Optex Systems Holdings Inc 10-K

Item 8. Financial Statements and Supplementary Data 43 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Optex Systems Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Optex Systems Holdings, Inc. and subsidiaries (the “Company”) as of September 28, 2025 and September 29, 2024, and the related consolidated statements of income, stockholders’ equity, and cash flows for the twelve months then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 28, 2025 and September 29, 2024, and the results of their operations and their cash flows for the twelve months then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Whitley Penn LLP We have served as the Company’s auditor since 2017. Dallas, Texas December 16, 2025 44 Optex Systems Holdings, Inc. Consolidated Balance Sheets September 28, 2025 September 29, 2024 (Thousands, except share and per share data) September 28, 2025 September 29, 2024 ASSETS Cash and Cash Equivalents $ 6,389 $ 1,009 Accounts Receivable, Net 4,569 3,764 Inventory, Net 14,322 14,863 Contract Asset 142 219 Prepaid Expenses 285 217 Current Assets 25,707 20,072 Property and Equipment, Net 1,427 1,292 Other Assets Deferred Tax Asset 1,199 947 Intangibles, net - 951 Right-of-use Asset 1,700 2,233 Security Deposits 23 23 Other Assets 2,922 4,154 Total Assets $ 30,056 $ 25,518 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts Payable $ 1,525 $ 1,177 Credit Facility - 1,000 Operating Lease Liability 645 638 Federal Income Taxes Payable 87 74 Accrued Expenses 1,634 1,258 Accrued Selling Expense 141 237 Accrued Warranty Costs 162 52 Contract Loss Reserves 132 259 Customer Advance Deposits 234 255 Current Liabilities 4,560 4,950 Other Liabilities Operating Lease Liability, net of current portion 1,205 1,760 Total Liabilities 5,765 6,710 Commitments and Contingencies - Stockholders’ Equity Common Stock – ($ 0.001 par, 2,000,000,000 authorized, 6,920,658 and 6,873,938 shares issued and outstanding, respectively) 7 7 Additional Paid in Capital 21,801 21,465 Retained Earnings (Accumulated Deficit) 2,483 ( 2,664 ) Stockholders’ Equity 24,291 18,808 Total Liabilities and Stockholders’ Equity $ 30,056 $ 25,518 The accompanying notes are an integral part of these financial statements. 45 Optex Systems Holdings, Inc. Consolidated Statements of Income September 28, 2025 September 29, 2024 (Thousands, except share and per share data) Twelve months ended September 28, 2025 September 29, 2024 Revenue $ 41,337 $ 33,995 Cost of Sales 29,280 24,466 Gross Profit 12,057 9,529 General and Administrative Expense 4,925 4,708 Operating Income 7,132 4,821 Other Expenses Asset Impairment 804 - Interest (Income) Expense, net ( 23 ) 47 Other Expenses 781 47 Income Before Taxes 6,351 4,774 Income Tax Expense, net 1,204 1,006 Net income applicable to common shareholders $ 5,147 $ 3,768 Basic income per share $ 0.75 $ 0.56 Weighted Average Common Shares Outstanding - basic 6,865,280 6,762,145 Diluted income per share $ 0.74 $ 0.55 Weighted Average Common Shares Outstanding - diluted 6,923,657 6,833,274 The accompanying notes are an integral part of these financial statements. 46 Optex Systems Holdings, Inc. Consolidated Statements of Cash Flows September 28, 2025 September 29, 2024 (Thousands) Twelve months ended September 28, 2025 September 29, 2024 Cash Flows from Operating Activities: Net Income $ 5,147 $ 3,768 Adjustments to Reconcile Net Income to Net Cash provided by Operating Activities: Depreciation and Amortization 515 487 Asset Impairment 804 - Stock Compensation Expense 383 425 Change in Deferred Tax Asset ( 252 ) ( 25 ) Change in Accounts Receivable ( 810 ) ( 150 ) Bad Debt Expense 4 10 Change in Inventory 541 ( 2,710 ) Change in Contract Asset 77 118 Change in Prepaid Expenses ( 69 ) 2 Change in Leases ( 15 ) 3 Change in Accounts Payable and Accrued Expenses 725 359 Change in Federal Income Taxes Payable 13 ( 173 ) Change in Accrued Warranty Costs 111 ( 23 ) Change in Accrued Selling Expense ( 95 ) ( 100 ) Change in Customer Advance Deposits ( 21 ) ( 226 ) Change in Accrued Estimated Loss on Contracts ( 127 ) 16 Total Adjustments 1,784 ( 1,987 ) Net Cash provided by Operating Activities 6,931 1,781 Cash Flows used in Investing Activities Purchases of Intangible Assets ( 10 ) ( 1,050 ) Purchases of Property and Equipment ( 494 ) ( 681 ) Net Cash used in Investing Activities ( 504 ) ( 1,731 ) Cash Flows used in Financing Activities Cash Paid for Taxes Withheld On Net Settled Restricted Stock Unit Share Issue ( 47 ) ( 245 ) Borrowings from Credit Facility - 1,350 Payments to Credit Facility ( 1,000 ) ( 1,350 ) Net Cash used in Financing Activities ( 1,047 ) ( 245 ) Net Increase (Decrease) in Cash and Cash Equivalents 5,380 ( 195 ) Cash and Cash Equivalents at Beginning of Year 1,009 1,204 Cash and Cash Equivalents at End of Year $ 6,389 $ 1,009 Supplemental Cash Flow Information: Cash Transactions: Cash Paid for Taxes 1,443 1,204 Cash Received from Interest 35 - Cash Paid for Interest 12 47 The accompanying notes are an integral part of these financial statements. 47 Optex Systems Holdings, Inc. Consolidated Statement of Stockholders’ Equity Issued Stock Capital Earnings Equity Thousands (except share data) Common Additional (Accumulated Deficit) / Total Shares Common Paid in Retained Stockholders Issued Stock Capital Earnings Equity Balance at October 1, 2023 6,763,070 $ 7 $ 21,285 $ ( 6,432 ) $ 14,860 Stock Compensation Expense - - 425 - 425 Vested restricted stock units issued net of tax withholding 110,868 - ( 245 ) - ( 245 ) Net income - - - 3,768 3,768 Balance at September 29, 2024 6,873,938 $ 7 $ 21,465 $ ( 2,664 ) $ 18,808 Balance 6,873,938 $ 7 $ 21,465 $ ( 2,664 ) $ 18,808 Stock Compensation Expense - - 383 - 383 Vested restricted stock units issued net of tax withholding 16,885 - ( 47 ) - ( 47 ) Restricted Board Shares issued 1 22,800 - - - - Restricted Board Shares issued 22,800 - - - - Restricted Officer Shares issued, net of tax shares withheld 2 7,035 - - - - Restricted Officer Shares issued, net of tax shares withheld 7,035 - - - - Net income - - - 5,147 5,147 Balance at September 28, 2025 6,920,658 $ 7 $ 21,801 $ 2,483 $ 24,291 Balance 6,920,658 $ 7 $ 21,801 $ 2,483 $ 24,291 (1) Restricted stock award made on November 5, 2024 which consisted of 7,600 shares each of restricted stock for the three independent directors. (2) Restricted stock award made on August 11, 2025 to Chad George, President. The award was for 10,000 shares which was issued net of tax shares withheld of 2,935 shares. The accompanying notes are an integral part of these financial statements. 48 Note 1 — Organization and Operations Optex Systems Holdings, Inc. (together with its subsidiaries, the “Company,” “Optex Systems Holdings,” “we,” “us,” and “our”) manufactures optical sighting systems and assemblies for the U.S. Department of Defense, foreign military applications and commercial markets. Our products are installed on a variety of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. The Company also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that are delivered both directly to the military and to other defense prime contractors or commercial customers. The Company’s consolidated revenues for the twelve months ended September 28, 2025 were derived from military sales to the U.S. government ( 28 %), U.S. prime military contractors ( 61 %), foreign military contractors ( 6 %), and commercial customers ( 5 %). Approximately 94 % of the total company revenue is generated from domestic customers and 6 % is derived from foreign customers, primarily in Canada and Israel. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of September 28, 2025, Optex Systems Holdings operated with 132 full-time equivalent employees. Note 2 — Summary of Significant Accounting Policies Basis of Presentation Principles of Consolidation : The consolidated financial statements include the accounts of Optex Systems Holdings and its wholly owned subsidiary, Optex Systems, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates : The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Segment Reporting : FASB ASC 280 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker in decisions regarding resource allocations and performance assessments. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. Segments are determined based on differences in products, internal reporting and how operational decisions are made. Management has determined that the Optex Systems, Richardson plant, and the Applied Optics Center, Dallas plant are separately managed, organized, and internally reported as separate business segments. The FASB ASC 280 requires that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliations of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise’s general-purpose financial statements. The Chief Operating Decision Maker (CODM), which is our CEO, uses the segment revenue, cost of sales and net operating income to assess the Company’s performance and allocation of resources. The CODM assesses the performance of our segments and decides how to allocate resources based on each segment’s revenue growth, gross profit and operating profit. The CODM utilizes these metrics by comparing budget versus actual results as well as benchmarking to our competitors. For the twelve months ended September 28, 2025 and September 29, 2024, the Company’s CODM was Danny Schoening, CEO. See also Note 14 “Subsequent Events” regarding changes to the CODM and CEO effective on December 20, 2025. Fiscal Year : Optex System Holdings’ fiscal year ends on the Sunday nearest September 30. Fiscal year 2025 ended on September 28, 2025 and included 52 weeks. Fiscal year 2024 ended on September 29, 2024 and included 52 weeks. Fair Value of Financial Instruments : Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of the financial statement presentation date. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, are carried at, or approximate, fair value as of the reporting date because of their short-term nature. The credit facility is reported at fair value as it bears market rates of interest. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions. The accounting guidance establishes a hierarchy which requires an entity to maximize the use of quoted market prices and minimize the use of unobservable inputs. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement. Fair value estimates are reviewed at the origination date and again at each applicable measurement date and interim or annual financial reporting dates, as applicable for the financial instrument, and are based upon certain market assumptions and pertinent information available to management at those times. Cash and Cash Equivalents : For financial statement presentation purposes, Optex Systems Holdings considers those short-term, highly liquid investments with original maturities of three months or less to be cash or cash equivalents. Optex Systems Holdings has $ 6.4 million in cash on deposit with our banks. As of September 28, 2025, $ 4.0 million of our cash balance was carried in a money market account with an annual interest rate of 3.84 %. For the twelve months ended September 28, 2025, the total interest income under the money market account was $ 35 thousand. Only a portion of the cash, currently $ 250 thousand, would be covered by federal deposit insurance and the uninsured balances are substantially greater than the insured amounts. Concentration of Credit Risk : The Company’s revenues for fiscal year ended September 28, 2025 were derived from sales to U.S. government agencies ( 29 %), four major U.S. defense contractors ( 19 %, 10 %, 6 % and 6 %), and all other customers ( 30 %). The Company’s revenues for fiscal year ended September 29, 2024 were derived from sales to U.S. government agencies ( 20 %), four major U.S. defense contractors ( 25 %, 7 %, 6 % and 6 %), one major commercial customer ( 13 %) and all other customers ( 23 %). Optex Systems Holdings does not believe that this concentration results in undue credit risk because of the financial strength of the obligees. 49 Accounts Receivable : Optex Systems Holdings records its accounts receivable at the original sales invoice amount less liquidations for previously collected advance/progress bills and an allowance for expected credit losses. As of the fiscal year beginning October 2, 2023, the Company adopted Accounting Standards Update (ASU) 2016-13, “ Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Under the new standard, the current expected credit loss (“CECL”) model is used for estimating an allowance for credit losses and an allowance is set up when the receivable is initially recorded, even if the probability of loss is remote. The Company utilizes a CECL model based on the aging schedule method. As the customer base is primarily U.S. government and government prime contractors, Optex Systems Holdings allowance for credit losses is minimal. On a quarterly basis, Optex Systems Holdings evaluates its accounts receivable and establishes an allowance for credit losses, using a CECL model based on a rolling aging schedule method. An account receivable is considered to be past due if any portion of the receivable balance is outstanding beyond its scheduled due date. No interest is accrued on past due accounts receivable. As of September 28, 2025, and September 29, 2024, Optex Systems Holdings had an allowance for credit losses of $ 5 thousand and $ 15 thousand, respectively, for non U.S. government account balances. Optex Systems Holdings charges uncollectible accounts to credit loss expense in the period in which they are first deemed uncollectible. In the fiscal year 2025 we recognized $ 4 thousand in credit loss expenses associated with uncollectible accounts. In the fiscal year 2024 we recognized $ 10 thousand in credit loss expenses associated with uncollectible accounts. As of September 28, 2025, 91 % of the accounts receivable balance was comprised of eight customers: the U.S. government, 12 %, seven major defense contractors, 27 %, 22 %, 8 %, 6 %, 6 %, 5 % and 5 %. As of September 29, 2024, 79 % of the accounts receivable balance was comprised of seven customers: the U.S. government, 15 %, five major defense contractors, 26 %, 10 %, 9 %, 7 % and 7 %, and a foreign military customer, 5 %. Inventory : Inventory is recorded at the lower of cost or net realizable value and adjusted as appropriate for decreases in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected sales activity, inventory costs and inventory balances to determine appropriate reserve levels. Cost is determined using the first-in first-out method. As of September 28, 2025, and September 29, 2024 inventory included: Schedule of Inventory September 28, 2025 September 29, 2024 (Thousands) As of September 28, 2025 As of September 29, 2024 Raw Materials $ 9,394 $ 9,460 Work in Process 6,063 5,954 Finished Goods 788 556 Gross Inventory 16,245 15,970 Less: Inventory Reserves ( 1,923 ) ( 1,107 ) Net Inventory $ 14,322 $ 14,863 In the twelve months ended September 28, 2025 Optex Systems Holdings recorded $ 0.8 million of excess and obsolete inventory reserves. We increased our reserves on old and slow-moving sighting systems inventories by $ 0.7 million due to the expected phase out of LAV and LAV-25 tanks by the U.S. government using the DDAN sighting system platform, combined with the modernization of the Abrams Commander Weapon Station with more advanced sighting systems. We set aside additional reserves of $ 0.1 million for other product inventories that were either slow moving, obsolete, or showed zero requirements over the prior five years. Net inventory decreased by $ 0.5 million primarily as a result of the increased reserves. 