What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-12-18 compared with 2022-12-19 · 311 added, 262 removed, 212 unchanged (73% of the section changed)

30 unchanged sentences

Systems, Inc.

manufactures optical sighting systems and assemblies, primarily for Department of Defense applications.

Its products are

installed on various types of U.S.

military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and armored

security vehicles and have been selected for installation on the Stryker family of vehicles.

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 the Stryker family of vehicles.

Optex Systems, Inc.

24 unchanged sentences

We are currently not

aware of any pending terminations for convenience or for default on our existing contracts.

aware of any material pending terminations for convenience or for default on our existing contracts.

the event a termination for convenience were to occur, Federal Acquisition Regulation clause 52.249-2 provides for full recovery of all

12 unchanged sentences

materials and labor required to complete the contracts.

Developments and Material Trends

Trends and Recent Developments

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

In addition, we are seeing 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 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.”

have experienced significant material shortages during the year ended October 1, 2023 and extending into the first three 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, which continue into the first three months of fiscal year 2024, have negatively impacted our production

levels and have pushed the expected delivery dates into the first half of fiscal year 2024.

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.

While we are encouraged by recent improvements in

supplier performance for the Optex Richardson segment periscope line which yielded increased revenue performance during the second

through fourth quarters, 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 dates for our periscope products will not experience further

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.

refer also to “ Item 1.

Business – Market Opportunity:

Military ” for a description of current trends in U.S.

military spending and its potential impact on Optex, which may be material, including particularly the tables included in that section

and disclosure on the significant reduction in spending for U.S ground system military programs, which has a direct impact on the Optex

Systems Richardson segment revenue, all of which is incorporated herein by reference.

to “ 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” for a description

of recent supply chain disruptions, which 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.

have experienced significant material shortages during the three months ended October 2, 2022 and extending into the first three

months of fiscal year 2023 from two significant suppliers of our periscope covers and housings.

These shortages affect several of

our periscope products at the Optex Richardson segment.

The delays in key components, combined with labor shortages during the first

quarter of fiscal year 2023 to date have negatively impacted our production levels and have pushed the expected delivery dates into

the second and third quarters of fiscal year 2023.

We are aggressively seeking alternative sources for these components as well as

increasing employee recruitment initiatives and overtime to mitigate any continuing risks to the periscope line.

In addition, one of

our major customers for the Applied Optics Center has requested a significant schedule delay pushing their laser filter unit

delivery schedules from the first half into the second half of fiscal year 2023.

expect the combination of these issues to negatively impact our revenue during the first three months of

fiscal year 2023.

Our first quarter revenue projection is expected to be approximately 8-9% below the 2022 first quarter level.

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.

We anticipate revenue and working capital in the second half of fiscal year 2023 to

increase significantly from the first six months with a full 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.

Business – Recent Events ” of this report for recent material events affecting the Company.

of Operations

Military ” for a description of current trends in

government military spending and its potential impact on Optex, which may be material, including particularly the tables included

in that section and disclosure on the significant reduction in spending for U.S ground system military programs, which has a direct impact

on the Optex Systems Richardson segment revenue, all of which is incorporated herein by reference.

refer to “ Item 1.

Business – Recent Events ” of this report for recent developments affecting the Company.

of Operations by Segment

have presented the operating results by segment to provide investors with an additional tool to evaluate our operating results.

11 unchanged sentences

of Operations Selective Financial Info

Optics Center

(non-allocated

costs and eliminations)

Optics Center

(non-allocated

costs and eliminations)

from External Customers

Segment Revenue

Cost of Sales

and Administrative Expense

Allocated G&A Expense

General & Administrative Expense

Income (Loss)

Income (Loss) %

(Loss) on Change in Fair Value of Warrants

(Loss) before taxes

(loss) before taxes %

Twelve months ended

October 1, 2023

October 2, 2022

Applied Optics Center

(non-allocated costs and eliminations)

Applied Optics Center

(non-allocated costs and eliminations)

Revenue from External Customers

Intersegment Revenues

Total Segment Revenue

Total Cost of Sales

Gross Margin %

General and Administrative Expense

Segment Allocated G&A Expense

Net General & Administrative Expense

Operating Income (Loss)

Operating Income (Loss) %

Interest Expense

Income (Loss) before taxes

Income (loss) before taxes %

total external sales revenues increased by $3.3 million in the fiscal year 2023, or 14.6% compared to the 2022 fiscal year.

