What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-12-19 compared with 2023-12-18 · 275 added, 277 removed, 246 unchanged (69% of the section changed)

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in our financial statements elsewhere in this Annual Report.

management’s discussion and analysis reflects information known to management as of our fiscal year end, October 1, 2023, and the

date of filing.

This MD&A is intended to supplement and complement our audited financial statements and notes thereto for the year

ended October 1, 2023, prepared in accordance with U.S.

management’s discussion and analysis reflects information known to management as of our fiscal year end, September 29, 2024, and

the date of filing.

This MD&A is intended to supplement and complement our audited financial statements and notes thereto for the

year ended September 29, 2024, prepared in accordance with U.S.

generally accepted accounting principles (GAAP).

You are encouraged to read our

financial statements in conjunction with this MD&A.

The financial information in this MD&A has been prepared in accordance with

GAAP, unless otherwise indicated.

You are encouraged to

read our financial statements in conjunction with 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

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references in the following section to 2023 or 2024 with respect to our financial position and results of operations are to our fiscal

years ended October 2, 2022 or October 1, 2023, respectively.

years ended October 1, 2023 or September 29, 2024, respectively.

Systems, Inc.

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We are also a military supplier to foreign

governments such as Israel, Australia and NAMSA and South American countries and as a subcontractor for several large U.S.

governments such as Israel, Australia and the NATO Support and Procurement Agency and South American countries, and as a subcontractor for several large U.S.

defense companies

serving foreign governments.

way of background, the Federal Acquisition Regulation is the principal set of regulations that govern the acquisition process of government

agencies and contracts with the U.S.

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 .

of our contracts are prime or subcontracted directly with the Federal government and, as such, are subject to Federal Acquisition Regulation

way of background, the Federal Acquisition Regulation (“FAR”) is the principal set of regulations that govern the

acquisition process of government agencies and contracts with the U.S.

In general, parts of the FAR are incorporated into government solicitations and contracts by reference as terms and conditions effecting contract

awards and pricing solicitations .

of our contracts are prime or subcontracted directly with the Federal government and, as such, are subject to FAR

Subpart 49.5, “Contract Termination Clauses” and more specifically Federal Acquisition Regulation clauses 52.249-2 “Termination

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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

the event a termination for convenience were to occur, FAR 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.

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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.

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”.

the control and without the fault or negligence of the Company as defined by FAR clause 52.249-8.

addition, some of our contracts allow for government contract financing in the form of contract progress payments pursuant to FAR 52.232-16, “Progress Payments”.

Subject to certain limitations, this clause provides for government

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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.

have experienced substantial increases in the costs of aluminum, steel and acrylic commodities, which has affected our net income in

the year ended September 29, 2024 and is expected to continue to have a negative effect on the margins generated under several of 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.”

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.

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 fiscal year ended October 1, 2023 and the first half of fiscal year ended

September 29, 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.

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

half of the fiscal year ended September 29, 2024, have negatively impacted our production levels and have pushed back expected

delivery dates.

We have obtained an alternative source for one of our key components and are expediting our other suppliers to

support the increased production levels.

have seen improvements in the local labor market since 2023 and increased our direct labor force and employee overtime in concert with

improvements in our supplier delivery performance.

Further, we have invested in additional machinery and equipment and other process

improvements to increase production capacity and alleviate process bottlenecks.

While we are encouraged by improvements in supplier performance

and available manpower for the Optex Richardson segment periscope line which yielded increased revenue performance during fiscal year

2024, 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.

refer also to “ Item 1.

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The table below provides a summary of selective statement of operations data by operating

segment for the years ended October 1, 2023 and October 2, 2022 reconciled to the Audited Consolidated Results of Operations as presented

segment for the years ended September 29, 2024 and October 1, 2023 reconciled to the Audited Consolidated Results of Operations as presented

in Item 8, “Financial Statements and Supplementary Data”.

of Operations Selective Financial Info

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)

Optex Systems

eliminations)

Optex Systems

eliminations)

Revenue from External Customers

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Total Cost of Sales

Gross Margin %

General and Administrative Expense

Segment Allocated G&A Expense

Segment Allocated G&A

Net General & Administrative Expense

Operating Income (Loss)

Operating Income (Loss) %

Income (Loss) %

Interest Expense

Income (Loss) before taxes

Income (loss) before taxes %

(loss) before taxes %

total external sales revenues increased by $8.3 million in the fiscal year 2024, or 32.5% compared to the 2023 fiscal year.