50 Warranty Costs : Some of Optex Systems Holdings’ customers require that the Company warrant the quality of its products to meet customer requirements and be free of defects for up to twelve months subsequent to delivery. Future warranty costs are based on the estimated cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of warranty covered sales. Throughout the year, warranty costs are expensed as incurred, and as of each year end, Optex Systems Holdings reviews the prior 12-month warranty experience rate and may adjust the warranty accrual as required to cover any estimated warranty expenses associated with the period end backlog of returned customer units awaiting repair or replacement plus any estimated warranty expenses related to anticipated future returns on previous deliveries. As of September 28, 2025 and September 29, 2024, the existing warranty reserve balances of $ 162 thousand and $ 52 thousand, respectively, were reviewed and determined to be adequate to satisfy any future warranty claims that may have existed as of the end of each fiscal year for shipments occurring in the prior 12 months. We have made numerous improvements to our supplier bases and internal production process to reduce the return rate on future shipments but will continue to review and monitor the reserve balances related to this product line against any existing warranty backlog and current trend data as we repair and replace our current warranty backlog and process future warranty returns. The table below summarizes the warranty expenses and incurred warranty costs for the twelve months ended September 28, 2025 and September 29, 2024. Schedule of Warranty Reserves 2025 2024 (Thousands) Years ended 2025 2024 Beginning balance $ 52 $ 75 Incurred costs for warranties satisfied during the period - ( 52 ) Warranty Expenses: Warranties reserved for new product shipped during the period (1) 152 106 Change in estimate for pre-existing warranty liabilities (2) ( 42 ) ( 77 ) Warranty Expense 110 29 Ending balance $ 162 $ 52 (1) Warranty expenses accrued to cost of sales for shipped optical assemblies of $ 9 thousand (based on prior three months shipments of optical assemblies and the optical assembly historical warranty return rate) in addition to an expected warranty repair cost of $ 143 thousand for shipped day windows due to a glass cracking issue. (2) Changes in estimated warranty liabilities recognized in cost of sales associated with: the period end customer returned warranty backlog, or the actual costs of repaired/replaced warranty units which were shipped to the customer during the year. During the twelve months ended September 28, 2025, the warranty return rate was below historical levels resulting in a favorable change in estimate during the period. Property and Equipment : Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from 3 three to seven years . Expenditures for renewals and betterments are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred. Gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place. Leases : Optex Systems Holdings has two significant operating facilities leases which extend beyond twelve months and fall under the guidance of ASC Topic 842. See also Note 8. 51 Revenue Recognition : The Company has adopted FASB ASC 606—Revenue from Contracts with Customers which requires revenue recognition based on a five-step model that includes: identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price and recognizing the revenue. The standard results in the recognition of revenue depicting the transfer of promised goods or services to customers in an amount reflecting the expected consideration to be received from the customer for such goods and services, based on the satisfaction of performance obligations, occurring when the control of the goods or services transfer to the customer. The majority of the Company’s contracts and customer orders originate with fixed determinable unit prices for each deliverable quantity of goods defined by the customer order line item (performance obligation) and include the specific due date for the transfer of control and title of each of those deliverables to the customer at pre-established payment terms, which are generally within thirty to sixty days from the transfer of title and control. We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods. In addition, the Company has one ongoing service contract which relates to optimized weapon system support (OWSS) and includes ongoing program maintenance, repairs and spare inventory support for the customer’s existing fleet units in service during the duration of the contract. Revenue recognition for this program has been recorded by the Company, and compensated by the customer, at fixed monthly increments over time, consistent with the defined contract maintenance period. The total revenue recognized over time related to the contract is $ 517 thousand for the twelve months ended September 28, 2025 and $ 483 thousand for the twelve months ended September 29, 2024. The Company has on occasion, outside of the presented periods, received selective contract awards and modifications which included substantive milestone performance obligations, contract modifications, negotiated settlements and financing arrangements which could fall within the scope of FASB ASC 606 revenue recognition guidance on reoccurrence, and as such, the Company has expanded their contract review process to ensure any new contract awards, changes, modifications, financing arrangements or potential negotiated settlements are recorded in compliance to the new standard guidance. During the twelve months ended September 28, 2025, there was $ 186 thousand of revenue recognized from customer deposit liabilities (deferred contract revenue). During the twelve months ended September 29, 2024, there was $ 226 thousand revenue recognized during the period from customer deposit liabilities (deferred contract revenue). As of September 28, 2025 and September 29, 2024, there were $ 141 thousand and $ 237 thousand in accrued selling expenses, respectively, and $ 142 thousand and $ 219 thousand in contract assets, respectively, related to agency fees for an Israeli contract booked in November 2022. The selling costs are amortized against the revenue for the contract deliveries which began in the first half of fiscal year 2024 and are expected to extend into fiscal year 2027. Customer Advance Deposits : Customer advance deposits represent amounts collected from customers in advance of shipment or revenue recognition which relate to undelivered product due to non-substantive milestone payments or other cash in advance payment terms. As of September 28, 2025 and September 29, 2024, Optex Systems, Inc. had a balance of $ 234 thousand and $ 255 thousand, respectively, in customer advance deposits. Contract Loss Reserves : The Company records loss provisions in the event that the current estimated total revenue against a contract and the total estimated cost remaining to fulfill the contract indicate a loss upon completion. When the estimated costs indicate a loss, we record the entire value of the loss against the contract loss reserve in the period the determination is made. The Company has several long-term fixed price contracts that are currently indicative of a loss condition due to recent inflationary pressures on material and labor, combined with increased manufacturing overhead costs. One of these long-term contracts has an active option year ordering period that expires January 5, 2026, with deliveries that could potentially extend into fiscal year 2027. As of September 28, 2025, the Company had contract loss reserves of $ 132 thousand. As of September 29, 2024, the Company had contract loss reserves of $ 259 thousand. Government Contracts : Many of Optex Systems Holdings’ 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 FAR 52.249-2 “Termination for Convenience of the Government (Fixed-Price)”, and FAR 49.504 “Termination of fixed-price contracts for default”. These clauses are standard clauses on prime military contracts and are required by the government to be “flowed down” by the prime contractor to any subcontractors used to perform work or provide components against the award. It has been Optex Systems Holdings’ experience that the termination for convenience is rarely invoked, except where it has been mutually beneficial for both parties. As of September 28, 2025, the Company had eight subcontract customer awards which are associated with two government prime contracts pending termination. We are currently in negotiation with the customer regarding the final termination claim amount, but expect to recover all of our incurred costs to date, plus a reasonable fee, against these contracts. 