Systems segment realized a $2.3 million decrease and the Applied Optics Center segment realized an increase of $6.5 million in external

revenue compared to the prior year period.

Intersegment revenues decreased by $0.2 million to $0.9 million in 2022 from $1.1 million

Intersegment revenues relate primarily to coated filters provided by the Applied Optics Center to Optex Systems in support of

the Optex Systems periscope line.

margin increased $2.4 million and the gross margin percentage increased by 8.1 points from 13.8% in the 2021 fiscal year to 21.9% in

Systems segment realized a $2.6 million, or 27.1% increase, and the Applied Optics Center segment realized an increase of $0.7 million,

or 5.4%, in external revenue compared to the prior year period.

Intersegment revenues were $0.9 million for 2023 and 2022.

revenues relate primarily to coated filters provided by the Applied Optics Center to Optex Systems in support of the Optex Systems periscope

profit increased $1.7 million and the gross margin percentage increased by 3.9 points from 21.9% in the 2022 fiscal year to 25.8% in

the 2023 fiscal year.

The Optex Systems gross margin decreased by $0.8 million and the gross margin percentage decreased to 11.5% as

compared to 16.0% in the prior year period on lower revenue.

The Applied Optics Center gross margin increased by $3.2 million and the

gross margin percentage increased by 19.3 points to 27.7% as compared to the prior year period of 8.4%.

The increase in the consolidated

gross margin is primarily attributable to a significant shift in revenue from the Optex-Richardson segment to higher margin products

in the Applied Optics segment combined with higher absorption of the Applied Optics segment fixed overhead cost base associated with

higher production levels.

the years ended 2022 and 2021, Applied Optics Center absorbed $1.1 million and $0.7 million of fixed general and administrative costs

incurred by Optex Systems for support services.

The increase in allocated general and administrative expenses during the 2022 year is

directly attributable to the shift in revenue volume between segments.

These expenses cover accounting, executive, human resources, information

technology, board fees and other corporate expenses paid by Optex Systems and shared across both operating segments.

income increased by $2.1 million in the year ended October 2, 2022 to an income of $1.6 million as compared to the prior year operating

loss of $(0.5) million.

The increase in operating income is primarily attributable to increased revenue and gross margin at the Applied

Optics Center segment.

before taxes decreased $0.4 million, to $1.6 million in the 2022 fiscal year from a prior year income before taxes of $2.0 million.

decrease in income before taxes year over year is primarily due to the expiration of the warrants in 2021 which generated a gain on change

in fair valuation of warrants of $2.5 million in the prior year and which is partially offset by the higher operating profit in 2022.

the twelve months ended October 2, 2022, the Company booked $28.0 million in new orders, representing a 4.1% decrease from the prior

Optex Systems gross profit increased by $1.3 million and the gross margin percentage increased to 19.7% as

compared to 11.5% in the prior year period on significantly higher revenue.

Applied Optics Center gross profit increased by $0.4

million and the gross margin percentage increased to 29.3% as compared to 27.7% in the prior year period.

The increase in consolidated

gross profit is primarily attributable to higher absorption of the fixed overhead cost base associated with higher revenue levels at

both operating segments combined with shifts in revenue mix in the Applied Optics Center.

general and administrative costs increased from $3.2 million for the twelve months ended October 2, 2022 to $3.8 million for the twelve

months ended October 1, 2023.

During the years ended 2023 and 2022, Applied Optics Center absorbed $1.3 million and $1.1 million, respectively, of fixed

general and administrative costs incurred by Optex Systems for support services.

The increase in allocated general and administrative

expenses during the 2023 year is directly attributable to the increase of $0.6 million in general and administrative spending during

the twelve-month period combined with a shift in revenue volume between segments.

These expenses cover accounting, executive, human resources,

information technology, board fees and other corporate expenses paid by Optex Systems and shared across both operating segments.

operating income increased by $1.2 million in the year ended October 1, 2023 to an income of $2.8 million as compared to the prior year

operating income of $1.6 million.