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or 16.9%, 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

Intersegment revenues were $1.0 million for 2024 and $0.9 million in

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

Optex Systems periscope line.

profit increased $2.9 million and the gross margin percentage increased by 2.2 points from 25.8% in the 2023 fiscal year to 28.0% in

the 2024 fiscal year.

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.

Optex Systems gross profit increased by $1.4 million and the gross margin percentage increased to 20.7% as compared

to 19.7% in the prior year period.

Applied Optics Center gross profit increased by $1.5 million and the gross margin percentage increased

to 34.1% as compared to 29.3% in the prior year period.

The increase in each segment and consolidated gross profit is primarily attributable

to higher revenue and increased absorption of fixed cost.

general and administrative costs increased from $3.8 million for the twelve months ended October 1, 2023 to $4.7 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.

months ended September 29, 2024.

General and administrative costs increased $0.9 million due to increased

royalties and selling expenses of $0.4 million, increased stock compensation expenses of $0.2 million, increased labor and fringe costs

of $0.2 million and increased information technology costs of $0.1 million.

During the fiscal years 2024 and 2023, Applied Optics Center

absorbed $1.5 million and $1.3 million, respectively, of fixed general and administrative costs incurred by Optex Systems for support

The increase in allocated general and administrative expenses during the 2024 year is directly attributable to increased general

and administrative costs during the current year period as compared to the prior year.

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 $2.0 million in the year ended September 29, 2024 to $4.8 million as compared to the prior

year operating income of $2.8 million.

The increase in operating income is primarily attributable to higher revenue and gross profit, partially

offset by increases in general and administrative costs.

The operating income increased across both segments as compared to the prior

year on higher revenue and gross profit.

before taxes increased $2.0 million, to $4.8 million in the 2024 fiscal year from a prior year income before taxes of $2.7 million.

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

The increase in income before taxes year over year is primarily due to higher revenue and gross profit, partially offset by

increased general and administrative costs.

Orders and Backlog

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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

the twelve months ended September 29, 2024, the Company booked $36.4 million in new orders, representing a 5.2% increase from the prior

year period orders of $34.6 million.

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Richardson segment and $12.9 million attributable to the Applied Optics Center segment.

following table depicts the new customer orders for the twelve months ending October 1, 2023 as compared to the prior year period in

millions of dollars:

Twelve months ended

October 1, 2023

Twelve months ended

October 2, 2022

following table depicts the new customer orders for the twelve months ending September 29, 2024 as compared to the prior year period

in millions of dollars:

Twelve months

Sighting Systems

Optex Systems – Richardson

Systems – Richardson

Optical Assemblies

Laser Filters

Applied Optics Center – Dallas

Total Customer Orders

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 1, 2023, as well as

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

Total Backlog

Optics Center – Dallas

Customer Orders

the year ended September 29, 2024, orders in the Company’s Optex Richardson segment increased by $0.2 million, or 0.9%, as compared

to the prior year.

The primary reason for the increase 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.

in orders for sighting systems and other products was offset by a significant increase in periscope orders in the year ended September

The Applied Optics Center orders increased $1.6 million, or 14.2%, 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 other products driven by our new program

of Infrared (IR) Signature Reduction Coatings used on aircraft.

Optex Richardson segment currently has five open US Government IDIQ type military contracts for periscopes, collimators, and big eye

assemblies with unspent funding which covers base year and option year requirement ordering periods into January 2029.

During the year,

approximately 20% of Optex Richardson’s segment orders, or $4.8 million, were awards against active IDIQ contracts.

Optics Center has two open US Government IDIQ orders.