52 Impairment or Disposal of Long-Lived Assets : Optex Systems Holdings follows the provisions of FASB ASC 360-10, “ Accounting for the Impairment or Disposal of Long-lived Assets ”. This standard requires, among other things, that long-lived assets be reviewed for potential impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. On September 28, 2025, the Company reviewed the Speedtracter intangible asset value based on the anticipated cash flow of the associated products over the next five years and determined that the remaining asset value could not be recovered. As a result, the remaining $ 0.8 million of unamortized intangible assets was impaired and as of September 28, 2025 and the remaining balance of intangible assets is zero . See also Note 6. Stock-Based Compensation : FASB ASC 718 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, but primarily focuses on transactions whereby an entity obtains employee services for share-based payments. FASB ASC 718 requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Income Tax/Deferred Tax : FASB ASC 740 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differing treatment of items for financial reporting and income tax reporting purposes. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that Optex Systems Holdings will not realize tax assets through future operations. When assessing the recoverability of deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies and results of recent operations. Based on those estimates, management has determined that a portion of the deferred tax assets may not be realized and has established a valuation allowance against the deferred tax asset balance. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. As of September 28, 2025 and September 29, 2024, Optex Systems, Inc. had a net carrying value of $ 1.2 million and $ 0.9 million, respectively, in deferred tax assets represented by deferred tax assets of $ 2.0 million and $ 1.7 million, respectively, and a deferred tax asset valuation allowance of ($ 0.8 ) million each of the years ended periods, against those assets. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control occurring in fiscal year 2018. As of September 28, 2025 and September 29, 2024, we reviewed the deferred tax assets and determined it was more likely than not that we would be able to utilize a substantial portion of the deferred tax asset balance against future earnings. Our assumptions were based on the previous three years earnings trend as well as anticipated future earnings. During the twelve months ended September 28, 2025 and September 29, 2024, the Company recognized an income tax expense of $ 1.2 million and $ 1.0 million, respectively. We will continue to review the deferred tax assets and related valuation reserves in accordance with ASC 740 on an annual basis. Earnings per Share : Basic earnings per share is computed by dividing income available for common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. 53 The Company has potentially dilutive securities outstanding, which include unvested restricted stock units and unvested shares of restricted stock. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Unvested restricted stock units and shares of restricted stock that are anti-dilutive are excluded from the calculation of diluted earnings per common share. For the twelve months ended September 28, 2025, 74,000 unvested restricted stock units and 32,800 unvested restricted shares (which converts to 58,377 incremental dilutive shares) were included in the diluted earnings per share calculation as dilutive. For the twelve months ended September 29, 2024, 66,500 unvested restricted stock units and 60,000 unvested restricted shares (which converts to 71,129 incremental dilutive shares) were included in the diluted earnings per share calculation as dilutive. Note 3 — Recent Accounting Pronouncements In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires disclosure of segment expenses that are significant and regularly provided to the CODM. In addition, ASU 2023-07 requires the Company to disclose the title and position of its CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Retrospective application to all prior periods presented in the financial statements is required. The Company adopted this guidance effective on September 30, 2024, the beginning of the fiscal year. As ASU 2023-07 applies to reportable segment disclosures, the adoption did not have a material impact on the Company’s consolidated financial statements. Note 4 — Segment Reporting The Company’s 2 two reportable segments, Applied Optics Center (“Applied Optics Center” or “AOC”) and Optex Systems – Richardson (“Optex Richardson”), are strategic businesses offering similar products to similar markets and customers; however, they are operated and managed separately due to differences in manufacturing technology, equipment, geographic location, and specific product mix. Applied Optics Center was acquired as a unit, and management at the time of the acquisition was retained. The Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies for the Optex Richardson segment. Intersegment sales and transfers are accounted for at annually agreed to pricing rates based on estimated segment product cost, which include segment direct manufacturing and general and administrative costs but exclude profits that would apply to third party external customers. The Chief Operating Decision Maker (CODM), which is our CEO, uses the segment revenue, cost of sales and net operating income to assess the Company’s performance and allocation of resources. A summary of segment performance for the twelve months ended September 28, 2025 and September 29, 2024 is included in the table below: Schedule of Summary of Segment Performance Optex Systems Richardson Applied Optics Center Dallas Other (non- allocated costs and eliminations) Consolidated Optex Systems Richardson Applied Optics Center Dallas Other (non- allocated costs and eliminations) Consolidated (Thousands) Twelve months ended September 28, 2025 September 29, 2024 Optex Systems Richardson Applied Optics Center Dallas Other (non- allocated costs and eliminations) Consolidated Optex Systems Richardson Applied Optics Center Dallas Other (non- allocated costs and eliminations) Consolidated Revenue from External Customers $ 23,761 $ 17,576 $ - $ 41,337 $ 18,171 $ 15,824 $ - $ 33,995 Intersegment Revenues - 1,157 ( 1,157 ) - - 1,042 ( 1,042 ) - Total Segment Revenue 23,761 18,733 ( 1,157 ) 41,337 18,171 16,866 ( 1,042 ) 33,995 Total Cost of Sales 17,699 12,738 ( 1,157 ) 29,280 14,401 11,107 ( 1,042 ) 24,466 Gross Profit 6,062 5,995 - 12,057 3,770 5,759 - 9,529 Gross Margin % 25.5 % 32.0 % - 29.2 % 20.7 % 34.1 % - 28.0 % General and Administrative Expense 3,771 771 383 4,925 3,630 653 425 4,708 Segment Allocated G&A Expense ( 1,356 ) 1,356 - - ( 1,486 ) 1,486 - - Net General & Administrative Expense 2,415 2,127 383 4,925 2,144 2,139 425 4,708 Operating Income (Loss) 3,647 3,868 ( 383 ) 7,132 1,626 3,620 ( 425 ) 4,821 Operating Income (Loss) % 15.3 % 20.6 % - 17.3 % 8.9 % 21.5 % - 14.2 % Asset Impairment ( 804 ) - - ( 804 ) - - - - Interest Income (Expense) - - 23 23 - - ( 47 ) ( 47 ) Income (Loss) before taxes $ 2,843 3,868 ( 360 ) 6,351 $ 1,626 3,620 ( 472 ) 4,774 Income (loss) before taxes % 12.0 % 20.6 % - 15.4 % 8.9 % 21.5 % - 14.0 % Optex Systems (OPX) – Richardson, Texas Optex Richardson revenues are primarily in support of prime and subcontracted military customers. Approximately 90 % of the Optex Richardson segment revenue is comprised of domestic military customers, and 10 % is comprised of foreign military customers. For the twelve months ended September 28, 2025, Optex Richardson represented 58 % of the Company’s total consolidated revenue and consisted of the U.S. government, 22 %, and two major U.S. defense contractors representing 15 % and 10 %, of the Company’s consolidated revenue, respectively. Optex Richardson is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of September 28, 2025, the Richardson facility operated with 87 full-time equivalent employees in a single shift operation. The facilities at Optex Richardson serve as the home office for both the Optex Richardson and Applied Optics Center segments. Applied Optics Center (AOC) – Dallas, Texas The Applied Optics Center serves primarily domestic U.S. customers. Sales to commercial customers represent 10 % and military sales to prime and subcontracted customers represent 90 % of the total segment revenue. Approximately 94 % of the AOC revenue is derived from external customers and approximately 6 % is related to intersegment sales to Optex Richardson in support of military contracts. For the twelve months ended September 28, 2025, AOC represented 42 % of the Company’s total consolidated revenue and consisted of revenue from the U.S. government, 5 %, and two major defense contractors representing 6 % and 6 % of the Company’s consolidated revenue, respectively. The Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of September 28, 2025, AOC operated with 45 full-time equivalent employees in a single shift operation. 