The increase in operating income is primarily attributable to operating income of $1.0 million at the

Optex Systems segment and increased operating income of $0.2 million at the Applied Optics Center segment on higher revenue and gross

The increased segment operating income is slightly offset by a decrease in operating income of ($0.1) million in other unallocated

costs for increases in general and administrative and interest costs as compared to the prior year.

before taxes increased $1.1 million, to $2.7 million in the 2023 fiscal year from a prior year income before taxes of $1.6 million.

increase in income before taxes year over year is primarily due to the increase in revenue and gross profit in both segments.

Orders and Backlog

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.

the twelve months ended October 1, 2023, the Company booked $34.6 million in new orders, representing a 23.6% increase from the prior

year period orders of $28.0 million.

13 unchanged sentences

Total Customer Orders

primary reason for the decline in orders in 2022 as compared to 2021 relates to the $8.4 million order awarded in August 2021 for laser

filters which was deliverable over twenty-four months.

We anticipate future awards against this program as we near completion of the

current contract.

In addition, in 2021 we received a $0.4 million award for sighting systems which are deliverable in 2023.

Optex Systems Richardson segment currently has seven open US Government IDIQ type military contracts for periscopes with unspent funding

which covers government base year and option year requirement periods into 2025.

We anticipate additional orders throughout the next

three years for these contracts.

Systems Holdings continues to pursue new international and commercial opportunities in addition to maintaining its current footprint

military vehicle manufacturers, with existing as well as new product lines.

We are also reviewing potential products, outside

our traditional product lines, which could be manufactured using our current production facilities in order to capitalize on our existing

Further, we continue to look for strategic businesses to acquire that will strengthen our existing product line, expand our

operations, and enter new markets.

Company has seen significant increases in orders for many of its defense products during the fiscal year 2023 inclusive of two new customers

for our sighting systems and filter programs.

On November 1, 2022, the Company announced it has been awarded a $3.4 million sighting

system 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.

Deliveries under this contract are expected to begin in the second quarter of fiscal year 2024.

Richardson periscope orders have increased $6.7 million, or 72.8% over the prior year, including $9.0 million in task delivery awards

against our long term IDIQ contracts.

On June 30, 2023, we booked a $3.0 million delivery order at our Applied Optics segment for the

delivery of laser interface filters against a five-year IDIQ contract.

On September 18, 2023, the Company announced it was awarded a

five-year Indefinite Delivery Indefinite Quantity (IDIQ) contract from the U.S.

Government, for M22 (7 x 50) Binoculars with an estimated

value of $2.12 million.

As of October 1, 2023, the Applied Optics Center had received task orders valuing $0.5 million against this award.

Optex Systems Richardson segment currently has six open US Government IDIQ type military contracts for periscopes and two open IDIQ

contracts with another prime contractor for periscopes and unity mirrors with unspent funding which covers base year and option year

requirement periods into 2029.

We anticipate additional orders throughout the next five years for these ongoing contracts.

addition, the Company has three open bid requests for new multi-year IDIQ contracts pending with the U.S.

Government for additional

periscopes that are expected to be awarded in the next twelve months.

as of October 1, 2023 was $41.8 million as compared to a backlog of $32.9 million as of October 2, 2022, representing an increase of

The following table depicts the current expected delivery by quarter of all contracts awarded as of October 2, 2022.

The following table depicts the current expected delivery by quarter of all contracts awarded as of October 1, 2023, as well as

the October 1, 2023 backlog as compared to the backlog on October 2, 2022.

Total Backlog

10 unchanged sentences

for our periscope product line has increased 96.1% or $7.3 million to $14.9 million, from our 2022 fiscal year end level of $7.6 million,

Systems and Howitzer product line backlog remained flat during the twelve months ended October 2, 2022 as compared to the prior year

end backlog at $1.7 million and $2.3 million, respectively.

The Howitzer contract awarded in July 2020 continues to experience customer

driven delays related to customer furnished materials.

We expect to complete the first article testing during the third fiscal quarter

and to begin production deliveries during the fourth fiscal quarter of 2023.

primarily on new order releases against our long term IDIQ contracts.