During the year, approximately 22% of Applied Optics Center segment orders, or

$2.8 million, were awards against active IDIQ contracts.

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

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

and other prime contractors for additional periscopes, and unity mirrors that are expected to be awarded in the next three to six months.

as of September 29, 2024 was $44.2 million as compared to a backlog of $41.8 million as of October 1, 2023, representing an increase

The following table depicts the current expected delivery by quarter of all contracts awarded as of September 29, 2024, as well

as the September 29, 2024 backlog as compared to the backlog on October 1, 2023.

Sighting Systems

Optex Systems – Richardson

Systems – Richardson

Optical Assemblies

Laser Filters

Applied Optics Center – Dallas

Total Backlog

Optics Center – Dallas

Systems - Richardson

the twelve months ended October 1, 2023, backlog for our Optex Richardson segment increased by 76.7%, or $11.5 million to $26.5 million,

the twelve months ended September 29, 2024, backlog for our Optex Richardson segment increased by 20.0%, or $5.3 million to $31.8 million,

as compared to the prior year ending backlog of $26.5 million.

for our periscope product line has increased 52.3% or $7.8 million to $22.7 million, from our 2023 fiscal year end level of $14.9 million,

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.

primarily on increased orders above our delivery capacity during the 2024 year.

With the majority of material shortages behind us, we

have substantially increased the headcount and overtime hours in addition to the purchase of machinery and equipment to eliminate process

bottlenecks and increase periscope throughput up to 60-75% over the next year in line with our customer demands.

We are anticipating

an increase of approximately 60% in periscope revenue in fiscal year 2025 as compared to 2024.

Systems product line backlog decreased 19.1%, or $0.9 million, to $3.8 million, from our 2023 fiscal year end level of $4.7 million.

The decreased backlog is primarily driven by deliveries of $0.7 million against our 2023 order for sighting systems to repair and refurbish

night vision equipment for the Government of Israel combined with revenues of $0.2 million recognized against our long term OWSS maintenance

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 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.

We anticipate deliveries against the

Howitzer contract to begin in fiscal year 2026.

backlog in other product groups decreased by $1.6 million or 34.8% from $4.6 million in 2023 to $3.0 million in 2024 on shipments against

a long-term collimator IDIQ of $1.3 million and commercial wedge assemblies of $0.3 million.

Optics Center – Dallas

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 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.

Applied Optics Center backlog decreased by $2.9 million, or 19.0%, for the year ended September 29, 2024, from $15.3 million in 2023

to $12.4 million in 2024.

for our optical assemblies decreased by $2.1 million, or 75.0%, as compared to the prior year on lower customer demand.

We anticipate

new orders during the next three to six months for deliveries in 2025.

filter backlog decreased by $0.4 million, or 4.0%, during the year due to increased shipments against our laser interface filter and

laser filter units during the year.

We are anticipating additional orders for shipment during the 2025 year.

window backlog decreased by $0.6 million, or 35.3%, during the period as compared to the prior year primarily due to shipments against

a long-term IDIQ contract with deliveries scheduled into 2026.

We anticipate additional orders in the next three months.

Applied Optics backlog increased by $0.2 million, or 22.2% for the year ended September 29, 2024, on an

increase in customer orders for Infrared (IR) Signature Reduction Coatings used on aircraft.

refer to “ Material Trends and Recent Events ” above or “ Liquidity and Capital Resources ” below for

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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.

October 1, 2023

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

our operations, offer operational scale and enter new markets.

months ended September 29, 2024 compared to the twelve months ended October 1, 2023

table below details the revenue changes by segment and product line for the year ended September 29, 2024 as compared to the year ended

October 1, 2023.

September 29,

Sighting Systems

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Systems - Richardson

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.

on our periscope line increased $3.5 million, or 40.7%, during the twelve months ended September 29, 2024 and October 1, 2023 on increased

customer demand and higher production throughput during the year.

on sighting systems increased by $0.4 million, or 40.0% from the prior year period due to deliveries against the 2023 order for repair

and refurbishment of night vision equipment to the Government of Israel.

