		7.0	%		-			(7.0	)%		(11.6	)%		10.8	%		-			0.3	%
Interest Expense																										-			-			(7	)		(7	)		-			-			-			-

Net Income (Loss) before taxes																									$	15			651			(120	)		546			(424	)	$	177		$	(35	)	$	(282	)
Net Income (Loss) %																										0.4	%		17.3	%		-			7.8	%		(26.2	)%		7.0	%		-			(7.0	)%

	Three months ended (thousands)
	January 1, 2023			January 2, 2022

Net (Loss) Income (GAAP)	$	(223	)	$	29
Add:
Depreciation and Amortization		81			72
Federal Income Tax Benefit		(59	)		(14	)
Stock Compensation		35			57
Adjusted EBITDA – Non-GAAP	$	(166	)	$	144

	(Millions)
Product Line	Q1 2023		Q1 2022		Variance			% Chg
Periscopes	$	3.7	$	2.2	$	1.5			68.2	%
Sighting Systems		3.4		0.1		3.3			3300.0	%
Howitzer		-		-		-			-	%
Other		1.5		0.3		1.2			400.0	%
Optex Systems – Richardson		8.6		2.6		6.0			230.8	%
Optical Assemblies		1.2		0.2		1.0			500.0	%
Laser Filters		1.3		-		1.3			100.0	%
Day Windows		-		-		-			-	%
Other		0.1		0.7		(0.6	)		(85.7	)%
Applied Optics Center – Dallas		2.6		0.9		1.7			188.9	%
Total Customer Orders	$	11.2	$	3.5	$	7.7			220.0	%

	(Millions)
Product Line	Three months ended December 31, 2023			Three months ended January 1, 2023		Variance			% Chg
Periscopes	$	4.9		$	3.7	$	1.2			32.4	%
Sighting Systems		(0.3	)		3.4		(3.7	)		(108.8	)%
Howitzer		-			-		-			-	%
Other		1.6			1.5		0.1			6.7	%
Optex Systems – Richardson		6.2			8.6		(2.4	)		(27.9	)%
Optical Assemblies		0.9			1.2		(0.3	)		(25.0	)%
Laser Filters		2.4			1.3		1.1			84.6	%
Day Windows		-			-		-			-	%
Other		0.6			0.1		0.5			500.0	%
Applied Optics Center – Dallas		3.9			2.6		1.3			50.0	%
Total Customer Orders	$	10.1		$	11.2	$	(1.1	)		(9.8	)%

	(Millions)
Product Line	Q2 2023		Q3 2023		Q4 2023		2023 Delivery		2024+ Delivery		Total Backlog 1/1/2023		Total Backlog 1/2/2022		Variance			% Chg
Periscopes	$	2.7	$	2.8	$	1.1	$	6.7	$	3.3	$	10.0	$	6.9	$	3.1			44.9	%
Sighting Systems		0.2		1.2		0.9		2.3		2.6		4.9		1.5		3.4			226.7	%
Howitzer		-		0.1		0.1		0.2		2.1		2.3		2.3		-			-	%
Other		1.2		0.6		0.9		2.7		2.1		4.8		1.0		3.8			380.0	%
Optex Systems - Richardson		4.1		4.7		3.0		11.9		10.1		22.0		11.7		10.3			88.0	%
Optical Assemblies		1.6		1.6		1.5		4.7		1.8		6.5		4.1		2.4			58.5	%
Laser Filters		1.2		2.4		3.1		6.8		2.6		9.4		9.0		0.4			4.4	%
Day Windows		0.1		0.2		0.1		0.4		1.4		1.8		0.9		0.9			100.0	%
Other		0.3		0.1		0.1		0.3		0.1		0.4		0.8		(0.4	)		(50.0	)%
Applied Optics Center - Dallas		3.2		4.3		4.8		12.2		5.9		18.1		14.8		3.3			22.3	%
Total Backlog	$	7.3	$	9.0	$	7.8	$	24.1	$	16.0	$	40.1	$	26.5	$	13.6			51.3	%

	(Millions)
Product Line	Q2 2024		Q3 2024		Q4 2024		2024 Delivery		2025+ Delivery		Total Backlog 12/31/2023		Total Backlog 1/1/2023		Variance			% Chg
Periscopes	$	2.4	$	4.3	$	5.0	$	11.7	$	6.1	$	17.8	$	10.0	$	7.8			78.0	%
Sighting Systems		0.3		0.3		0.3		0.9		3.1		4.0		4.9		(0.9	)		(18.4	)%
Howitzer		-		-		-		-		2.3		2.3		2.3		-			-	%
Other		1.4		0.7		0.6		2.7		2.5		5.2		4.8		0.4			8.3	%
Optex Systems - Richardson		4.1		5.3		5.9		15.3		14.0		29.3		22.0		7.3			33.2	%
Optical Assemblies		0.9		0.7		0.2		1.8		0.7		2.5		6.5		(4.0	)		(61.5	)%
Laser Filters		2.4		3.2		2.4		8.0		2.5		10.5		9.4		1.2			12.8	%
Day Windows		0.2		0.2		0.3		0.7		0.8		1.5		1.8		(0.3	)		(16.7	)%
Other		0.4		0.2		0.6		1.2		-		1.2		0.4		0.7			175.0	%
Applied Optics Center - Dallas		3.9		4.3		3.5		11.7		4.0		15.7		18.1		(2.4	)		(13.3	)%
Total Backlog	$	8.0	$	9.6	$	9.4	$	27.0	$	18.0	$	45.0	$	40.1	$	4.9			12.2	%

	●	is made in accordance with generally accepted accounting principles,

	●	involves a significant level of estimation uncertainty, and

Exhibit No.		Description

~~10.1~~		Amended and Restated Line of Credit Note dated as of November 21, 2022 by and among Optex Systems Holdings, Inc., Optex Systems, Inc. and PNC Bank, National Association*

~~10.2~~		Employment Agreement of Danny Schoening, dated December 1, 2022*

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

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: February ~~13, 2023~~12, 2024	By:	/s/ Danny Schoening
		Danny Schoening
		Principal Executive Officer

	OPTEX SYSTEMS HOLDINGS, INC.

Date: February ~~13, 2023~~12, 2024	By:	/s/ Karen Hawkins
		Karen Hawkins
		Principal Financial Officer and
		Principal Accounting Officer