54 The financial table below presents the information for each of the reportable segments profit or loss as well as segment assets for each year. The Company does not allocate interest expense, income taxes or unusual items to segments. Schedule of Segment Reporting Information Reportable Segment Financial Information (thousands) Twelve months ended September 28, 2025 Optex Systems Richardson Applied Optics Center Dallas Other (non-allocated costs and intersegment eliminations) Consolidated Total Revenues from external customers $ 23,761 $ 17,576 $ - $ 41,337 Intersegment revenues - 1,157 ( 1,157 ) - Total Revenue 23,761 18,733 ( 1,157 ) 41,337 Interest income - - ( 23 ) ( 23 ) Depreciation and Amortization 276 239 - 515 Income (loss) before taxes 2,843 3,868 ( 360 ) 6,351 Other significant noncash items: Allocated home office expense ( 1,356 ) 1,356 - - Stock compensation expense - - 383 383 Warranty expense - 110 - 110 Segment Assets 22,126 7,930 - 30,056 Expenditures for segment assets 259 245 - 504 Reportable Segment Financial Information (thousands) Twelve months ended September 29, 2024 Optex Systems Richardson Applied Optics Center Dallas Other (non-allocated costs and intersegment eliminations) Consolidated Total Revenues from external customers $ 18,171 $ 15,824 $ - $ 33,995 Intersegment revenues - 1,042 ( 1,042 ) - Total Revenue 18,171 16,866 ( 1,042 ) 33,995 Interest expense - - 47 47 Depreciation and Amortization 167 320 - 487 Income (loss) before taxes 1,626 3,620 ( 472 ) 4,774 Other significant noncash items: Allocated home office expense ( 1,486 ) 1,486 - - Stock compensation expense - - 425 425 Warranty expense 17 12 - 29 Segment Assets 17,038 8,480 - 25,518 Expenditures for segment assets 1,382 349 - 1,731 55 Note 5 — Property and Equipment A summary of property and equipment at September 28, 2025 and September 29, 2024 is as follows: Schedule of Property and Equipment Estimated Useful Life September 28, 2025 September 29, 2024 (Thousands) Estimated Useful Life September 28, 2025 September 29, 2024 Property and Equipment Furniture and Fixtures 3 - 5 yrs $ 485 $ 451 Machinery and Equipment 5 yrs 5,605 5,145 Leasehold Improvements 7 yrs 448 448 Property and Equipment, gross 7 yrs 448 448 Less: Accumulated Depreciation ( 5,111 ) ( 4,752 ) Net Property & Equipment $ 1,427 $ 1,292 Depreciation Expense $ 359 $ 387 During the twelve months ended September 28, 2025, Optex Systems Holdings purchased $ 34 thousand in new furniture and fixtures, $ 460 thousand in machinery and equipment and zero leasehold improvements. During the twelve months ended September 29, 2024, Optex Systems Holdings purchased $ 23 thousand in new furniture and fixtures, $ 614 thousand in machinery and equipment and $ 44 thousand in leasehold improvements. During the twelve months ended September 28, 2025 and September 29, 2024, there were no sales or retirements of fixed assets. Note 6 – Asset Purchase of Intellectual Property On January 18, 2024, Optex Systems Holdings, Inc., through its wholly-owned subsidiary Optex Systems, Inc. (collectively, the “Company”), entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminum s.r.o. (“RUB”). Under the agreements, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line, which is primarily used for firearm projectile speed detection, measuring and tracking. RUB may continue to manufacture Speedtracker Mach products on behalf of the Company. 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 1 one-year renewal terms to which both parties must agree. Subsequent to the acquisition, the Company has determined it would be more economical to move the manufacturing operations in house and is no longer ordering assembled units against the contract manufacturing agreement. The acquisition included transaction costs of $30 thousand for legal fees. Pursuant to the asset purchase agreement, the total earnout payment would have been $238 thousand only if the earnout revenue milestones were achieved during the earnout period, otherwise the earnout would be zero . As of January 18, 2024, the fair value of the contingent liability was $ 83 thousand. As of September 29, 2024, it was determined that the revenue milestones related to the earnout agreement would be unachievable within the earnout period and the fair value of the contingent liability related to the earnout was set to zero. The intangible asset for the Speedtracker product acquisition was amortized on a straight-line basis over a seven-year period. Subsequent to the asset purchases, the Company invested an additional $ 30 thousand for software app development for the Speedtracker product. The software app development was amortized on a straight-line basis across a 3 three-year period. Unlike indefinite-lived intangible assets and goodwill, which are required to be tested for impairment at least annually, ASC 360-10 does not require annual impairment testing for long-lived assets that are held and used. Instead, a long-lived asset (asset group) that is held and used should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable regardless of whether such carrying amount is zero or negative. Due to delays in the Speedtracker product line launch during the twelve months ended September 29, 2024, the Company reviewed the recoverability of the intangible assets as of September 29, 2024 and found no impairment. The Speedtracker product was launched during the second quarter of 2025, with minimal revenue for the twelve months ended on September 28, 2025. On September 28, 2025, the Company reviewed the intangible asset value based on the anticipated cash flow of the product line over the next five years and determined that the remaining asset value could not be recovered. As a result, the remaining $ 0.8 million of unamortized intangible assets was impaired and as of September 28, 2025, the remaining balance of intangible assets is zero . 56 As of September 28, 2025 and September 29, 2024 the value of intangible assets was as follows: Schedule of the Value of Intangible Assets (Thousands) September 28, 2025 September 29, 2024 Intangible Assets – Speedtracker $ 951 $ 1,030 Software App Development 10 20 Amortization of Intangible Assets ( 157 ) ( 99 ) Asset Impairment ( 804 ) - Net Intangible Assets $ - $ 951 Note 7 — Accrued Expenses The components of accrued liabilities as of September 28, 2025 and September 29, 2024 are summarized below: Schedule of Accrued Liabilities September 28, 2025 September 29, 2024 (Thousands) September 28, 2025 September 29, 2024 Accrued Vacation $ 488 $ 439 Property Taxes 123 122 Operating Expenses 737 398 Payroll & Payroll Related 286 299 Total Accrued Expenses $ 1,634 $ 1,258 Note 8 — Commitments and Contingencies Non-cancellable Operating Leases The Company leases its office and manufacturing facilities for the Optex Systems, Inc. Richardson location and the Applied Optics Center Dallas location. The Company also leases certain office equipment under non-cancellable operating leases. The leased facility under Optex Systems, Inc. located at 1420 Presidential Drive, Richardson, Texas consists of 49,100 square feet of space at the premises. The previous lease term for this location expired March 31, 2021 and the monthly base rent was $24.6 thousand through March 31, 2021. On January 11, 2021 the Company executed a sixth amendment extending the terms of the lease for eighty-six (86) months, commencing on April 1, 2021 and ending on May 31, 2028 . The initial base rent is set at $25.3 thousand and escalates 3% on April 1 each year thereafter. The initial term included two months of rent abatement for April and May of 2021. The monthly rent includes approximately $ 15 thousand for additional Common Area Maintenance fees and taxes (“CAM”), to be adjusted annually based on actual expenses incurred by the landlord. The leased facility under the Applied Optics Center located at 9839 and 9827 Chartwell Drive, Dallas, Texas, consists of 44,867 square feet of space at the premises. The previous lease term for this location expired on October 31, 2021 and the monthly base rent was $21.9 thousand through the end of the lease. On January 11, 2021 the Company executed a first amendment extending the terms of the lease for eighty-six (86) months, commencing on November 1, 2021 and ending on December 31, 2028 . The initial base rent is set at $23.6 thousand as of January 1, 2022 and escalates 2.75% on January 1 each year thereafter. The initial term includes 2 months of rent abatement for November and December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing rental rate” or the then current base rental rate. Our obligations to make payments under the lease are secured by a $ 125 thousand standby letter of credit. The monthly rent includes approximately $ 9 thousand for additional CAM, to be adjusted annually based on actual expenses incurred by the landlord. 