Our projected periscope revenue over the next twelve months is

currently exceeding our supplier and headcount capacity.

We are currently working with our suppliers to ramp up material deliveries in

addition to adding automated buffing equipment and manpower to increase production capacity in line with our increasing customer demands

over the next twelve months.

Systems product line backlog increased 176.5%, or $3.0 million, to $4.7 million, from our 2022 fiscal year end level of $1.7 million.

increased backlog is primarily driven by the $3.4 million order from Israel for the repair and refurbishment of night vision equipment.

Deliveries against the new award are expected to begin in the second fiscal quarter of 2024, pending the approval of export licenses.

Howitzer contract awarded in July 2020 continues to experience customer driven delays related to customer furnished materials.

is currently on hold pending statement of work changes and materials furnished by the customer.

backlog in other product groups increased by $1.2 million or 35.3% from $3.4 million in 2022 to $4.6 million in 2023 on new orders booked

during the twelve months ended October 2, 2022, primarily for muzzle reference systems for a major U.S.

defense contractor.

during the twelve months ended October 1, 2023, primarily for muzzle reference systems and spare components for a major U.S.

contractor, combined with $0.3 million in optical wedge assemblies for a commercial customer.

Optics Center – Dallas

Applied Optics Center backlog increased by $1.6 million, or 9.8%, for the year ended October 2, 2022, from $16.3 million in 2021 to $17.9

Applied Optics Center backlog decreased by $2.6 million, or 14.5%, for the year ended October 1, 2023, from $17.9 million in 2022 to

$15.3 million in 2023.

for our optical assemblies increased by $1.8 million, or 36.0%, as compared to the prior year on new orders from one of our commercial

filter backlog decreased by $1.2 million, or 12.1%, during the year due to shipments against our long term laser filter unit contract.

window backlog increased by $0.9 million during the period as compared to the prior year on new orders from a major U.S.

defense contractor.

backlog increased by $0.1 million, or 33.3% for the year ended October 2, 2022, on new orders booked during the period for specialty

month period ended October 2, 2022 compared to the twelve month period ended October 3, 2021

for our optical assemblies decreased by $4.0 million, or 58.8%, as compared to the prior year on lower customer demand from one of our

commercial customers.

We anticipate new order bookings during the next six months, although we are projecting an overall revenue reduction

in optical assemblies of approximately 40% over the next twelve months compared to fiscal year 2023.

filter backlog increased by $1.2 million, or 13.8%, during the year due to $3.5 million in new order releases against our U.S.

Government long term laser interface filter contract in addition to several new orders booked from other U.S.

defense contractors

for laser interface filters and laser filter units.

We are anticipating additional order bookings for delivery in the fourth fiscal

quarter of 2024 and a substantial increase in laser filter revenue of 55-60% over the next twelve months from the 2023

window backlog decreased by $0.3 million during the period as compared to the prior year as we continue to deliver against the existing

orders from our ending 2022 backlog.

We anticipate a slight increase in deliveries for day windows over the next twelve months based

on the customer contract schedules.

Applied Optics backlog increased by $0.5 million, or 125.0% for the year ended October 1, 2023, on new orders booked during the period

for M22 binoculars.

On September 18, 2023, the Company announced it was awarded a 5-year IDIQ contract from the U.S.

Government, for

M22 (7 x 50) Binoculars with an estimated value of $2.12 million and during the month of September, the Company received $0.5 million

in task award orders against this contract.

Deliveries against the contract are expected to begin in the fourth fiscal quarter of 2024.

refer to “ Material Trends and Recent Events ” 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

Company continues to pursue domestic, international and commercial opportunities in addition to maintaining its current footprint with

vehicle manufactures, with existing as well as new product lines.

We are also reviewing potential products outside our traditional

product lines.

Further, we continue to look for strategic businesses to acquire that will strengthen our existing product line, expand our operations,

and enter new markets.

months ended October 1, 2023 compared to the twelve months ended October 2, 2022

table below details the revenue changes by segment and product line for the year ended October 1, 2023 as compared to the year ended

October 2, 2022.