Systems-Richardson revenue on other product lines increased by $2.2 million, or 88.0%, 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.

increased orders for collimators, windows, beamsplitters, cell assemblies and other spares.

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 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 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

on optical assemblies decreased by $1.7 million, or 30.4%, during the twelve months ended September 29, 2024 as compared to the prior

twelve-month period on lower customer demand.

We are anticipating revenue over the next twelve months to approximate the 2024 revenue

level pending new customer orders in the next three to six months.

filter revenue increased by $3.2 million, or 50.0%, during the twelve months ended September 29, 2024 as compared to the prior twelve-month

period on increased customer demand.

We anticipate revenue to continue at the higher levels throughout 2025.

on our day windows increased by $0.1 million, or 16.7%, during the twelve months ended September 29, 2024 as compared to October 1, 2023

as we continue to ship against the long-term IDIQ contract for these units.

We anticipate revenues to continue at this, or a slightly

increased, level through 2025.

Optics Center revenue for other product lines increased by $0.6 million, or 60.0%, during the twelve months ended September 29, 2024

as compared to the prior twelve-month period on increased deliveries in products for Infrared (IR)

Signature Reduction Coatings used on aircraft.

We anticipate these delivery levels to continue into 2025 combined with additional

increases for shipments against our current binocular contract.

The gross margin for the year ended September 29, 2024 was 28.0% of revenue as compared to a gross margin of 25.8% of revenue

for the year ended October 1, 2023.

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The increase is primarily due

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 $0.6 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

to increased revenue, and higher absorption of fixed cost and changes in product mix between the segments.

For the years ended September 29, 2024 and October 1, 2023, we recorded operating expenses of $4.7 million and $3.8

million, respectively.

General and administrative cost increased $0.9 million, or 22.9%, for fiscal year 2024 as compared to the

prior year due to increased royalties and selling expenses of $0.4 million, increased stock compensation expenses of $0.2 million,

increased labor and fringe costs of $0.2 million and increased information technology costs of $0.1 million.

The selling expenses

are directly related to new products including the Speedtracker acquisition and the Government of Israel repair and refurbishment on

night vision products and the royalties are related to the new Infrared (IR) Signature

Reduction Coatings product.

For the year ended September 29, 2024, we recorded operating income of $4.8 million as compared to operating income of $2.8

million during the year ended October 1, 2023.

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.

The $2.0 million increase in operating income is primarily due to increased revenue and

gross profit, offset by higher general and administrative costs.

income applicable to common shareholders .

During the year ended October 1, 2023, we recorded net income applicable to common shareholders

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

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.

During the year ended September 29, 2024, we recorded net income applicable to common

shareholders of $3.8 million as compared to net income applicable to common shareholders of $2.3 million during the year ended

October 1, 2023.

The increase of net income of $1.5 million is primarily attributable to increased revenue and gross profit, offset

by higher general and administrative costs and increased federal income taxes of $0.5 million.

GAAP Adjusted EBITDA

use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the performance

of our business as “net income” includes the significant impact of noncash valuation gains and losses on warrant liabilities,

noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest expenses and federal income

of our business as “net income” includes the significant impact of noncash compensation expenses related to equity stock issues, as well as depreciation, amortization, interest expenses and federal income

We believe that Adjusted EBITDA is a meaningful indicator of our operating performance because it permits period-over-period comparisons

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Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative

table below summarizes our twelve-month operating results for the periods ended October 1, 2023 and October 2, 2022, in terms of both

table below summarizes our twelve-month operating results for the periods ended September 29, 2024 and October 1, 2023, in terms of both

the GAAP net income measure and the non-GAAP Adjusted EBITDA measure.

Twelve months ended

October 1, 2023

September 29, 2024

October 1, 2023

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Federal Income Tax Expense

Depreciation & Amortization

Stock Compensation

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Adjusted EBITDA - Non GAAP

Adjusted EBITDA increased by $1.3 million to $3.4 million during the twelve months ended October 1, 2023 as compared to $2.1 million

during the twelve months ended October 2, 2022.

The increase in EBITDA is primarily driven by increased revenue and operating profit

during the current year as compared to the prior year twelve-month period.