57 The Company had one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease cost for the equipment was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November 18, 2021 for an additional 48 months at a cost of $1.2 thousand per month. As of September 28, 2025, the remaining minimum base lease and estimated common area maintenance (CAM) payments under the non-cancellable office equipment and facility space leases are as follows: Schedule of Non-cancellable Operating Leases Minimum Payments Non-cancellable Operating Leases Minimum Payments Fiscal Year Facility Lease Payments Facility Lease Payments Lease Payments Total Lease Payments Total Variable CAM Estimate (Thousands) Optex Richardson Applied Optics Center Office Equipment Consolidated Fiscal Year Facility Lease Payments Facility Lease Payments Lease Payments Total Lease Payments Total Variable CAM Estimate 2026 Base year lease $ 346 $ 313 $ 4 $ 663 $ 293 2027 Base year lease 357 322 - 679 298 2028 Base year lease 241 330 - 571 213 2029 Base year lease - 83 - 83 30 2030 Base year lease Total base lease payments $ 944 $ 1,048 $ 4 $ 1,996 $ 834 Imputed interest on lease payments (1) ( 62 ) ( 84 ) - ( 146 ) Total Operating Lease Liability (2) $ 882 964 $ 4 $ 1,850 Right-of-use Asset (3) $ 806 890 $ 4 $ 1,700 (1) Assumes a discount borrowing rate of 5.0 % on the new lease amendments effective as of January 11, 2021 . (2) Short-term and Long-term portion of Operating Lease Liability is $ 645 thousand and $ 1,205 thousand, respectively. (3) Includes $ 150 thousand of unamortized deferred rent. Total expense under both facility lease agreements for the twelve months ended September 28, 2025 was $ 951 thousand. Total expense under both facility lease agreements as of the twelve months ended September 29, 2024 was $ 905 thousand. Total office equipment rentals included in operating expenses was $ 21 thousand for the twelve months ended September 28, 2025 and $ 24 thousand for the twelve months ended September 29, 2024. 58 Note 9 — Debt Financing Credit Facility — Texas Capital Bank On March 22, 2023, the Company and Optex Systems, Inc. entered into a Business Loan Agreement with Texas Capital Bank (the “Lender”), pursuant to which the Lender will make available a revolving line of credit in the principal amount of $ 3 million. The commitment period for advances under the facility expired on May 22, 2025 . Outstanding advances under the facility accrued interest at a rate equal to the secured overnight financing rate (SOFR) plus a specified margin, subject to a specified floor interest rate. The related agreement provided for a $ 125 thousand Letter of Credit sublimit. On May 21, 2025, the Company and Optex Systems, Inc. renewed their existing credit facility with the Lender by entering into a new Business Loan Agreement (the “Loan Agreement”) effective May 22, 2025, pursuant to which the Lender will continue to make available a revolving line of credit in the principal amount of $ 3 million (the “Texas Capital Facility”). The commitment period for advances under the Texas Capital Facility is twenty-four months expiring on May 22, 2027 (the “Maturity Date”). Outstanding advances under the Texas Capital Facility will accrue interest at a variable rate equal to the secured overnight financing rate (SOFR) plus a specified margin. The interest rate is currently at 6.7 % per annum. The Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing capital expenditures (limited to $ 1 million per year), indebtedness and liens, affiliate transactions, fundamental changes (including change in management), investments, and restricted payments (including 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 3:1. The Texas Capital Facility is secured by substantially all of the operating assets of the borrowers as collateral. The borrowers’ obligations under the Texas Capital 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 September 28, 2025, the Company is in compliance with all covenants. The outstanding balance under the Texas Capital Facility was zero as of September 28, 2025 and $ 1.0 million as of September 29, 2024. For the years ended September 28, 2025 and September 29, 2024, the total interest expense under the facility was $ 12 thousand and $ 47 thousand, respectively. Note 10 — Stock Based Compensation Restricted Stock, Performance Shares and Restricted Stock Units issued to Directors, Officers and Employees The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units and performance shares: Schedule of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted and Performance Shares Restricted Stock Units Weighted Average Grant Date Fair Value Restricted Shares Weighted Average Grant Date Fair Value Performance Shares Weighted Average Grant Date Fair Value Outstanding at October 1, 2023 39,000 $ 3.06 120,000 $ 2.20 135,000 $ 2.37 Granted 40,500 7.17 - - - - Vested ( 13,000 ) 3.06 ( 60,000 ) 2.20 ( 135,000 ) 2.37 Forfeited - - - - - - Outstanding at September 29, 2024 66,500 $ 5.56 60,000 $ 2.20 - $ - Granted 39,000 6.35 32,800 9.29 - - Vested ( 24,000 ) 5.17 ( 60,000 ) 2.20 - - Forfeited ( 7,500 ) 5.19 - - Outstanding at September 28, 2025 74,000 $ 6.11 32,800 $ 9.29 - $ - 59 Restricted Stock Units On May 1, 2024, the Company granted an aggregate of 39,000 restricted stock units to eleven employees under its 2023 Equity Incentive Plan. As of the grant date, assuming a 7.7 % forfeiture rate based on expected turnover across the three years, the aggregate value of the restricted stock units is $ 258 thousand which will be amortized across the three-year period on a straight-line basis. The restricted stock units will vest at a rate of 33.33 % annually on the anniversary date of the grant and any unvested restricted stock units will be forfeited if employment terminates prior to the relevant vesting date. On June 4, 2024 there was an additional grant of 500 restricted stock units to one employee with a fair value of $ 4 thousand. The 500 restricted stock units will vest 100 % on the anniversary date of the grant and will be forfeited if employment terminates prior to the relevant vesting date. On July 3, 2024 there was an additional grant of 1,000 restricted stock units to one employee with a fair value of $ 7 thousand. The 1,000 restricted stock units will vest 100 % on the anniversary date of the grant and will be forfeited if employment terminates prior to the relevant vesting date. During the twelve months ended September 29, 2024, there were 13,000 shares vested under its 2023 Equity Incentive Plan for restricted stock units granted on May 1, 2023 and August 14, 2023, which resulted in 9,150 shares issued to eleven employees, net of tax withheld of $ 28 thousand. During the twelve months ended September 28, 2025, there were 24,000 shares vested under its 2023 Equity Incentive Plan for restricted stock units granted on May 1, 2023, May 1, 2024 and July 3, 2024, which resulted in 16,885 shares issued to eleven employees, net of tax withheld of $ 47 thousand. During the twelve months ended September 28, 2025, there were 7,500 restricted stock units forfeited on the resignation of two employees. On May 1, 2025, the Company granted an aggregate of 39,000 restricted stock units to eleven employees under its 2023 Equity Incentive Plan. As of the grant date, assuming a 12.8 % forfeiture rate based on expected turnover across the three years, the aggregate value of the restricted stock units is $ 216 thousand which will be amortized across the three-year period on a straight-line basis. The restricted stock units will