Twelve months ended

October 1, 2023

October 2, 2022

Sighting Systems

6 unchanged sentences

The Optex Systems Richardson segment

realized a $2.3 million, or 19.5%, decrease in revenue and the Applied Optics Center segment realized an increase of $6.5 million, or

101.6%, in revenue compared to the prior year period.

realized a $2.6 million, or 27.4%, increase in revenue and the Applied Optics Center segment realized an increase of $0.7 million, or

5.4%, in revenue compared to the prior year.

Systems - Richardson

on our periscope line remained flat at $7.2 million during the twelve months ended October 2, 2022 and October 3, 2021.

on sighting systems decreased by $1.5 million, or 65.2% from the prior year period due to completion of the Commander Weapon Sighting

Systems in the prior year with no follow-on order for the current year period, combined with lower revenue on the DDAN and OWSS repair

units during the current year as compared to the prior year.

Lower revenue during the year is attributable to reductions in US spending

for military ground systems.

on Howitzers decreased by $0.2 million, to zero, compared to revenues of $0.2 million in the prior fiscal year due to customer driven

delays against our Aiming Circle XM10 optical assemblies contract awarded in 2020.

Systems-Richardson revenue on other product lines decreased by $0.6 million, or 28.6%, compared to revenues in the prior year due to

lower contract demand on MRS collimators and cell assemblies attributable to reductions in US spending for military ground systems.

on our periscope line increased $1.4 million during the twelve months ended October 1, 2023 and October 2, 2022 on higher customer demand

and improved supplier deliveries.

on sighting systems increased by $0.2 million, or 25.0% from the prior year period due to shipments of $0.4 million in back up sights

during the fourth quarter, offset by lower shipments against our OWSS repair contract.

Systems-Richardson revenue on other product lines increased by $1.0 million, or 66.7%, compared to revenues in the prior year due to

increased revenues for optical wedge assemblies, day camera assemblies, unity mirrors and assorted spare part assemblies for both commercial

defense contractors.

Optics Center - Dallas

on optical assemblies increased by $0.7 million, or 14.3%, during the twelve months ended October 1, 2023 as compared to the prior twelve-month

period on significantly higher demand on several rifle scope assemblies from one of our major commercial customers.

period on higher demand on several rifle scope assemblies from one of our major commercial customers.

filter revenue increased by $0.5 million, or 8.5%, during the twelve months ended October 1, 2023 as compared to the prior twelve-month

period on significantly higher demand for laser filter units from multiple defense contract customers.

on our day windows remained flat at $1.0 million during the twelve months ended October 2, 2022 and October 3, 2021 as we continue to

ship against our existing contracts.

Optics Center revenue for other product lines increased by $0.6 million, or 120.0%, during the twelve months ended October 2, 2022 as

compared to the prior twelve-month period on increased revenue for unity mirrors and specialty coatings.

period on higher demand for laser interface filters and laser filter units from multiple defense contract customers.

on our day windows decreased by $0.4 million, or 40.0%, during the twelve months ended October 1, 2023 as compared to October 2, 2022

as we continue to ship against our existing customer contract schedule.

Optics Center revenue for other product lines decreased by $0.1 million, or 9.1%, during the twelve months ended October 1, 2023 as compared

to the prior twelve-month period on decreased revenue for unity mirrors.

The gross margin for the year ended October 1, 2023 was 25.8% of revenue as compared to a gross margin of 21.9% of revenue

1 unchanged sentence

Cost of sales increased by $1.6 million to $19.0 million for 2023 compared to $17.5 million for 2022.

The gross margin increased by $2.4 million to $4.9 million in 2022 as compared to $2.5 million in 2021.

The gross profit increased by $1.7 million to $6.6 million in 2023 as compared to $4.9 million in 2022.

The increase is primarily due

to higher revenue and shifts between segments and product lines combined with higher fixed cost absorption at the Applied Optics Center

segment related to increased production volume.

to higher revenue and shifts between segments and product lines combined with higher fixed cost absorption at both the Applied Optics

Center and Optex Richardson segments related to increased production volume.

For the years ended October 1, 2023 and October 2, 2022, we recorded operating expenses of $3.83 million and $3.25 million,

respectively.

