# Optex Systems Holdings Inc: Form 10-Q for the period ended Jun 30, 2024

- Company: [Optex Systems Holdings Inc](/companies/opxs.md) (CIK 1397016)
- Form: 10-Q
- Filed: 2024-08-13
- Accepted by EDGAR: Aug 13, 2024, 16:05 ET
- Period: 2024-06-30
- Accession: 0001493152-24-031607
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1397016/000149315224031607/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1397016/000149315224031607/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $9.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-10-02 to 2024-06-30 | $24.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-04-01 to 2024-06-30 | $6.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-10-02 to 2024-06-30 | $17.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-04-01 to 2024-06-30 | $2.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-10-02 to 2024-06-30 | $7.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | $1.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-10-02 to 2024-06-30 | $3.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $17.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-10-02 to 2024-06-30 | $32.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $337.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-10-02 to 2024-06-30 | $737.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $1.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-10-02 to 2024-06-30 | $2.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.18 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-10-02 to 2024-06-30 | $0.40 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-10-02 to 2024-06-30 | $0.41 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 6,888,208 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-10-02 to 2024-06-30 | 6,812,431 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-10-02 to 2024-06-30 | $1.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-10-02 to 2024-06-30 | $473.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-06-30 | $486.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-06-30 | $19.5m | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $24.9m | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $5.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-06-30 | $7.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-06-30 | $17.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,881 characters.

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

*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 working capital); orders and backlog; expected timing of 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; 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.

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

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

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 us for materials and labor required to complete the contracts.

### Recent Events

### January 2024 Asset Acquisition

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

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

### Material Trends

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

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

We are seeing some recent improvements in the local labor market and are adding to our direct labor force in concert with improvements in our supplier delivery performance. While we are encouraged by improvements in supplier performance for the Optex Richardson segment periscope line which yielded increased revenue performance during fiscal year 2023 and into the first nine months of fiscal 2024, we have yet to ramp up deliveries sufficiently to keep pace with our current customer demands. As such, we cannot give any assurances that expected customer delivery dates for our periscope products will not experience further delays.

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 previous $2.0 million line with PNC. The increase in credit limit helps us meet our working capital requirements in light of the increased backlog and delay of revenues from the fiscal year 2023.

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

### Results of Operations

### Non-GAAP Adjusted EBITDA

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

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-and nine-month operating results for the periods ended June 30, 2024 and July 2, 2023, in terms of both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both measures allows the reader better to evaluate our overall performance.

|  | (Thousands) Three months ended June 30, 2024 | July 2, 2023 | Nine months ended June 30, 2024 | July 2, 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net Income (GAAP) | $1,261 | $576 | $2,754 | $832 |
| Add: |  |  |  |  |
| Federal Income Tax Expense | 337 | 154 | 737 | 223 |
| Depreciation | 132 | 86 | 341 | 252 |
| Stock Compensation | 90 | 81 | 360 | 134 |
| Interest Expense | 17 | 22 | 32 | 31 |
| **Adjusted EBITDA - Non GAAP** | **$1,837** | **$919** | **$4,224** | **$1,472** |

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

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

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

|  | Results of Operations Selective Financial Information (Thousands) Three months ended June 30, 2024 Optex Richardson | Applied Optics Center Dallas | Other (non-allocated costs and eliminations) | Consolidated | July 2, 2023 Optex Richardson | Applied Optics Center Dallas | Other (non-allocated costs and eliminations) | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue from External Customers | $4,675 | 4,385 | - | 9,060 | $3,069 | $4,103 | $- | $7,172 |
| Intersegment Revenues | - | 282 | (282) | - | - | 265 | **(265)** | - |
| **Total Segment Revenue** | **4,675** | **4,667** | **(282)** | **9,060** | **3,069** | **4,368** | **(265)** | **7,172** |
| Total Cost of Sales | 3,575 | 2,886 | (282) | 6,179 | 2,757 | 2,968 | (265) | 5,460 |
| **Gross Profit** | **1,100** | **1,781** | **-** | **2,881** | **312** | **1,400** | **-** | **1,712** |
| **Gross Margin %** | **23.5%** | **38.2%** | **-** | **31.8%** | **10.2%** | **32.1%** | - | **23.9%** |
| General and Administrative Expense | 997 | 179 | 90 | 1,266 | 758 | 121 | 81 | 960 |
| Segment Allocated G&A Expense | (339) | 339 | - | - | (386) | 386 | - | - |
| Net General & Administrative Expense | 658 | 518 | 90 | 1,266 | 372 | 507 | 81 | 960 |
| **Operating Income (Loss)** | **442** | **1,263** | **(90)** | **1,615** | **(60)** | **893** | **(81)** | **752** |
| **Operating Income (Loss) %** | **9.5%** | **27.1%** | **-** | **17.8%** | **(2.0)%** | **20.4%** | - | **10.5%** |
| Interest Expense | - | - | 17 | 17 | - | - | 22 | 22 |
| **Net Income (Loss) before taxes** | **$442** | **1,263** | **(107)** | **1,598** | **$(60)** | **$893** | **$(103)** | **$730** |
| **Net Income (Loss) %** | **9.5%** | **27.1%** | **-** | **17.6%** | **(2.0)%** | **20.4%** | **-** | **10.2%** |