Operating segment performance is discussed in greater detail

throughout the previous sections.

Our Adjusted EBITDA increased by $2.4 million to $5.7 million during the

twelve months ended September 29, 2024 as compared to $3.4 million during the twelve months ended October 1, 2023.

The increase in EBITDA

is primarily driven by increased net income, offset by increased taxes, depreciation and amortization, and stock compensation.

segment performance is discussed in greater detail throughout the previous sections.

and Capital Resources

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 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

of September 29, 2024, Optex Systems Holdings had working capital of $15.1 million, as compared to $13.5 million as of October 1,

During the twelve months ended September 29, 2024, we generated operating cash of $1.8 million, primarily driven by increased

revenue and net income.

As of September 29, 2024, there was no net change against the outstanding credit

facility balance of $1.0 million.

Company has capital commitments of $0.3 million for the purchase of property and equipment consisting of a significant coating chamber

upgrade, a black bond dispensing machine, an air compressor, and an Opotek tunable laser system.

as of September 29, 2024 was $44.2 million as compared to a backlog of $41.8 million as of October 1, 2023, representing an increase

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

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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 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.

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.

September 29, 2024, the Company had approximately $1.0 million in cash and an outstanding payable balance of $1.0 against its $3.0 million

line of credit.

As of September 29, 2024, our outstanding accounts receivable balance was $3.8 million, which has been collected during

the first quarter of fiscal 2025.

During the first quarter of 2025, 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 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.

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.

We may also repurchase

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, product line or other asset acquisitions, or additional stock purchases as attractive opportunities

present themselves.

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.

The Company acquired the assets using $1 million 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.

After the acquisition, the Company determined it would be more economical to move the manufacturing operations in

house and is no longer ordering assembled units under the original contract manufacturing agreement.

RUB will continue to provide the

Company with purchased kit parts for the manufacture of the Speedtracker Mach products.

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 September 29, 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.

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

FAR 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.

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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.

refer to “ Note 8 – Commitments and Contingencies – Rental Payments under Non-cancellable Operating Leases ”

for a tabular depiction of our remaining minimum lease and estimated C ommon Area Maintenance (“C AM ”) payments under such leases as of September 29, 2024, 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.

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.

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 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.

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The interest rate is currently at 7.509% per annum.

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

As of September 29, 2024, the interest rate was 7.67% per annum.

Loan Agreement contains customary events of default (including a 25% change in ownership) and negative covenants, including but not limited

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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.

As of September 29, 2024,

there was $1.0 million borrowed under the Credit Facility.

As of September 29, 2024, the Company was 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.

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,

As of September 29, 2024,

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

During the years ended September 29,2024 and 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.

As of October 1, 2023, there are no outstanding declared

and unpaid dividends.

the twelve months ended September 29, 2024 the Company declared and paid no dividends.

As of September 29, 2024, there are no outstanding

declared and unpaid dividends.

Accounting Estimates

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costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly.

As of October 1, 2023, the Company had

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

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.

As of September 29, 2024, the Company

had accrued warranty costs of $52 thousand, as compared to $75 thousand as of October 1, 2023.

The primary reason for the decrease in

reserve balances relates to lower shipments of our optical assemblies during the twelve months ended September 29, 2024 as compared to

the prior year.

of September 29, 2024 and October 1, 2023, we had $259 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

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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.

During the twelve months ended September 29, 2024, the accrued

contract losses increased by $16 thousand on new awards against one of our loss IDIQ contracts, partially offset by shipments during

the twelve month period.

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

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 September 29, 2024 and 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.

The valuation allowance covers certain deferred tax

assets where we believe we will be unlikely to recover those tax assets through future operations.

The valuation reserve includes assumptions

related to future taxable income which would be available to cover net operating loss carryforward amounts.

Because of the uncertainties

of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are subject to change over time.

While we believe our current estimate to be reasonable, changing market conditions and profitability, changes in equity structure and

changes in tax regulations may impact our estimated reserves in future periods.

Accounting Pronouncements

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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