General and administrative cost increases of $0.3 million, or 10%, during fiscal year 2022 are primarily attributable to

increased labor and expenses based on labor, increased office expenses and higher selling expenses as compared to the prior year.

For the year ended October 2, 2022, we recorded an operating income of $1.6 million as compared to operating loss of $(0.5)

General and administrative cost increases of $0.6 million, or 17.8%, for fiscal year 2023 as compared to the prior year,

are primarily attributable to increases of $0.2 million relating to labor expenses and $0.2 million relating to office, legal, IT and

audit expenses, combined with a $0.1 million increase in stock compensation and a $0.1 million increase in bank fees.

During the twelve

months ended October 1, 2023, approximately $0.1 million of the increase in office and legal expense are directly related to our uplisting

to the NASDAQ market in March 2023.

For the year ended October 1, 2023, we recorded operating income of $2.8 million as compared to operating income of $1.6

million during the year ended October 2, 2022.

The $2.1 million increase in operating income in the current year over the prior year

is primarily due to higher revenue and gross margin, partially offset by increased general and administrative expenses.

The $1.2 million increase in operating income is primarily due to higher revenue and gross profit, partially offset by increased general and administrative expenses.

income applicable to common shareholders .

1 unchanged sentence

of $2.3 million as compared to net income applicable to common shareholders of $1.3 million during the year ended October 2, 2022.

decrease of net income of $0.2 million is primarily attributable to the elimination of the warrants which expired in 2021 and resulted

in a $2.5 million gain during the prior year twelve-month period, and a change in tax expenses of $0.5 million as compared to 2021.

change in income due to the warrants and taxes is partially offset by higher revenue and operating income of $2.1 million in the current

year as compared to the prior year period and elimination of the deemed dividends of $0.7 million associated with the warrants which

expired in 2021.

increase of net income of $1.0 million is primarily attributable to the increase in operating profit, offset by increased interest expense

of $0.1 million and increased income tax expense of $0.1 million over the prior year period.

GAAP Adjusted EBITDA

14 unchanged sentences

Twelve months ended

October 1, 2023

October 2, 2022

Net Income — GAAP

Gain on Change in Fair Value of Warrants

Federal Income Tax Expense (Benefit)

Federal Income Tax Expense

Stock Compensation

9 unchanged sentences

of October 1, 2023, Optex Systems Holdings had working capital of $13.5 million, as compared to $10.0 million as of October 2, 2022.

During the twelve months ended October 2, 2022, we generated operating cash flow of $2.0 million and spent ($4.7) million for the purchase

of shares against our stock repurchase plan and common stock tender offer and ($0.25) million on acquisitions of property and equipment.

During the twelve months ended October 1, 2023, we used operating cash of ($0.3) million, primarily driven by increased inventory,

and spent ($0.4) million on acquisitions of property and equipment.

During the twelve months ended October 1, 2023, our net

borrowing against the credit facility was $1.0 million.

as of October 1, 2023 was $41.8 million as compared to a backlog of $32.9 million as of October 2, 3022, representing an increase of

For further details, see “ Results of Operations – New Orders and Backlog ”

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 October 2, 2022, the Company had approximately $0.9 million in cash and

an outstanding payable balance of zero against its then $1.125 million line of credit (which has since been increased to $2.0 million).

As of October 2, 2022, our outstanding accounts receivable was $2.9 million.

We expect the accounts to be collected during the first

quarter of fiscal 2023.

experienced supplier delays, labor shortages, and customer schedule changes are expected to negatively impact our revenue during the

first three months of 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.

We anticipate revenues, and working capital, in

the second half of fiscal year 2023 to increase significantly from the first six months with a full recovery expected by fiscal year

the short term, the Company plans to utilize its current cash, open line of credit and operating cash flow to fund inventory purchases

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 October 1, 2023, the Company had approximately $1.2 million

in cash and an outstanding payable balance of $1.0 against its $3.0 million line of credit.

As of October 1, 2023, our outstanding

accounts receivable balance was $3.6 million, which has been collected during the first quarter of fiscal 2024.

During the first

quarter of 2024, we paid down our credit facility to zero.

refer to the disclosure above under “ Material Trends and Recent Developments” with respect to recent supply chain

disruptions and material shortages, which disclosure is incorporated herein by reference.