5

|  | Results of Operations Selected Financial Info by Segment (Thousands) Nine months ended June 30, 2024 Optex Richardson | Applied Optics Center Dallas | Other (non-allocated costs and eliminations) | Consolidated | July 2, 2023 Optex Richardson | Applied Optics Center Dallas | Other (non-allocated costs and eliminations) | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue from External Customers | $12,344 | 12,208 | - | 24,552 | $7,742 | $9,840 | $- | $17,582 |
| Intersegment Revenues | - | 700 | (700) | - | - | 511 | (511) | - |
| **Total Segment Revenue** | **12,344** | **12,908** | **(700)** | **24,552** | **7,742** | **10,351** | **(511)** | **17,582** |
| Total Cost of Sales | 9,763 | 8,367 | (700) | 17,430 | 6,830 | 7,280 | (511) | 13,599 |
| **Gross Profit** | **2,581** | **4,541** | **-** | **7,122** | **912** | **3,071** | **-** | **3,983** |
| **Gross Margin %** | **20.9%** | **35.2%** | **-** | **29.0%** | **11.8%** | **29.7%** | **-** | **22.7%** |
| General and Administrative Expense | 2,750 | 489 | 360 | 3,599 | 2,417 | 346 | 134 | 2,897 |
| Segment Allocated G&A Expense | (1,019) | 1,019 | - | - | (978) | 978 | - | - |
| Net General & Administrative Expense | 1,731 | 1,508 | 360 | 3,599 | 1,439 | 1,324 | 134 | 2,897 |
| **Operating Income (Loss)** | **850** | **3,033** | **(360)** | **3,523** | **(527)** | **1,747** | **(134)** | **1,086** |
| **Operating Income (Loss) %** | **6.9%** | **23.5%** | **-** | **14.3%** | **(6.8)%** | **16.9%** | **-** | **6.2%** |
| Interest Expense | - | - | 32 | 32 | - | - | 31 | 31 |
| **Income (Loss) before taxes** | **$850** | **3,033** | **(392)** | **3,491** | **$(527)** | **$1,747** | **$(165)** | **$1,055** |
| **Income (loss) before taxes %** | **6.9%** | **23.5%** | **-** | **14.2%** | **(6.8)%** | **16.9%** | **-** | **6.0%** |

For the three months ended June 30, 2024, our total revenues increased by $1.9 million, or 26.3%, compared to the prior year period. For the nine months ended June 30, 2024, our total revenues increased by $7.0 million, or 39.6%, compared to the prior year period. The increase in revenue for the three and nine-month periods was driven by increased customer demand for military products across both operating segments partially offset by lower customer demand in commercial optical assemblies.

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

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

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

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

| Product Line | (Millions) Nine months ended June 30, 2024 | Nine months ended July 2, 2023 | Variance | % Chg |
| --- | ---: | ---: | ---: | ---: |
| Periscopes | $15.9 | $11.6 | $4.3 | 37.1% |
| Sighting Systems | 0.3 | 4.0 | (3.7) | (92.5)% |
| Howitzer | - | - | - | -% |
| Other | 2.3 | 3.0 | (0.7) | (23.3)% |
| **Optex Systems – Richardson** | **18.5** | **18.6** | **(0.1)** | **(0.5)%** |
| Optical Assemblies | 1.8 | 1.2 | 0.6 | 50.0% |
| Laser Filters | 6.5 | 5.5 | 1.0 | 18.2% |
| Day Windows | 0.1 | 0.1 | - | -% |
| Other | 1.4 | 0.9 | 0.5 | 55.6% |
| **Applied Optics Center – Dallas** | **9.8** | **7.7** | **2.1** | **27.3%** |
| **Total Customer Orders** | **$28.3** | **$26.3** | **$2.0** | **7.6%** |

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

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

| Product Line | Q4-2024 Delivery | 2025+ Delivery | Total Backlog 6/30/24 | Total Backlog 7/2/23 | Variance | % Chg |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Periscopes | $3.7 | $19.3 | $23.0 | $13.1 | $9.9 | 75.6% |
| Sighting Systems | 0.5 | 3.5 | 4.0 | 5.2 | (1.2) | (23.1)% |
| Howitzer | - | 2.3 | 2.3 | 2.3 | - | -% |
| Other | 0.8 | 2.6 | 3.4 | 5.5 | (2.1) | (38.2)% |
| **Optex Richardson** | **5.0** | **27.7** | **32.7** | **26.1** | **6.6** | **25.3%** |
| Optical Assemblies | 0.6 | 0.7 | 1.3 | 3.3 | (2.0) | (60.6)% |
| Laser Filters | 2.4 | 6.8 | 9.2 | 9.8 | (0.6) | (6.1)% |
| Day Windows | 0.2 | 1.1 | 1.3 | 1.8 | (0.5) | (27.8)% |
| Other | 0.3 | 0.8 | 1.1 | 0.6 | 0.5 | 83.3% |
| **Applied Optics Center - Dallas** | **3.5** | **9.4** | **12.9** | **15.5** | **(2.6)** | **(16.8)%** |
| **Total Backlog** | **$8.5** | **$37.1** | **$45.6** | **$41.6** | **$4.0** | **9.6%** |

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

Applied Optics Center backlog as of June 30, 2024, was $12.9 million as compared to a backlog of $15.5 million as of July 2, 2023, representing a decrease of ($2.6) million or (16.8%). Subsequent to the end of the quarter, on July 8, 2024, the Company announced a $2.5 million order for laser filter units to be delivered from August 2024 through July 2025.

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

The Company continues to pursue domestic, international and commercial opportunities in addition to maintaining its current footprint with U.S. vehicle manufactures, with existing as well as new product lines. We are also reviewing potential products outside our traditional product lines, which could be manufactured using our current production facilities in order to capitalize on our existing excess capacity.

### Three Months Ended June 30, 2024 Compared to the Three Months Ended July 2, 2023

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

| Product Line | Three months ended (Thousands) June 30, 2024 | July 2, 2023 | Variance | % Chg |
| --- | ---: | ---: | ---: | ---: |
| Periscopes | $3,171 | $2,623 | $548 | 20.9% |
| Sighting Systems | 432 | 137 | 295 | 215.3% |
| Howitzers | - | - | - | - |
| Other | 1,072 | 309 | 763 | 246.9% |
| **Optex Richardson** | **4,675** | **3,069** | **1,606** | **52.3%** |
| Optical Assemblies | 963 | 1,452 | (489) | (33.7)% |
| Laser Filters | 2,941 | 2,286 | 655 | 28.7% |
| Day Windows | 109 | 120 | (11) | (9.2)% |
| Other | 372 | 245 | 127 | 51.8% |
| **Applied Optics Center - Dallas** | **4,385** | **4,103** | **282** | **6.9%** |
| **Total Revenue** | **$9,060** | **$7,172** | **$1,888** | **26.3%** |

8

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

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

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

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

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

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

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

| Product Line | Nine months ended (Thousands) June 30, 2024 | July 2, 2023 | Variance | % Chg |
| --- | ---: | ---: | ---: | ---: |
| Periscopes | $7,842 | $6,085 | $1,757 | 28.9% |
| Sighting Systems | 1,003 | 464 | 539 | 116.2% |
| Howitzers | - | - | - | - |
| Other | 3,499 | 1,193 | 2,306 | 193.3% |
| **Optex Systems - Richardson** | **12,344** | **7,742** | **4,602** | **59.4%** |
| Optical Assemblies | 3,252 | 4,438 | (1,186) | (26.7)% |
| Laser Filters | 7,208 | 4,404 | 2,804 | 63.7% |
| Day Windows | 460 | 350 | 110 | 31.4% |
| Other | 1,288 | 648 | 640 | 98.8% |
| **Applied Optics Center - Dallas** | **12,208** | **9,840** | **2,368** | **24.1%** |
| **Total Revenue** | **$24,552** | **$17,582** | **$6,970** | **39.6%** |

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

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

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

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

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

### Liquidity and Capital Resources

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

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

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

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

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

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

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

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.

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

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

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

On March 22, 2023, we entered into a Business Loan Agreement (the “Loan Agreement”) with Texas Capital Bank (the “Lender”), pursuant to which the Lender will make available to the Borrowers a revolving line of credit in the principal amount of $3 million (the “Credit Facility”). The commitment period for advances under the Credit Facility is twenty-six months expiring on May 22, 2025. We refer to the expiration of that time period as the “Maturity Date.” Outstanding advances under the Credit Facility will accrue interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. The interest rate is currently at 8.07% per annum.

The Loan Agreement contains customary events of default (including a 25% change in ownership) and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes (including changes in management), investments, and restricted payments (including cash dividends). The Loan Agreement also requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1 and a total leverage ratio of 3.00:1. The Credit Facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the Credit Facility are subject to acceleration upon the occurrence of an event of default as defined in the Loan Agreement. The Loan Agreement further provides for a $125,000 Letter of Credit sublimit. As of June 30, 2024, there was $1.0 million borrowed under the Credit Facility. As of June 30, 2024, the Company is in compliance with all covenants under the Credit Facility.

The Credit Facility replaced the prior $2 million line of credit with PNC Bank, National Association.

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

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

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

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

## Controls and procedures

As filed, 1,398 characters.

#### Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by our Quarterly Report on Form 10-Q for the quarter ended June 30, 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) under 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 June 30, 2024, our disclosure controls and procedures were effective.

#### Changes in Internal Control Over Financial Reporting

During the three months ended June 30, 2024, 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.

## Risk factors

As filed, 120 characters.

There have been no material changes in the risk factors set forth in Form 10-K filed for the year ended October 1, 2023.

Filed Aug 13, 2024.
Source: SEC EDGAR, the filing index for accession 0001493152-24-031607. Last ingested by Listed: Oct 24, 2026, 15:12 ET. No prices; not investment advice.