vest at a rate of 33.33 % annually on the anniversary date of the grant and any unvested restricted stock units will be forfeited if employment terminates prior to the relevant vesting date. As of September 28, 2025, there were 74,000 unvested restricted stock units outstanding. Restricted Shares On April 30, 2020, the Board of Directors of the Company (the “Board”) voted to increase the annual board compensation for the three independent directors from $ 22,000 to $ 36,000 with an effective date of January 1, 2020, in addition to granting 100,000 shares of restricted stock to each independent director which vest at a rate of 20% per year (20,000 shares) each January 1 st through January 1, 2025. The total fair value for the 300,000 shares was $ 525 thousand based on the stock price of $ 1.75 as of April 30, 2020. On each of January 1, 2021, January 1, 2022, and January 1, 2023, 60,000 of the restricted director shares vested. On February 16, 2023, 40,000 of the unvested restricted shares were forfeited and cancelled when one of the independent directors departed the Board. On May 9, 2023, the Board approved a grant of 40,000 shares of restricted stock to independent board member Dayton Judd. The shares vested 50 % on each of January 1, 2024 and January 1, 2025. As of the grant date, the fair value of the shares was $ 124 thousand, to be amortized on a straight-line basis through December 31, 2024. The Company amortized the grant date fair value to stock compensation expense on a straight-line basis across the 5 five-year and 2 two-year vesting periods beginning on April 30, 2020 and May 9, 2023, respectively. On January 1, 2025, the remaining 60,000 shares were vested. 60 On November 5, 2024, the Board approved the following Board compensation for the three independent directors, effective January 1, 2025: (a) a cash retainer of $44,000, paid quarterly, and (b) $66,000 in restricted stock awarded under the 2023 Equity Incentive Plan, with 100% vesting on January 1, 2026, the share price calculated on the basis of the 10-day Volume Weighted Average Price (“VWAP”), and the number of shares rounded up to the nearest 100 shares. The restricted stock award was made on November 5, 2024 and consisted of 7,600 shares of restricted stock for each independent director. The total fair value for the 22,800 shares was $ 185 thousand based on the stock price of $ 8.10 as of November 5, 2024. As of September 28, 2025, there were 22,800 of such unvested restricted shares outstanding which will vest on January 1, 2026. On August 11, 2025, the Board approved an award to Chad George of 10,000 shares of restricted stock under the Company’s 2023 Equity Incentive Plan pursuant to his employment as Optex Systems Holdings, Inc.’s President. The shares will vest on January 1, 2026. The total fair value for the 10,000 shares was $ 120 thousand based on the stock price of $ 12.00 as of August 12, 2025. As of September 28, 2025, there were 10,000 of such unvested restricted shares outstanding which will vest on January 1, 2026. The share issue was 7,035 shares, net of 2,965 shares which were withheld for taxes due upon the vesting date. Also see Note 14 “Subsequent Events” for additional restricted share issues occurring after September 28, 2025. Performance Shares On May 3, 2023, the Board approved a grant of 100,000 and 35,000 performance shares to Danny Schoening, CEO, and Karen Hawkins, CFO, respectively. Each performance share represents a contingent right to receive one share of common stock. The performance shares vest in five equal increments if, in each case and during a five-year performance period beginning on October 2, 2023, the average VWAP per share of common stock over a 30 consecutive trading day period equals or exceeds $3.70, $4.45, $5.35, $6.40, or $7.70. The fair value of the shares, as of the grant date, is $ 320 thousand and will be amortized through December 31, 2025 based on the derived service periods using a Monte Carlo simulation valuation model. On October 2, 2023, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 1. The Company issued a total of 21,060 shares on October 24, 2023 in settlement of the vested shares, net of tax withheld of $ 27 thousand. On December 22, 2023 and December 29, 2023, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 2 and Tranche 3. On January 8, 2024, the Company issued a total of 39,563 shares in settlement of the vested shares, net of tax withheld of $ 91 thousand. On March 11, 2024, 27,000 performance shares vested each date for reaching the 30-day VWAP for Tranche 4. The Company issued a total of 20,669 shares on March 13, 2024 in settlement of the vested shares, net of tax withheld of $ 46 thousand. On May 17, 2024, 27,000 performance shares vested for reaching the 30-day VWAP for Tranche 5. The Company issued a total of 20,426 shares on May 17, 2024 in settlement of the vested shares, net of tax withheld of $ 53 thousand. As of September 29, 2024 and September 28, 2025, there were no performance shares remaining to vest. 61 The assumptions and results for the Monte Carlo simulation employed for the performance shares are as follows: Schedule of Assumptions and Results for the Monte Carlo Simulation for the Performance Shares Assumptions Performance Period Start 10/2/2023 Performance Period End 10/1/2028 Term of simulation (1) 5.42 years Time steps in simulation 1,365 Time steps per year 252 Common share price at valuation date (2) $ 3.04 Volatility (annual) (4) 50.0 % Risk-free rate (annual) (5) 3.37 % Cost of equity (6) 11.5 % Dividend yield (3) 0.0 % Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Number of performance shares in the Tranche (1) 27,000 27,000 27,000 27,000 27,000 Fair Value of One Performance share (7) $ 2.75 $ 2.58 $ 2.39 $ 2.18 $ 1.93 Total Fair Value of Tranche $ 74,345 $ 69,742 $ 64,446 $ 58,819 $ 52,238 Derived Service Period (Years) (7) 0.71 1.13 1.60 2.06 2.48 (1) Based on the terms of the Performance Shares agreement issued by the Company on May 3, 2023. (2) Closing price of OPXS shares on the Valuation Date, as obtained via S&P Capital IQ. (3) Expected dividends provided by management. (4) Based on historical volatility of OPXS and comparable public companies. (5) Interest rate for US Treasury commensurate with the Performance Shares holding period, as of the Valuation Date, as obtained via S&P Capital IQ. (6) Estimated cost of equity for OPXS as of the Valuation Date. (7) Based on Monte Carlo simulation. Stock Based Compensation Expense Equity compensation is amortized based on a straight-line basis across the vesting or service period as applicable. The recorded compensation costs for options and shares granted and restricted stock units awarded as well as the unrecognized compensation costs are summarized in the table below: Schedule of Unrecognized Compensation Costs (Thousands) Recognized Compensation Expense Unrecognized Compensation Expense Year Ended Year Ended September 28, 2025 September 29, 2024 September 28, 2025 September 29, 2024 Restricted Shares $ 226 $ 140 $ 112 $ 33 Performance Shares - 212 - - Restricted Stock Units 157 73 342 284 Total Stock Compensation $ 383 $ 425 $ 454 $ 317 The unrecognized compensation expense for restricted shares and restricted stock units as of September 28, 2025, is expected to be recognized over a weighted-average period of 0.26 years and 2 years, respectively. Note 11 — Defined Contribution Plan The Company sponsors a defined contribution pension plan under Section 401(k) of the Internal Revenue Code for all employees. Company contributions are voluntary and are determined annually at the discretion of the Board at the beginning of each fiscal year. For the fiscal years ended September 28, 2025 and September 29, 2024, the Company offered a qualified automatic contribution arrangement (QACA) with a 100% match of the first 1% and 50% matching of the next 5% and a 2-year vesting requirement. The Company’s contribution expense for the fiscal years ended September 28, 2025 and September 29, 2024 were $ 261 thousand and $ 202 thousand, respectively. Note 12 — Stockholders’ Equity Dividends There were no dividends declared or paid during the twelve months ended September 28, 2025 or September 29, 2024. Common stock During the twelve months ended September 28, 2025, there were zero shares repurchased. 62 During the twelve months ended September 29, 2024, there were 110,868 common shares issued to officers and employees, net of tax withholding of $ 245 thousand, in settlement of 13,000 vested restricted stock units, and 135,000 vested performance shares. During the twelve months ended September 28, 2025, the Company issued 16,885 shares to eleven employees in settlement of 24,000 restricted stock units, which vested during the twelve months. The shares were issued net of tax withholding of $ 47 thousand. During the twelve months ended September 28, 2025, the Company issued 22,800 restricted shares to the three independent board members which will vest on January 1, 2026. During the twelve months ended September 28, 2025, the Company issued 7,035 restricted shares to Mr. George pursuant to his employment as President of the Company. The shares were issued net of 2,965 shares which were withheld for taxes due upon the vesting date of January 1, 2026. The total fair value for the 10,000 shares was $ 120 thousand based on the stock price of $ 12.00 as of August 12, 2025. As of September 28, 2025, and September 29, 2024, the total outstanding common shares were 6,920,658 and 6,873,938 , respectively. Note 13 — Income Taxes The income tax provision for the twelve months ended September 28, 2025 and September 29, 2024 include the following: Schedule of Income Tax Provision 2025 2024 (Thousands) 2025 2024 Current income tax expense: Current year federal income tax $ 1,456 $ 1,045 Prior year tax adjustment - ( 14 ) Current income tax expense 1,456 1,031 Deferred income tax provision (benefit): Federal ( 252 ) ( 25 ) Provision for income taxes, net $ 1,204 $ 1,006 As of September 28, 2025 and September 29, 2024, Optex Systems, Inc. had a net carrying value of $ 1.2 million and $ 0.9 million, respectively, in deferred tax assets represented by deferred tax assets of $ 2.0 million and $ 1.7 million, respectively, and a deferred tax asset valuation allowance of ($ 0.8 ) million, against those assets. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years 2010 through 2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control occurring in fiscal year 2018. As of September 28, 2025 and September 29, 2024, we reviewed the deferred tax assets and determined it was more likely than not that we would be able to utilize a substantial portion of the deferred tax asset balance against future earnings. Our assumptions were based on the previous three years earnings trend as well as anticipated future earnings. During the twelve months ended September 28, 2025, the Company recognized a ($ 252 ) thousand tax benefit to deferred tax assets. During the twelve months ended September 29, 2024, the Company recognized a ($ 25 ) thousand in tax benefit to deferred tax assets. We will continue to review the deferred tax assets and related valuation reserves in accordance with ASC 740 on an annual basis. 63 The income tax provision for Optex Systems Holdings as of September 28, 2025 and September 29, 2024 differs from those computed using the statutory federal tax rate in the respective years due to the following permanent differences: Schedule of Effective Income Tax Rate Reconciliation ($ in Thousands) 2025 % 2024 % Tax provision at statutory federal rate $ 1,334 21 $ 1,003 21 Nondeductible expenses 1 - 3 - Other permanent adjustments ( 131 ) ( 2 ) 14 - Prior year federal income tax adjustment - - ( 14 ) - Change in deferred tax valuation allowance - - - - Provision for income taxes, net $ 1,204 19 $ 1,006 21 Deferred income taxes recorded in the balance sheets result from differences between financial statement and tax reporting of income and deductions. A summary of the composition of the deferred income tax assets (liabilities) follows: Schedule of Deferred Income Tax Assets (Liabilities) As of September 28, 2025 As of September 29, 2024 (Thousands) Deferred Tax Asset As of September 28, 2025 As of September 29, 2024 Stock Compensation $ 83 $ 177 Inventory Reserve 404 232 Unicap 60 59 Deferred Compensation 65 56 Property and Equipment ( 213 ) ( 233 ) Intangible Asset Amortization 188 10 Contract Loss Reserve 28 54 Accrued Paid Time Off 103 92 Net Operating Losses 1,189 1,223 Other 65 50 Subtotal $ 1,972 $ 1,720 Valuation allowance ( 773 ) ( 773 ) Net deferred asset $ 1,199 $ 947 The Company has a net loss carryforward of $ 5.7 million as of September 28, 2025 as compared to a net loss carryforward of $ 5.8 million as of September 29, 2024. Due to an IRS section 382 change in control limitation which was effective during the fiscal year ended 2017, it is anticipated that the Company may only realize $ 2.0 million of the current net operating loss carryforward for a net tax benefit of $ 0.4 million through fiscal year ending in 2037. Accordingly, a valuation allowance of $ 0.8 is recorded as of September 28, 2025 and September 29, 2024. The Company applied FASB ASC 740-10 and has no unrecognized tax benefits. By statute, the tax years ended September 28, 2025, September 29, 2024 and October 1, 2023 are open to examination by the major taxing jurisdictions to which the Company is subject. During the twelve months ended September 28, 2025, the Company paid $ 1.4 million in income taxes. During the twelve months ended September 29, 2024, the Company paid $ 1.2 million in income taxes. As of September 28, 2025 the Company has recorded a tax liability of $ 87 thousand. 64 Note 14 — Subsequent Events On November 4, 2025 the Board approved board compensation, effective January 1, 2026, for each of Dale Lehmann, Rimmy Malhotra and Dayton Judd of $ 44,000 annually, in cash, combined $ 66,000 in restricted stock issued under the 2023 Equity Incentive Plan, with 100% vesting on January 1, 2027, share price calculated on the basis of the 10-day (immediately preceding and including the grant date) VWAP, and the number of shares rounded up to the nearest 100 shares. On November 4, 2025, 4,000 shares each of restricted stock were issued pursuant to the board resolution. On December 4, 2025, Danny Schoening notified the Company that he intends to resign, effective as of December 20, 2025 (the “Effective Date”), from the position of Chief Executive Officer of the Company. Mr. Schoening will remain on the Board, will continue to serve in the position of Chairman of the Board, and will continue to serve as the Company’s facilities security officer. On December 5, 2025, the Board appointed Chad George, the Company’s President, to assume the additional role of Chief Executive Officer to fill the vacancy left by Mr. Schoening, effective as of the Effective Date. In connection with the appointment, the Company entered into a new employment agreement with Mr. George as of the Effective Date (the “New Employment Agreement”). Pursuant to the agreement, Mr. George will serve as the Company’s President and Chief Executive Officer through December 31, 2028. Thereafter, the term of the agreement will automatically extend for successive additional 12-month periods unless Mr. George or the Company provides written notice of termination at least 90 days prior to the end of the term then in effect. Mr. George’s initial annual base salary under the new agreement is $ 300,000 and will be eligible for a performance bonus based upon a one-year operating plan adopted by the Company’s Board. Concurrently with Mr. George’s appointment as Chief Executive Officer, the Board elected Mr. George to serve as a director of the Board, effective as of the Effective Date, until the Company’s 2026 annual meeting of shareholders and until his successor has been elected and qualified. In connection with Mr. George’s election as a director of the Board, the Board increased the total number of Board seats from four to five. On December 5, 2025, the Board also approved compensation for Mr. Schoening as an independent board member, effective January 1, 2026, of $ 44,000 annually, in cash, combined with $ 66,000 in restricted stock issued under the 2023 Equity Incentive Plan, with 100% vesting on January 1, 2027, share price calculated on the basis of the 10-day (immediately preceding and including the grant date) VWAP, and the number of shares rounded up to the nearest 100 shares. On December 5, 2025, 4,700 shares of restricted stock were issued pursuant to the board resolution. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.