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 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.

of our contracts may allow for government contract financing in the form of contract progress payments pursuant to Federal Acquisition

Regulation 52.232-16, “Progress Payments.” Subject to certain limitations, this clause provides for government payment of

up to 90% of incurred program costs prior to product delivery for small businesses like us.

To the extent any contracts allow for progress

payments and the respective contracts would result in significant preproduction cash requirements for design, process development, tooling,

material or other resources which could exceed our current working capital or line of credit availability, we intend to utilize this

benefit to minimize any potential negative impact on working capital prior to receipt of payment for the associated contract deliveries.

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.

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.

some instances, new contract awards may allow for government contract financing in the form of contract progress payments pursuant to

Federal Acquisition Regulation 52.232-16, “Progress Payments.” Subject to certain limitations, this clause provides for government

payment of up to 90% of incurred program costs prior to product delivery for small businesses like us.

To the extent any contracts allow

for progress payments and the respective contracts would result in significant preproduction cash requirements for design, process development,

tooling, material or other resources which could exceed our current working capital or line of credit availability, we intend to utilize

this benefit to minimize any potential negative impact on working capital prior to receipt of payment for the associated contract deliveries.

Currently none of our existing contracts allow for progress payments.

refer to “ Note 7 – Commitments and Contingencies – Rental Payments under Non-cancellable Operating

Leases ” for a tabular depiction of our remaining minimum lease and estimated CAM payments under such leases as of October

1, 2023, which disclosure is incorporated herein by reference.

Company expects to generate net income and positive cash flow from operating activities over the next twelve months.

To remain profitable,

we need to maintain a level of revenue adequate to support our cost structure.

Management intends to manage operations commensurate with

its level of working capital and facilities 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 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.

April 12, 2022, the Company and its subsidiary, Optex Systems, Inc.

(collectively with the Company, the “Borrowers”), entered

into an Amended and Restated Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, successor to BBVA

USA (the “Lender”), pursuant 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.

Loan Agreement requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1.

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%.

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.

intend to renew or replace the 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.

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.

These shares represented approximately

19.3% of its shares of common stock outstanding as of September 15, 2022.

Because the tender offer was oversubscribed, the Company accepted

for payment only a pro-rated portion of the shares of common stock properly tendered by each tendering stockholder (other than “odd

lot” holders whose shares were purchased on a priority basis).

profitable, we need to maintain a level of revenue adequate to support our cost structure.

Management intends to manage operations

commensurate with its level of working capital and line of credit facility during the next twelve months and beyond;

however, uneven

revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program delays

associated with the pandemic could create a working capital shortfall.

In the event the Company does not successfully implement its

ultimate business plan, certain assets may not be recoverable.

March 22, 2023, the Company and its subsidiary, Optex Systems, Inc.

(“Optex”, and with the Company, the “Borrowers”),

entered into a Business Loan Agreement (the “Loan Agreement”) with Texas Capital Bank (the “Lender”), pursuant

to which the Lender will make available to the Borrowers a revolving line of credit in the principal amount of $3 million (the “Credit

The commitment period for advances under the Credit Facility is twenty-six months expiring on May 22, 2025.

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

The interest rate is currently at 8.08% per annum.

As of October 1, 2023, the interest rate was 8.07% per annum.

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 October 1, 2023, there

was $1.0 million borrowed under the Credit Facility which was fully repaid during the first three months of fiscal year 2024.

As of October 1,

2023, the Company is in compliance with all covenants under the Credit Facility.

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

September 22, 2021 the Company announced authorization for an additional $1 million stock repurchase program.

During the twelve months

ended October 2, 2022, the Company purchased 190,954 common shares under the September 2021 stock repurchase plan at a cost of $371 thousand.

As of October 2, 2022, there were zero shares held in treasury.

As of October 2, 2022, there was an authorized balance of $560 thousand

remaining to be spent against the repurchase program.

As of July 2, 2023, there

was an authorized balance of $560 thousand remaining to be spent against the repurchase program.

During the year ended October 1, 2023,

there were no stock repurchases against the plan.

the twelve months ended October 1, 2023 the Company declared and paid no dividends.

29 unchanged sentences

accrued warranty costs of $75 thousand, as compared to $169 thousand as of October 2, 2022.

The primary reason for the $91 thousand increase

in reserve balances relates to higher revenue on warrantied product being sold during the twelve months ended October 2, 2022, combined

with an increase in customer returned backlog pending repair or replacement to our customer as compared to the warranty backlog as of

October 3, 2021.

of October 2, 2022 and October 3, 2021, we had $289 thousand, and $51 thousand, respectively, of contract loss reserves included in our

balance sheet accrued expenses.

These loss contracts are related to some of our older legacy periscope IDIQ contracts which were priced

in 2018 through early 2020, prior to Covid-19 and the significant downturn in defense spending on ground system vehicles.

Due to inflationary

price increases on component parts and higher internal manufacturing costs (as a result of escalating labor costs and higher burden rates

on reduced volume), some of these contracts are in a loss condition, or at marginal profit rates.

These contracts are typically three-year

IDIQ contracts with two optional award years, and as such, we are obligated to accept new task awards against these contracts until the

contract expiration.

Should contract costs continue to increase above the negotiated selling price, or in the event the customer should

release substantial quantities against these existing loss contracts, the losses could be material.

For contracts currently in a loss

status based on the estimated per unit contract costs, losses are booked immediately on new task order awards.

During the twelve months

ended October 2, 2022, there accrued contract losses increased by $238 thousand on new awards against the active IDIQ contracts.

is no way to reasonably estimate future inflationary impacts, or customer awards on the existing loss contracts.

We continue to monitor

these contracts throughout the year for any significant changes in addition to seeking potential cost saving strategies to mitigate risk.

of October 2, 2022 and October 3, 2021, Optex Systems Inc.

had a net carrying value of $0.9 million and $1.3 million, respectively in

deferred tax assets.

Net deferred tax assets as October 2 2022 and October 3, 2021 consisted of deferred tax assets of $ 1.8 million

and $2.1 million, and valuation reserves of $0.9 million and $0.8 million, respectively.

During the twelve-month period ended October

2, 2022, we collected $0.3 million in tax refunds related to the prior year net operating loss carryback in deferred tax assets.

valuation allowance covers certain deferred tax assets where we believe we will be unlikely to recover those tax assets through future

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.

The primary reason for the $94 thousand decrease

in reserve balances relates to lower customer returns on warrantied product being sold during the twelve months ended October 1, 2023,

combined with a decrease in customer returned backlog pending repair or replacement to our customer as compared to the warranty backlog

as of October 2, 2022.

of October 1, 2023 and October 2, 2022, we had $243 thousand, and $289 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 subsequent decline in revenue at the Optex Systems Richardson segment combined

with significant inflationary pressures on materials and labor in the last two years.

Due to inflationary price increases on component

parts and higher internal manufacturing costs (as a result of escalating labor costs and higher burden rates), some of these contracts

are in a loss condition, or at marginal profit rates.

These contracts are typically three-year IDIQ contracts with two optional award

years, and as such, we are obligated to accept new task awards against these contracts until the contract expiration.

Should contract

costs continue to increase above the negotiated selling price, or in the event the customer should release substantial quantities against

these existing loss contracts, the losses could be material.

For contracts currently in a loss status based on the estimated per unit

contract costs, losses are booked immediately on new task order awards.

During the twelve months ended October 1, 2023, the accrued contract

losses decreased by $46 thousand on shipments against the active IDIQ contract backlog combined with improvements in manufacturing overhead

rates on higher revenue volume.

There is no way to reasonably estimate future inflationary impacts, or customer awards on the existing

loss contracts.

We continue to monitor these contracts throughout the year for any significant changes in addition to seeking potential

cost saving strategies to mitigate risk.

of October 1, 2023, Optex Systems Inc.

had a net carrying value of $0.9 million in deferred tax assets consisting of deferred tax assets

of $1.7 million and valuation reserves of ($0.8) million.

As of October 2, 2022, Optex Systems Inc.

had a net carrying value of $0.9

million in deferred tax assets consisting of deferred tax assets of $1.8 million and valuation reserves of ($0.9) million.

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

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.

Accounting Pronouncements

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis