UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~December 31, 2017~~January 1, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the transition period from ______to______.

OPTEX SYSTEMS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware

000-54114

90-0609531

(State or other jurisdiction

of incorporation)

(Commission

File
Number)

(IRS Employer

Identification No.)

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

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

~~Check~~Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None.

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

~~Large Accelerated Filer ☐~~

~~Accelerated Filer ☐~~

~~Non-Accelerated Filer ☐~~

~~Smaller Reporting Company ☒~~

Indicate by check mark whether the registrant has submitted electronically, ~~and posted on its corporate website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth ~~company as defined in Rule 405~~company. See definition of ~~the Securities Act of 1933 (§230.405 of this chapter) or~~“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the ~~Securities~~ Exchange ~~Act of 1934 (§240.12b-2 of this chapter).~~Act:

Large Accelerated Filer ☐

Accelerated Filer ☐

Non-Accelerated Filer ☒

Smaller Reporting Company ☒

☐	Emerging growth company

☐
☐	If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.

Yes ☐ No ☒

~~State~~Indicate the number of shares outstanding of each of the issuer’s classes of common ~~equity,~~stock, as of February 13,~~2018: 8,646,003 shares~~ 2023: 6,763,070 shares of common stock.

OPTEX SYSTEMS HOLDINGS, INC.

FORM 10-Q

For the period ended ~~December 31, 2017~~January 1, 2023

INDEX

PART I— FINANCIAL INFORMATION			F-1

Item 1.	Unaudited Condensed Consolidated Financial Statements		F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	~~Control~~Controls and Procedures		1214
PART II— OTHER INFORMATION			1314
Item 11.	Legal Proceedings		1314
Item 1A1A.	Risk Factors		1314
Item 42.	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3.	Defaults Upon Senior Securities	14
Item 4.	Mine Safety Disclosures		1314
Item 6.	Exhibits		1315
SIGNATURE			1416

Part 1. Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

OPTEX SYSTEMS HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF ~~DECEMBER 31, 2017~~JANUARY 1, 2023

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF ~~DECEMBER 31, 2017~~JANUARY 1, 2023 (UNAUDITED) AND OCTOBER ~~1, 2017~~2, 2022	F-2

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED ~~DECEMBER 31, 2017~~JANUARY 1, 2023 (UNAUDITED) AND THE THREE MONTHS ENDED JANUARY ~~1, 2017~~2, 2022 (UNAUDITED)	F-3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED ~~DECEMBER 31, 2017~~JANUARY 1, 2023 (UNAUDITED) AND THE THREE MONTHS ENDED JANUARY 2, 2022 (UNAUDITED)	F-4

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED JANUARY 1, ~~2017~~2023 (UNAUDITED) AND THE THREE MONTHS ENDED JANUARY 2, 2022 (UNAUDITED)	~~F-4~~F-5

CONDENSED CONSOLIDATED FINANCIAL STATEMENT FOOTNOTES (UNAUDITED)	~~F-5~~F-6

F-1

Optex Systems Holdings, Inc.

Condensed Consolidated Balance Sheets

	(Thousands, except share and per share data)
							(Thousands, except share and per share data)
	December 31, 2017 (Unaudited)			October 1, 2017			January 1, 2023			October 2, 2022
							(Unaudited)
ASSETS

Cash and Cash Equivalents	$	1,546		$	1,682		$	1,280		$	934
Accounts Receivable, Net		2,424			3,125			1,605			2,908
Net Inventory		7,702			7,614
Inventory, Net								10,798			9,212
Contract Asset								336			-
Prepaid Expenses		59			63			249			328

Current Assets		11,731			12,484			14,268			13,382


Property and Equipment, Net		1,378			1,460			977			968

Other Assets
Prepaid Royalties - Long Term		53			60
Deferred Tax Asset								1,001			942
Right-of-use Asset								3,104			3,222
Security Deposits		23			23			23			23

Other Assets		76			83			4,128			4,187

Total Assets	$	13,185		$	14,027		$	19,373		$	18,537

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts Payable	$	829		$	1,362		$	1,433		$	706
Dividends Payable		262			261
Operating Lease Liability								608			604
Federal Income Taxes Payable		90			—			331			331
Accrued Expenses		1,156			1,450			977			958
Accrued Warranties		251			174
Accrued Selling Expense								336			-
Accrued Warranty Costs								229			169
Contract Loss Reserves								282			289
Customer Advance Deposits		712			927			326			311
Credit Facility		300			300

Current Liabilities		3,600			4,474			4,522			3,368

Warrant Liability		3,951			3,607
Other Liabilities
Operating Lease Liability, net of current portion								2,646			2,761

Other Liabilities								2,646			2,761

Total Liabilities		7,551			8,081			7,168			6,129

Commitments and Contingencies

Stockholders’ Equity
Preferred Stock Series C ($0.001 par 400 authorized, 78 and 174 issued and outstanding, respectively)		—			—
Common Stock – ($0.001 par, 2,000,000,000 authorized, 8,590,101 and 8,190,101 shares issued and outstanding, respectively)		9			8
Additional Paid-in-capital		26,454			26,411
Common Stock – ($0.001 par, 2,000,000,000 authorized, 6,763,070 and 6,716,638 shares issued, and 6,763,070 and 6,716,638 shares outstanding, respectively)								7			7
Additional Paid in capital								21,116			21,096
Accumulated Deficit		(20,829	)		(20,473	)		(8,918	)		(8,695	)

Stockholders’ Equity		5,634			5,946			12,205			12,408

Total Liabilities and Stockholders’ Equity	$	13,185		$	14,027		$	19,373		$	18,537

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

F-2

Optex Systems Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


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

Revenue	$	4,040		$	4,340

Cost of Sales		3,323			3,517

Gross Profit		717			823

General and Administrative Expense		999			808

Operating (Loss) Income		(282	)		15

Other Expense		-			-

(Loss) Income Before Taxes		(282	)		15

Income Tax Benefit	$	(59	)	$	(14	)

Net (loss) income	$	(223	)	$	29
Basic (loss) income per share	$	(0.03	)	$	0.00

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

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

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

(Thousands, except share and per share data)
Three months ended

December 31, 2017 January 1, 2017

Revenue $ 4,777 $ 3,512

Cost of Sales 3,661 2,740

Gross Margin 1,116 772

General and Administrative Expense 773 844

Operating Income (Loss) 343 (72 )

(Loss) Gain on Change in Fair Value of Warrants (344 ) 430

Interest Expense (3 ) (4 )

Other (Expense) Income (347 ) 426

(Loss) Income Before Taxes (4 ) 354

Current Income Taxes 90 —

Net (loss) income applicable to common shareholders $ (94 ) $ 354

Basic (loss) income per share $ (0.01 ) $ 0.04

Weighted Average Common Shares Outstanding - basic 8,319,771 8,175,309

Diluted income per share $ (0.01 ) $ 0.04

Weighted Average Common Shares Outstanding - Diluted 8,319,771 9,600,309

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

F-3

Optex Systems Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


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

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

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

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

Cash Flows used in Financing Activities
Cash Paid for Taxes Withheld on Net Settled Restricted Stock Unit Shares Issued		(15	)		-
Common Stock Repurchase		-			(74	)
Net Cash used in Financing Activities		(15	)		(74	)

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

(Thousands)

Three months ended
December 31, 2017 January 1, 2017

Cash flows from operating activities:
Net (loss) income $ (94 ) $ 354

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 81 83
Loss (gain) on change in fair value of warrants 344 (430 )
Stock compensation expense 44 64
Accounts receivable 701 82
Inventory (88 ) (371 )
Prepaid expenses 4 45
Accounts payable and accrued expenses (826 ) (131 )
Federal income taxes payable 90 —
Accrued warranty costs 77 —
Prepaid royalties - long term 7 7
Customer advance deposits (215 ) (72 )

Total adjustments 219 (723 )
Net cash provided by (used in) operating activities 125 (369 )

Cash flows used in investing activities
Purchases of property and equipment — (130 )

Net cash used in investing activities — (130 )

Cash flows used in financing activities
Dividends paid (261 ) —

Net cash used in financing activities (261 ) —

Net decrease in cash and cash equivalents (136 ) (499 )
Cash and cash equivalents at beginning of period 1,682 2,568
Cash and cash equivalents at end of period $ 1,546 $ 2,069

Supplemental cash flow information:
Exchange of common stock for non-trade accounts receivable $ — $ 155
Exchange of preferred stock for common stock 480 90
Dividends declared and unpaid 262 —
Cash paid for interest 3 4

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

F-4

��

Optex Systems Holdings, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Thousands, except share data)


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

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

	Three months ended January 2, 2022
	Common									Additional					Total
	Shares		Treasury		Common		Treasury			Paid in		Retained			Stockholders
	Issued		Shares		Stock		Stock			Capital		Earnings			Equity
Balance at October 3, 2021		8,523,704		35,555	$	9	$	(69	)	$	25,752	$	(9,978	)	$	15,714
Stock Compensation Expense		-		-		-		-			57		-			57
Common Stock Repurchase⁽¹⁾		-		37,238		-		(74	)		-		-			(74	)
Vested Restricted Stock Units, net of withheld taxes		23,216		-		-		-			-		-			-
Net income		-		-		-		-			-		29			29
Net income (loss)		-		-		-		-			-		29			29

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

(1)

Common shares repurchased in the open market during the three months ended January 2, 2022. The shares were held as treasury stock using the cost method and subsequently cancelled as of October 2, 2022.

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

F-5

Note 1 - Organization and Operations

Optex Systems Holdings, Inc. (the “Company”) manufactures optical sighting systems and assemblies for the U.S. Department of Defense, foreign military applications and commercial markets. Its products are installed on a variety of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. ~~Optex Systems Holdings~~The Company also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems Holdings’ products consist primarily of build to customer print products that are delivered both directly to the military and to other defense prime contractors or commercial customers. The Company’s consolidated revenues for the three months ended January 1, 2023 were derived from the U.S. government (22%), one major U.S. defense contractor (14%), one major commercial customer (37%), and all other customers (27%). Approximately 95% of the total company revenue is generated from domestic customers and 5% is derived from foreign customers, primarily in Canada. Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising 93,967 square feet. As of ~~December 31, 2017,~~January 1, 2023, Optex Systems Holdings operated with 9492 full-time equivalent employees.

Note 2 - Accounting Policies

Basis of Presentation

Principles of Consolidation:The condensed consolidated financial statements include the accounts of ~~Optex Systems Holdings~~the Company and its wholly-owned subsidiary, Optex Systems, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements of Optex Systems Holdings included herein have been prepared by Optex Systems Holdings, without audit, pursuant to the rules and regulations of the ~~SEC.~~Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although ~~Optex Systems Holdings~~the Company believes that the disclosures are adequate to make the information presented not misleading.

These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Optex Systems Holdings’ Form 10-K for the year ended October ~~1, 2017~~2, 2022 and other reports filed with the SEC.

The accompanying unaudited interim condensed consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of Optex Systems Holdings for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. Certain information that is not required for interim financial reporting purposes has been omitted.

Inventory: As of January 1, 2023, and October 2, 2022, inventory included:

Schedule of Inventory

	January 1, 2023			October 2, 2022
	(Thousands)
	January 1, 2023			October 2, 2022
Raw Materials	$	6,240		$	6,953
Work in Process		4,822			2,722
Finished Goods		547			348
Gross Inventory	$	11,609		$	10,023
Less: Inventory Reserves		(811	)		(811	)
Net Inventory	$	10,798		$	9,212

Concentration of Credit Risk: Optex Systems Holdings’ accounts receivables as of January 1, 2023 consist of U.S. government agencies (30%), three major U.S. defense contractors (12%, 12% and 7%, respectively), one major commercial customer (32%) and all other customers (7%). The Company does not believe that this concentration results in undue credit risk because of the financial strength of the customers and the Company’s long history with these customers.

F-6

Accrued Warranties: Optex Systems Holdings accrues product warranty liabilities based on the historical return rate against period shipments as they occur and reviews and adjusts these accruals quarterly for any significant changes in estimated costs or return rates. The accrued warranty liability includes estimated costs to repair or replace returned warranty backlog units currently in-house plus estimated costs for future warranty returns that may be incurred against warranty covered products previously shipped as of the period end date. As of January 1, 2023, and October 2, 2022, the Company had warranty reserve balances of $229 thousand and $169 thousand, respectively.

Schedule of Warranty Reserves

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

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

Warranty expenses for new product shipped during the period⁽¹⁾		60		46

Ending balance	$	229	$	122

(1)

Warranty expenses accrued to cost of sales (based on current period shipments and historical warranty return rate).

Use of ~~Estimates:~~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.

~~Inventory:~~~~As of December 31, 2017 and October 1, 2017, inventory included:~~

(Thousands)
December 31, 2017 October 1, 2017
Raw Material $ 5,372 $ 5,931
Work in Process 3,319 2,859
Finished Goods 628 441
Gross Inventory $ 9,319 $ 9,231
Less: Inventory Reserves (1,617 ) (1,617 )
Net Inventory $ 7,702 $ 7,614

~~F-5~~

~~Warranty Costs:~~ As of December 31, 2017 and October 1, 2017, Optex had warranty reserve balances of $251 thousand and $174 thousand, respectively. The increase in warranty reserves of $77 thousand during the three months ending December 31, 2017 represent additional expenses recognized during three months ended December 31, 2017 related to quality issues encountered on our Applied Optics Center optical assemblies for returned products requiring repairs or replacements. We believe we have made sufficient improvements to the production process to minimize the return rate on future shipments but we will continue to review and monitor the reserve balances related to this product line against any existing warranty backlog and current trend data on an interim basis until the current warranty backlog is depleted.

Fair Value of Financial ~~Instruments:~~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 ~~the balance sheet~~ cash and cash equivalents, accounts ~~and notes~~ receivable, accounts payable and accrued liabilities, ~~and notes payable,~~ are carried at, or approximate, fair value as of the reporting date because of their short-term nature. ~~Fair values for the Company’s warrant liabilities and derivatives are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends,~~The credit facility is reported at fair value as it bears market ~~interest~~ rates ~~forward yield curves and discount rates. Such amounts and the recognition~~ of ~~such amounts are subject to significant estimates that may change in the future.~~interest.

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

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.

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

F-7

Revenue Recognition:The ~~methods~~majority of the Company’s contracts and ~~significant inputs~~customer orders originate with fixed determinable unit prices for each deliverable quantity of goods defined by the customer order line item (performance obligation) and ~~assumptions utilized~~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 ~~estimating~~service during the ~~fair~~duration of the contract. Revenue recognition for this program has been recorded by the Company, and compensated by the customer, at fixed monthly increments over time, consistent with the defined contract maintenance period. During the three months ended January 1, 2023 and January 2, 2022, there was $112 thousand and $120 thousand in service contract revenue recognized over time.

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

For the three months ended January 1, 2023, there were $336 thousand in accrued selling expenses and $336 thousand in contract assets related to a new $3.4 million contract booked in November 2022. The costs will be amortized against the revenue for the contract deliveries expected to begin in April 2023 and extend through the following 10-15 months into fiscal year 2024.

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 ~~warrant liabilities~~loss against the contract loss reserve in the period the determination is made. The Company has several long-term fixed price contracts that are ~~discussed further~~currently indicative of a loss condition due to recent inflationary pressures on material and labor, combined with increased manufacturing overhead costs. Some of these long-term contracts have option year ordering periods ending in ~~Note 7 “Warrant Liabilities”. Each~~February 2025 with deliveries that may extend into February 2026. As of the ~~measurements is considered a Level 3 measurement as a result~~three months ended January 1, 2023 and October 2, 2022, the accrued contract loss reserves were $282 thousand and $289 thousand, respectively. During the three months ended January 1, 2023, the Company recognized additional expenses for contract loss reserves of ~~at least one unobservable input.~~$51 thousand on new task awards against the long-term fixed contracts and applied $58 thousand of the reserves against revenues booked during the period.

Income Tax/Deferred ~~Tax:~~Tax: As of ~~December 31, 2017~~January 1, 2023 and October 2, 2022, Optex Systems, Inc. has a deferred tax asset valuation allowance of ($~~2.8)~~0.8) million against deferred tax assets of ~~$2.8 million, as compared to a valuation allowance of ($4.6) million against deferred tax assets of $4.6 million as of October 1, 2017.~~$1.8 million. The valuation allowance has been established due to historical losses resulting in a Net Operating Loss Carryforward for each of the fiscal years ~~2010~~2011 through ~~2016.~~2016 which may not be fully recognized due to an IRS Section 382 limitation related to a change in control. During the three months ended ~~December 31, 2017,~~January 1, 2023, our deferred tax assets ~~and corresponding valuation account decreased~~increased by ~~$1.8 million as a result of the Tax Cuts and Jobs Act of 2017 enacted on December 22, 2017 which changed the Corporate~~$59 thousand related to temporary tax rate from 34% to 21% effective as of January 1, 2018. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our improved earnings performance during fiscal year ending October 1, 2017, and our anticipated future earnings, we believe that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. We believe the change in the valuation allowance could approximate $2.0 million at the 21% tax rate. However, the exact timing and amount of the valuation allowance release are subject to change based on the level of profitability that we are able to actually achieve and the corporate tax rate in effected at that time.adjustments.

~~F-6~~

Earnings per ~~Share:~~Share: Basic earnings per share is computed by dividing income available for common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The Company has potentially dilutive securities ~~that Optex Systems Holdings has~~ outstanding ~~are convertible preferred stock,~~which include unvested restricted stock units and stock options and warrants. In computing the dilutive effect of convertible preferred stock, the numerator is adjusted to add back any convertible preferred dividends and the denominator is increased to assume the conversion of the number of additional common shares. Optex Systems Holdingsoptions. The Company uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. ~~Convertible preferred stock, unvested~~Unvested restricted stock units and stock options ~~and warrants~~ that are anti-dilutive are excluded from the calculation of diluted earnings per common share.

For the three months ended December 31, 2017, 78 preferred Series C shares (which converts to 325,000 common shares), 182,000 unvested restricted stock units, 60,000 stock options and 4,125,200 warrants were excluded from the earnings per share calculation as anti-dilutive. For the three months ended January 1, ~~2017, 132,000~~2023, 120,000 unvested shares of restricted stock ~~units, 56,290 stock options and 4,125,200 warrants~~(which convert to an aggregate of 36,045 incremental shares) were excluded from the diluted earnings per share calculation as ~~anti-dilutive.~~antidilutive due to the net loss for the period. For the three months ended January 2, 2022, 66,000 unvested restricted stock units and 180,000 shares of unvested restricted stock (which convert to an aggregate of 52,861 incremental shares) were included in the diluted earnings per share calculation.

F-8

Note 3 - Segment Reporting

~~Optex Systems Holdings~~The Company’s reportable segments are strategic businesses offering similar products to similar markets and customers; however, the companies are operated and managed separately due to differences in manufacturing technology, equipment, geographic location, and specific product mix. Applied Optics Center was acquired as a unit, and the management at the time of the acquisition was retained. Both the Applied Optics Center and Optex Systems – Richardson operate as reportable segments under the Optex Systems, Inc. corporate umbrella.

The Applied Optics Center segment also serves as the key supplier of laser coated filters used in the production of periscope assemblies for the Optex Systems-Richardson (“Optex Systems”) segment. Intersegment sales and transfers are accounted for at annually agreed to pricing rates based on estimated segment product cost, which includes segment direct manufacturing and general and administrative costs, but exclude profits that would apply to third party external customers.

Optex Systems (OPX) – Richardson, Texas

Optex Systems manufactures optical sighting systems and assemblies, primarily for Department of Defense applications. Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles, light armored and armored security vehicles and have been selected for installation on the Stryker family of vehicles. Optex Systems also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. We have capabilities which include machining, bonding, painting engraving and assembly and can perform both optical and environmental testing in-house. Optex Systems products consist primarily of build-to-customer print products that are delivered both directly to the armed services and to other defense prime contractors. Optex Systems in Richardson is both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE, Textron and others. Optex Systems is 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. defense companies serving foreign governments.

~~During the three months ended December 31, 2017, approximately 98% of~~ Optex Systems revenues ~~were~~are primarily in support of prime and subcontracted military customers. ~~The Optex Systems segment serves domestic military customers, 69%, and foreign military customers, 29%, and commercial customers, 2%. The~~Approximately 86% of the Optex Systems segment revenue ~~for the year ending December 31, 2017 was~~is comprised of domestic military customers, 12% is comprised of foreign military customers and 2% is comprised of commercial customers. Optex Systems segment revenue is derived from ~~external customers consisting of~~ the U.S. government, ~~42%, General Dynamics, 47%~~representing 19%, and ~~other external customers, 11%.~~one major U.S. defense contractor representing 14% of the Company’s consolidated revenue.

Optex Systems is located in Richardson Texas, with leased premises consisting of approximately 49,100 square feet. As of ~~December 31, 2017,~~January 1, 2023, the Richardson facility operated with 5750 full time equivalent employees in a single shift operation. Optex Systems, Richardson serves as the home office for both the Optex Systems ~~(OPX)~~ and Applied Optics Center ~~(AOC)~~ segments.

~~F-7~~

Applied Optics Center (AOC) – Dallas, Texas

On November 3, 2014, Optex Systems, Inc. entered into a Purchase Agreement with L-3 pursuant to which Optex Systems, Inc. purchased from L-3 the assets comprising L-3’s Applied Optics Center Products Line. Applied Optics Center (“AOC”) is engaged in the production, marketing and sales of precision optical assemblies and components which utilize thin film coating technologies. Most of the AOC products and services are directly related to the deposition of thin-film coatings. AOC is both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems, Raytheon Corp., L-3 Communications, Harris Corp and others. AOC also creates a new sector of opportunity for commercial products.Globally, commercial optical products use thin film coatings to create product differentiation and performance levels. These coatings can be used for redirecting light (mirrors), blocking light (laser protection), absorbing select light (desired wavelengths), and many other combinations. They are used in telescopes, rifle scopes, binoculars, microscopes, range finders, protective eyewear, photography, etc. The Applied Optics Center is a key supplier to Nightforce Optics, Inc. and provides optical assembly components to their markets of interest in commercial sporting optics and select military optics. Given this broad potential, the commercial applications are a key opportunity going forward. The Applied Optics Center segment also serves as the key supplier of the laser coated filters used in the production of periscope assemblies at the Optex Systems segment.

The Applied Optics Center serves primarily domestic U.S. customers. Approximately 85% of the Applied Optics Center revenue for the three months ending December 31, 2017 was derived from external customers consisting of Nightforce Optics, Inc., 70%, Harris Corp., 22%, and other external customers, 8%. Sales to commercial customers represent ~~74%~~65% and military sales to prime and subcontracted customers represent ~~26%~~35% of the total segment revenue. ~~Intersegment~~Approximately 95% of the AOC revenue is derived from external customers and approximately 5% is related to intersegment sales to Optex Systems ~~during the year ended October 1, 2017 comprised 15% of the total segments revenue and was primarily~~ in support of military contracts. For the three months ended January 1, 2023, the AOC segment revenue from one major commercial customer represents approximately 37% of the Company’s consolidated revenue.

The Applied Optics Center is located in Dallas, Texas with leased premises consisting of approximately 44,867 square feet of space. As of ~~December 31, 2017,~~January 1, 2023, AOC operated with 3742 full time equivalent employees in a single shift operation.

The financial ~~table~~tables below ~~presents the~~present information ~~for each of~~on the reportable ~~segments~~segments’ profit or loss for each period, as well as segment assets ~~for~~as of each ~~year. Optex Systems Holdings, Inc.~~period end. The Company does not allocate interest expense, income taxes or unusual items to segments.

Reportable Segment Financial Information
(thousands)
Three months ending December 31, 2017
Optex Systems
Richardson Applied Optics Center
Dallas Other
(non allocated costs and intersegment eliminations) Consolidated
Total

Revenues from external customers $ 2,665 $ 2,112 $ — $ 4,777
Intersegment revenues — 371 (371 ) —
Total Revenue $ 2,665 $ 2,483 $ (371 ) $ 4,777

Interest expense $ — $ — $ 3 $ 3

Depreciation and Amortization $ 10 $ 71 $ — $ 81

Income (Loss) before taxes $ 48 $ 249 $ (391 ) $ (94 )

Other significant noncash items:
Allocated home office expense $ (156 ) $ 156 $ — $ —
Loss on change in fair value of warrants $ — $ — $ 344 $ 344
Stock compensation expense $ — $ — $ 44 $ 44
Royalty expense amortization $ 7 $ — $ — $ 7
Warranty Expense $ — $ 77 $ — $ 77

Segment Assets $ 8,477 $ 4,708 $ — $ 13,185

Schedule of Segment Reporting Information

~~F-8~~ F-9

	Reportable Segment Financial Information (thousands)													Reportable Segment Financial Information (thousands)
	Three months ending January 1, 2017													As of and for the three months ended January 1, 2023
		Optex Systems Richardson			Applied Optics Center Dallas				Other (non allocated costs and intersegment eliminations)			Consolidated Total		Optex Systems Richardson			Applied Optics Center Dallas		Other (non-allocated costs and intersegment eliminations)			Consolidated Total

Revenues from external customers	$	2,039		$	1,473			$	—		$	3,512		$	1,619		$	2,421	$	-		$	4,040
Intersegment revenues		—			462				(462	)		—			-			116		(116	)		-
Total Revenue	$	2,039		$	1,935			$	(462	)	$	3,512		$	1,619		$	2,537	$	(116	)	$	4,040

Interest expense	$	—		$	—			$	4		$	4
							��
Depreciation and Amortization	$	16		$	67			$	—		$	83		$	11		$	70	$	-		$	81

Income (Loss) before taxes(1)	$	23		$	(31	)		$	362		$	354
(Loss) income before taxes														$	(424	)	$	177	$	(35	)	$	(282	)

Other significant noncash items:
Allocated home office expense	$	(166	)	$	166			$	—		$	—		$	(280	)	$	280	$	-		$	-
(Gain) on change in fair value of warrants	$	—		$	—			$	(430	)	$	(430	)
Stock option compensation expense(1)	$	—		$	—			$	64		$	64
Royalty expense amortization	$	7		$	—			$	—		$	7
Stock compensation expense														$	-		$	-	$	35		$	35
Warranty expense														$	-		$	60	$	-		$	60

Segment Assets	$	8,339		$	4,052			$	—		$	12,391		$	11,745		$	7,628	$	-		$	19,373
Expenditures for segment assets	$	4		$	126			$	—		$	130		$	23		$	67	$	-		$	90

	Reportable Segment Financial Information (thousands)
	As of and for the three months ended January 2, 2022
	Optex Systems Richardson			Applied Optics Center Dallas		Other (non-allocated costs and intersegment eliminations)			Consolidated Total

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

Depreciation and Amortization	$	10		$	62	$	-		$	72

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

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

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

(1) General and administrative expenses for the three months ending January 1, 2017 of $64 thousand associated with the amortized stock compensation on executive/director restricted stock units has been restated from Optex Richardson to Other (non allocated costs). Operating income (loss) for Optex Richardson and Other (non allocated costs) has been restated to reflect the change.

F-10

Note 4 - Commitments and Contingencies

~~Rental Payments under~~ Non-cancellable Operating Leases

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

The 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 2 months of rent abatement for April and May of 2021. The monthly rent includes approximately $11.9 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 included 2 months of rent abatement for November and December of 2021. The amendment provides for a five-year renewal option at the end of the lease term at the greater of the then “prevailing rental rate” or the then current base rental rate. Our obligations to make payments under the lease are secured by a $125,000 standby letter of credit. The monthly rent includes approximately $8.6 thousand for additional CAM, to be adjusted annually based on actual expenses incurred by the landlord.

The Company had one non-cancellable office equipment lease with a commencement date of October 1, 2018 and a term of 39 months. The lease cost for the equipment was $1.5 thousand per month from October 1, 2018 through December 31, 2021. The lease was renewed on November 18, 2021 for an additional 48 months at a cost of $1.2 thousand per month. The start of the lease was delayed until April 2022 due to temporary equipment shortages. The lease renewal resulted in the recognition of an additional right of use asset and a lease liability of $51 thousand, respectively during the twelve months ended October 2, 2022.

As of ~~December 31, 2017,~~January 1, 2023, the remaining minimum lease and estimated ~~adjusted common area maintenance (CAM)~~CAM payments under the non-cancelable ~~office 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
2023 Base year lease	$	239		$	218		$	11		$	468		$	188
2024 Base year lease		327			296			15			638			256
2025 Base year lease		336			305			15			656			261
2026 Base year lease		346			313			3			662			266
2027 Base year lease		357			322			-			679			272
2028 Base year lease		242			330			-			572			198
2029 Base year lease		-			83			-			83			30
Total base lease payments	$	1,847		$	1,867		$	44		$	3,758		$	1,471
Imputed interest on lease payments ⁽¹⁾		(238	)		(263	)		(3	)		(504	)
Total Operating Lease Liability⁽³⁾	$	1,609		$	1,604		$	41		$	3,254

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

~~Non-cancellable Operating Leases Minimum Payments~~(1)

Assumes a discount borrowing rate of 5.0% on the new lease amendments effective as of January 11, 2021.

(2)

Includes $150 thousand of unamortized deferred rent.

(3)

Short-term and Long-term portion of Operating Lease Liability is $608 thousand and $2,646 thousand, respectively.

(Thousands)

Optex Systems
Richardson
Applied Optics Center
Dallas
Fiscal Year Lease
Payments CAM
Estimate Lease
Payments CAM
Estimate Total
Payments
2018 $ 205 $ 81 $ 180 $ 45 $ 511
2019 281 110 248 61 700
2020 291 112 255 62 720
2021 147 57 262 63 529
2022 — — 22 5 27
Total minimum lease payments $ 924 $ 360 $ 967 $ 236 $ 2,487

Total facilities rental and CAM expense for both facility lease agreements as of the three months ended ~~December 31, 2017~~January 1, 2023 and January 2, 2022 was ~~$168 thousand.~~ $214 thousand and $209 thousand, respectively.

Total ~~expense under facility lease agreements as of~~office equipment rentals included in operating expenses was $5 and $4 thousand for the three months ended January 1, ~~2017 was $166 thousand.~~2023 and January 2, 2022, respectively.

~~F-9~~ F-11

~~As of December 31, 2017, the unamortized deferred rent was $121 thousand as compared to $123 thousand as of October 1, 2017. Deferred rent expense is amortized monthly over the life of the lease.~~

Note 5 - Debt Financing

Credit Facility — ~~Avidbank~~PNC Bank (formerly BBVA, USA)

AsOn April 16, 2020, the Company terminated its facility with Avidbank and entered into a new facility with BBVA USA.

On April 16, 2020, Optex Systems Holdings, Inc. and its subsidiary, Optex Systems, Inc. (collectively, the “Borrower”) entered into a line of ~~December 31, 2017~~credit facility (the “Facility”) with BBVA, USA. In June 2021, PNC Bank completed its acquisition of BBVA, USA and ~~October 1, 2017,~~ the bank name changed to PNC Bank (“PNC”). The substantive terms are as follows:

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

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

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

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

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

F-12

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

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

The Line of Credit Note and Loan Agreement contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The credit facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers’ obligations under the credit facility are subject to acceleration upon the occurrence of an event of default as defined in the Line of Credit Note and Loan Agreement.

The outstanding balance on the ~~line~~facility was zero as of ~~credit was $300 thousand.~~January 1, 2023 and October 2, 2022. For the three months ended ~~December 31, 2017~~January 1, 2023 and January ~~1, 2017,~~2, 2022, the total interest expense against the outstanding line of credit balance was ~~$3 thousand and $4 thousand.~~zero.

~~Note 6-Warrant Liabilities~~

On August 26, 2016, Optex Systems Holdings, Inc. issued 4,125,200 warrants to new shareholders and the underwriter, in connection with a public share offering. The warrants entitle the holder to purchase one share of our common stock at an exercise price equal to $1.50 per share at any time on or after August 26, 2016 (the “Initial Exercise Date”) and on or prior to the close of business on August 26, 2021 (the “Termination Date”). The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the public share offering. Management also determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480~~“Distinguishing Liabilities from Equity”~~. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations.

The fair value of the warrant liabilities were measured using a binomial lattice model (“Binomial”). Significant inputs into the model at the inception and reporting period measurement dates are as follows:

Binomial Assumptions Issuance date ⁽¹⁾ August 26, 2016 Period ending October 2, 2016 Period ending October 1, 2017 Period ending December 31, 2017
Exercise Price⁽¹⁾ $ 1.5 $ 1.5 $ 1.5 $ 1.5
Warrant Expiration Date⁽¹⁾ 8/26/2021 8/26/2021 8/26/2021 8/26/2021
Stock Price⁽²⁾ $ 0.95 $ 0.77 $ 0.98 $ 1.1
Interest Rate (annual)⁽³⁾ 1.23 % 1.14 % 1.62 % 1.98 %
Volatility (annual)⁽⁴⁾ 246.44 % 242.17 % 179.36 % 171.04 %
Time to Maturity (Years) 5 4.9 3.9 3.7
Number of Steps (Quarters) 20 20 16 15
Calculated fair value per share $ 0.93 $ 0.76 $ 0.87 $ 0.96

(~~1) Based on the terms provided in the warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26, 2016.~~

~~(2) Based on the trading value of common stock of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending date.~~

~~(3) Interest rate for U.S. Treasury Bonds, as of August 26, 2016 and each presented period ending date, as published by the U.S. Federal Reserve.~~

~~(4) Based on the historical daily volatility of Optex Systems Holdings, Inc. as of August 26, 2016 and each presented period ending date.~~

~~F-10~~

~~The warrants outstanding and fair values at each of the respective valuation dates are summarized below:~~

Warrant Liability Warrants
Outstanding Fair Value
per Share
Fair Value
(000’s)

Fair Value at initial measurement date of 8/26/2016 4,125,200 $ 0.93 $ 3,857
(Gain) on Change in Fair Value of Warrant Liability (739 )
Fair Value as of period ending 10/2/2016 4,125,200 $ 0.76 $ 3,118
Loss on Change in Fair Value of Warrant Liability 489
Fair Value as of period ending 10/01/2017 4,125,200 $ 0.87 $ 3,607
Loss on Change in Fair Value of Warrant Liability 344
Fair Value as of period ending 12/31/2017 4,125,200 $ 0.96 $ 3,951

The warrant liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various assumptions about future activities and the Company’s stock prices and historical volatility as inputs. During the three months ending December 31, 2017, none of the warrants have been exercised.

Note ~~7-Stock~~6-Stock Based Compensation

Stock Options issued to Employees, Officers and Directors

The Optex Systems Holdings 2009 Stock Option Plan provides for the issuance of up to 75,000 shares to ~~Optex Systems Holdings~~the Company’s officers, directors, employees and to independent contractors who provide services to Optex Systems Holdings as either incentive or non-statutory stock options determined at the time of grant. ~~As of December 31, 2017, Optex Systems Holdings has granted stock options to officers and employees as follows:~~

Date of Options Exercise Options Outstanding Expiration Vesting
Grant Granted Price As of 12/31/17 Date Period
12/09/11 46,070 $ 10.00 35,000 12/08/2018 4 years
12/19/13 25,000 $ 10.00 25,000 12/18/2020 4 years
Total 71,070 60,000

~~The following table summarizes the status of Optex Systems Holdings’ aggregate stock options granted under the incentive stock option plan:~~

Number Weighted
of Shares Average Weighted Aggregate
Remaining Fair Average Value
Subject to Exercise Options Value Life (Years) (Thousands)
Outstanding as of October 2, 2016 60,340 $ — 1.4 $ —
Granted – 2017 —
Forfeited – 2017 (330 ) —
Exercised – 2017 — —
Outstanding as of October 1, 2017 60,010 $ — 0.76 $ —
Granted – 2018 —
Forfeited – 2018 (10 ) —
Exercised – 2018 — —
Outstanding as of December 31, 2017 60,000 $ — 0.62 $ —

Exercisable as of October 1, 2017 56,260 $ — 0.60 $ —

Exercisable as of December 31, 2017 60,000 $ — 0.62 $ —

~~F-11~~

There were no new grants of stock options ~~granted in~~during the three months ended ~~December 31, 2017 or twelve months ending October~~January 1, ~~2017.~~2023. As of January 1, 2023, there are zero stock options outstanding.

~~The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested shares granted under the 2009~~Restricted Stock ~~Option Plan:~~

Number of
Non-vested Shares
Subject to Options Weighted-
Average Grant-
Date Fair Value
Non-vested as of October 2, 2016 7,500 $ 8.00
Non-vested granted — year ended October 1, 2017 — —
Vested — year ended October 1, 2017 (3,750 ) 8.00
Forfeited — year ended October 1, 2017 —
Non-vested as of October 1, 2017 3,750 $ 8.00
Non-vested granted — three months ended December 31, 2017 — —
Vested — three months ended December 31, 2017 (3,750 ) 8.00
Forfeited — three months ended December 31, 2017 —
Non-vested as of December 31, 2017 -0- $ —

and Restricted Stock Units issued to Officers and Employees

The following table summarizes the status of Optex Systems Holdings’ aggregate non-vested restricted stock and restricted stock units, with the latter granted under the Company’s 2016 Restricted Stock Unit Plan:

Schedule of Aggregate Non-vested Restricted Stock and Restricted Stock Units Granted

	Restricted Stock Units			Weighted Average Grant Date Fair Value		Restricted Shares			Weighted Average Grant Date Fair Value
Outstanding at October 3, 2021		99,000		$	1.59		240,000		$	1.75
Granted		-			-		-			-
Vested		(33,000	)	$	1.73		(60,000	)	$	1.75
Forfeited		-			-		-			-
Outstanding at October 2, 2022		66,000		$	1.52		180,000		$	1.75
Granted		-			-		-			-
Vested		(66,000	)	$	1.52		(60,000	)	$	1.75
Forfeited		-			-		-			-
Outstanding at January 1, 2023		-		$	-		120,000		$	1.75

	~~Outstanding Unvested RSU’s~~
~~Unvested as of October 2, 2016~~		~~200,000~~
~~Granted - year ended 2017~~		~~50,000~~
~~Vested - year ended 2017~~		~~(68,000~~	)
~~Unvested as of October 1, 2017~~		~~182,000~~
~~Granted – three months ended December 31, 2017~~		—
~~Vested - three months ended December 31, 2017~~		—
~~Unvested as of December 31, 2017~~		~~182,000~~

~~During~~On January 2, 2019, the ~~three months ended December 31, 2017, there were no new grants of~~Company granted 150,000 and 50,000 restricted stock units with a January 2, 2019 grant date to Danny Schoening and ~~zero~~Karen Hawkins, respectively, vesting as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34% in year one, and 33% each year thereafter. The stock price at grant date was $1.32 per share. Effective December 1, 2021, the vesting terms of Danny Schoening’s Restricted Stock Unit (RSU) grant from January 2019 were revised as described below. The Company amortizes the grant date fair value of $264 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on January 2, 2019. As of January 1, 2023, there was no unrecognized compensation cost relating to this award.

F-13

The Company entered into an amended and restated employment agreement with Danny Schoening dated December 1, 2021. The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, by changing the third and final vesting date for the restricted stock units ~~had vested. On~~granted under such agreement from January 1, ~~2018, 83,000~~2022 to the “change of control date,” that being the first of the following to occur with respect to the Company: (i) any “Person,” as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with certain exclusions, is or becomes the “Beneficial Owner” (as that term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities; or (ii) the Company is merged or consolidated with any other corporation or other entity, other than: (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) the Company engages in a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no “Person” (as defined above) acquires fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities. The amended RSU Agreement contains certain exceptions to the definition of change of control.

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

On November 28, 2022, the Company entered into a new employment agreement with Danny Schoening which amended Mr. Schoening’s RSU Agreement, dated January 2, ~~2018, 55,902~~2019, which had been previously amended as of December 1, 2021, by changing the third and final vesting date for the restricted stock units granted under such agreement from the “change of control date” to January 1, 2023.

On February 17, 2020, the Company granted 50,000 restricted stock units to Bill Bates, General Manager of the Applied Optics Center. The restricted stock units vest as of January 1 each year subsequent to the grant date over a three-year period at a rate of 34% in year one, and 33% each year thereafter. The stock price at grant date was $2.13 per share. The Company will amortize the grant date fair value of $107 thousand to stock compensation expense on a straight-line basis across the three-year vesting period beginning on February 17, 2020.

On April 30, 2020, the Optex Systems Holdings, Inc. Board of Directors held a meeting and voted to increase the annual board compensation for the three independent directors from $22,000 to $36,000 with an effective date of January 1, 2020, in addition to granting 100,000 restricted shares to each independent director which shall vest at a rate of 20% per year (20,000 shares) each January 1^st, over the next five years, through January 1, 2025. The total market value for the 300,000 shares is $525 thousand based on the stock price of $1.75 as of April 30, 2020. The Company amortizes the grant date fair value to stock compensation expense on a straight-line basis across the five-year vesting period beginning on April 30, 2020. On each of January 1, 2021, January 1, 2022, and January 1, 2023, 60,000of the restricted director shares vested. As of January 1, 2023, there were 120,000 unvested restricted shares.

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

On January 4, 2023, the Company issued 46,432 common shares to ~~these shares (see subsequent events).~~Danny Schoening, CEO, and Bill Bates (AOC GM), net of tax withholding of $15 thousand, in settlement of 66,000 restricted stock units which vested on January 1, 2023. As of January 1, 2023, there are zero unvested restricted stock units outstanding.

F-14

Stock Based Compensation Expense

Equity compensation is amortized based on a ~~straight line~~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

	Stock Compensation								Stock Compensation
	(thousands)								(thousands)
	Recognized Compensation Expense				Unrecognized Compensation Expense				Recognized Compensation Expense				Unrecognized Compensation Expense
	Three months ended				As of period ending				Three months ended				As of
	December 31, 2017		January 1, 2017		December 31, 2017		October 1, 2017		January 1, 2023		January 2, 2022		January 1, 2023		October 2, 2022

Stock Options	$	8	$	10	$	—	$	8
Restricted Shares									$	26	$	26	$	210	$	236
Restricted Stock Units		36		31		158		194		9		31		-		9
Consultant Shares (IRTH)		—		23		—		—
Total Stock Compensation	$	44	$	64	$	158	$	202	$	35	$	57	$	210	$	245

~~F-12~~

Note 8 7 - Stockholders’ Equity

Dividends

On June 26, 2017, the board of directors approved a resolution authorizing a $0.02 per share (and per warrant) dividend payment on July 12, 2017, for common and preferred series C shareholders and warrant holders of record as of July 5, 2017 and for three subsequent quarterly record dates thereafter. Quarterly dividends of $261 thousand were paid out to share and warrant holders on July 12, 2017. Optex Systems Holdings recorded an additional $261 thousand in dividends payable as of October 1, 2017 for the fourth quarter declared dividends which were paid on October 19, 2017. Optex Systems Holdings recorded an additional $262 thousand in dividends payable as of December 31, 2017 for the first quarter 2018 which were paid on January 19, 2018.

~~Common stock~~

As of ~~October 2, 2016, Optex Systems Holdings had 8,266,601 common shares outstanding.~~

~~On October 31, 2016, Longview Fund L.P. authorized~~ the return to Optex Systems Holdings’ treasury of 197,299 common shares, held by Sileas Corporation in settlement of $155 thousand of accounts receivable due for expenses paid by Optex Systems, Inc. on behalf of the Sileas Corporation. The shares were subsequently cancelled in satisfaction of the outstanding accounts receivable balance as of October 31, 2016.

On April 27, 2017, the Board of Directors of Optex Systems Holdings approved a purchase of 700,000 shares of its common stock in a private transaction from The Longview Fund, L.P. The transaction was priced at the closing sale price on April 28, 2017 of $0.74 per share for a total transaction amount of $518,000. Upon repurchase on Maythree months ended January 1, ~~2017, the shares were cancelled thereby reducing the total shares outstanding of its common stock.~~

~~During the twelve months ending October 1, 2017, Optex Systems Holdings issued 775,000 common shares due to conversions of Series C preferred stock~~2023 and ~~45,799 common shares related to the vesting of restricted stock units. There were no other issuances of common or preferred stock during~~ the twelve months ended October 2, 2022, there were no declared or outstanding dividends payable.

Common stock

On June 8, 2020 the Company announced authorization for a $1 million stock repurchase program. As of September 27, 2020 there were 105,733 shares held in treasury purchased under the June 2020 stock repurchase program. The Company purchased a total of 519,266 common shares against the program through April 2021, which were subsequently cancelled in June 2021.

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

F-15

During the three months ended January 1, ~~2017.~~ 2023, there were zero common shares repurchased under the program. All shares purchased have been cancelled. A summary of the purchases under the program follows:

Summary of Purchases Under Plan

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


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

Furthermore, on August 18, 2022, the Company announced the commencement of a tender offer to purchase up to $4.25 million in value of shares of its common stock. On September 15, 2022, the Company’s “modified Dutch auction” tender offer expired. In accordance with the terms and conditions of the tender offer, the Company accepted for purchase 1,603,773 shares of common stock at a price of $2.65 per share, for an aggregate cost of approximately $4.25 million, excluding fees and expenses relating to the tender offer. The transaction cost associated with the tender offer was $111 thousand. The shares were immediately cancelled upon completion of the transaction.

As of October 2, 2022, and January 1, ~~2017,~~2023, the total issued and outstanding common shares were ~~8,190,101.~~

During the three months ending December 31, 2017, Optex Systems Holdings issued 400,000 common shares due to conversions of Series C preferred stock. There were no other issuances of common or preferred stock during the three months ended December 31, 2017. As of December 31, 2017, the outstanding common shares were 8,590,101.

~~Series C Preferred Stock~~

6,716,638 and 6,763,070, respectively. As of October 2, 2022, and January 1, ~~2017~~2023 there were ~~174 preferred Series C~~zero shares outstanding. During the three months ending December 31, 2017, there were no new issues of preferred Series C shares, and conversions of 96 preferred Series C shares, or $0.5 million, into 400,000 common shares. As of December 31, 2017 there were 78 preferred Series C shares outstanding, convertible into 325,000 common shares. During the three months ending January 1, 2017 there were no new issues of preferred Series C shares, and conversions of 16 preferred Series C shares, or $0.1 million, into 75,000 common shares.held in Treasury.

Note 9 8 - Subsequent Events

On January 1, 2018, there were 83,000 shares vested in relation to restricted stock units issued to Danny Schoening, Karen Hawkins, and Bill Bates. On January 2, 2018 Optex Systems Holdings issued 55,902 common shares in settlement of the vested shares, net of 12,098 shares which were withheld for tax obligations.None.

On January 2, 2018, we executed a Fifth Amendment to our Avid Bank letter of credit, extending the maturity date from January 22, 2018 to March 22, 2018 at which date we intend to renew the line of credit for an additional two years.

~~On January 5, 2018 we paid annual bonuses for fiscal year 2017 in the amount of $152,432 for Danny Schoening and $55,691 for Karen Hawkins.~~

~~F-13~~ F-16

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis ~~or Plan~~of Financial Condition and Results of Operations

~~This MD&A~~ (MD&A) is intended to supplement and complement our audited consolidated financial statements and notes thereto for the fiscal year ended October ~~1, 2017~~2, 2022 and our ~~reviewed but~~ unaudited condensed consolidated financial statements and ~~footnotes~~notes thereto for the quarter ended ~~December 31, 2017,~~January 1, 2023, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to review our condensed consolidated financial statements in conjunction with your review of this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance and financial position. We use these non-GAAP financial measures internally for comparing actual results from one period to another, as well as for planning purposes. We will also report non-GAAP financial results as supplemental information, as we believe their use provides more insight into our performance. When a non-GAAP ~~measures are~~measure is used in this MD&A, ~~they are~~it is clearly identified as a non-GAAP ~~measures~~measure and reconciled to the most closely corresponding GAAP measure.

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Special cautionary statement concerning forward-looking statements” and “Risk factors” for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements. The operating results for the periods presented were not significantly affected by inflation.

~~Background~~Cautionary Note Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q, in particular the MD&A, contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Quarterly Report on Form 10-Q and other reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”), in our press releases, presentations to securities analysts or investors, or in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements.

These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding growth strategy; product and development programs; financial performance (including revenue and net income); backlog; expected timing of shipments; increases in the cost of materials and labor; labor shortages; follow-on orders; the impact of the COVID-19 pandemic; supply chain challenges; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the defense industry.

We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Some of these risks and uncertainties are identified in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the section “Risk Factors” in our Annual Report on Form 10-K and you are urged to review those sections. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.

We do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.

Background

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

We are both a prime and sub-prime contractor to the Department of Defense. Sub-prime contracts are typically issued through major defense contractors such as General Dynamics Land Systems, Raytheon Corp., BAE, ~~NorcaTec~~ADS Inc. and others. 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. defense companies serving foreign governments.

The Federal Acquisition Regulation is the principal set of regulations that govern the acquisition process of government agencies and contracts with the U.S. government. In general, parts of the Federal Acquisition Regulation are incorporated into government solicitations and contracts by reference as terms and conditions effecting contract awards and pricing solicitations.

Many of our contracts are prime or subcontracted directly with the Federal government and, as such, are subject to Federal Acquisition Regulation Subpart 49.5, “Contract Termination Clauses” and more specifically Federal Acquisition Regulation clauses 52.249-2 “Termination for Convenience of the Government (Fixed-Price)”, and 49.504 “Termination of fixed-price contracts for default”. These clauses are standard clauses on our prime military contracts and generally apply to us as subcontractors. It has been our experience that the termination for convenience is rarely invoked, except where it is mutually beneficial for both parties. We are currently not aware of any pending terminations for convenience or for default on our existing contracts.

In the event a termination for convenience were to occur, Federal Acquisition Regulation clause 52.249-2 provides for full recovery of all contractual costs and profits reasonably occurred up to and as a result of the terminated contract. In the event a termination for default were to occur, we could be liable for any excess cost incurred by the government to acquire supplies from another supplier similar to those terminated from us. We would not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Company as defined by Federal Acquisition Regulation clause 52.249-8.

In addition, some of our contracts allow for government contract financing in the form of contract progress payments pursuant to Federal Acquisition Regulation 52.232-16, “Progress Payments”. As a small business, and subject to certain limitations, this clause provides for government payment of up to 90% of incurred program costs prior to product delivery. To the extent our contracts allow for progress payments, we intend to utilize this benefit, thereby minimizing the working capital impact on Optex Systems Holdings for materials and labor required to complete the contracts.

Recent ~~Orders~~Developments

●

~~In October 2016, we received a $0.8 million order from L-3 Communications for night vision goggle laser interference filter assemblies deliverable through March 2017.~~

●

In October 2016, we were awarded a $1.3 million portion of a commercial multi-year strategic supplier agreement with a domestic manufacturer of premium optical devices to supply its optical assemblies. The units will be delivered in fiscal year 2017.

●

~~In November 2016, we were awarded a $1.5 million contract forlaser protected periscopes from Defense Logistics Agency (DLA)~~. The award is the first delivery order against a 5-year Indefinite Delivery, Indefinite Quantity (IDIQ) contract with DLA totaling $5.99 million. Deliveries for the first order against this contract began in January 2017 and will continue through August 2017.

NASDAQ Listing Application

●	In December 2016, we were awarded a $1.5 million purchase order from one of the world’s largest defense companies for laser protected periscopes installed into Light Armored Vehicles in the Middle East. The periscopes will be delivered over three years, with the first delivery beginning in December 2017.
●	~~In February 2017, we wereawarded a $1.3 million award with a domestic manufacturer of premium optical devices for deliveries in fiscal year 2017.~~
●	~~In March 2017, we~~received a purchase order from a domestic defense contractor in the amount of $1.7 million to supply Laser Interference Filter (LIF) Assemblies supporting the U.S. Government spares for fielded night vision goggles. Deliveries will begin in June 2017 and continue through January 2018.
●	On July 3, 2017, we were awarded a five year Indefinite-Delivery Indefinite-Quantity contract through DLA Land at Aberdeen for provision of night vision assemblies for the U.S. military. The Laser Interference Filter Assemblies will be manufactured at the Applied Optics Center (AOC) Division of Optex Systems, Inc. in Dallas, Texas. The contract calls for five one-year ordering periods running consecutively commencing on July 5, 2017 at pricing set forth in the addenda to the contract. The contract calls for first article testing and has a guaranteed minimum of $50,000. Given prior contracts awarded On December 7, 2022 the Company submitted an application to list its common stock on the NASDAQ Capital Market. There are no assurances (1) that the Company ~~through DLA, the Company expects to generate between $8.4 and $12.4 million in revenue over the next five year period from this contract.~~

●

On September 11, 2017 we were awarded a $1.35 million contract by defense industry leader General Dynamics Land Systems-Canada, to provide LAV 6.0 optimized weapon system support for Optex Systems’ Commander Sighting System. This in-service support will continue over the next three years for their existing fleet of Light Armored Vehicles.

●

On September 18, 2017 we were awarded a five year Indefinite-Delivery Indefinite-Quantity (IDIQ) contract through Defense Logistics Association (DLA) in support of the Abrams Main Battle Tank platform. The contract is expected to generate between $1.5M and $2.4 million in revenue over the next five year period for Optex Systems. As of October 30, 2017, three task delivery orders have been awarded against the IDIQ for a total value of $1.5 million.

~~New Product Development~~

We continue to field new product opportunities from both domestic and international customers. Given continuing unrest in multiple global hot spots, the need for precision optics continues to increase. Most of these requirements are for observation and situational awareness applications; however, we continue to see requests for higher magnification and custom reticles in various product modifications. The basic need to protect the soldier while providing information about the mission environment continues to be the primary driver for these requirements.

We are cautiously optimistic that the new government administrations proposed boost in military spending will have a favorable impact in the direction of funding or product need for the U.S. military. We anticipate that absent any significant changes from the current defense spending levels, maintenance will still be required, and the opportunities for us to upgrade existing systems with higher performing systems will continue to ~~present themselves. Spending levels may change, but given~~meet the ~~mix between foreign spending, domestic/prime demand,~~initial listing criteria throughout the pendency of the application (including with respect to its share price), (2) that NASDAQ will approve the application or (3) relating to the timing of any such approval. If and when listed on NASDAQ, there are no assurances that the Company will continue to meet NASDAQ’s continued listing requirements.

Amended and Restated Employment Agreement for Danny Schoening

On November 28, 2022, the Company entered into a new employment agreement with Danny Schoening. Pursuant to the agreement, which is dated as of December 1, 2022, Mr. Schoening will continue to serve as the Company’s President and Chief Executive Officer through November 30, 2025. Mr. Schoening’s base salary initially is $304,912 per annum, and will be increased to $314,060 on December 1, 2023 and $323,481 on December 1, 2024. Mr. Schoening will be eligible for a performance bonus based on a one-year operating plan adopted by the Company’s Board of Directors (the “Board”). The bonus will be based on financial and/or operating metrics decided annually by the Board or the Compensation Committee and tied to such one-year plan. The target bonus will equate to 30% of Mr. Schoening’s base salary. The Board will have discretion in good faith to alter the performance bonus upward or downward by 20%.

The updated employment agreement also served to amend Mr. Schoening’s RSU Agreement, dated January 2, 2019, which had been previously amended as of December 1, 2021, by changing the third and final vesting date for the restricted stock units granted under such agreement from the “change of control date” to January 1, 2023.

The employment agreement events of termination consist of: (i) death or permanent disability of Mr. Schoening; (ii) termination by the Company for cause (including conviction of a felony, commission of fraudulent, illegal or dishonest acts, certain willful misconduct or gross negligence by Mr. Schoening, continued failure to perform material duties or cure material breach after written notice, violation of securities laws and material breach of the employment agreement), (iii) termination by the Company without cause and (iv) termination by Mr. Schoening for good reason (including continued breach by the Company of its material obligations under the agreement after written notice, the requirement for Mr. Schoening to move more ~~recent commercial opportunities, we do not expect~~than 100 miles away for his employment without consent, and merger or consolidation that results in more than 66% of the combined voting power of the Company’s then outstanding securities or those of its successor changing ownership or a sale of all or substantially all of its assets, without the surviving entity assuming the obligations under the agreement). For a termination by the Company for cause or upon death or permanent disability of Mr. Schoening, Mr. Schoening will be paid accrued and unpaid salary and any ~~negative trends arising from political domestic changes over~~bonus earned through the ~~next twelve months.~~date of termination. For a termination by the Company without cause or by Mr. Schoening with good reason, Mr. Schoening will also be paid six months’ base salary in effect.

~~In July 2017,~~New Loan Agreement

On April 12, 2022, the Company and its subsidiary, Optex Systems, Inc. (collectively with the Company, the “Borrowers”), entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, successor to BBVA USA (the “Lender”), pursuant to which the Borrowers’ existing revolving line of credit facility was ~~awarded~~decreased from $2.25 million to $1.125 million, and the maturity date was extended from April 15, 2022 to April 15, 2023.

The Loan Agreement requires the Borrowers to maintain a ~~design patent on our “Red Tail” digital spotting scope. This device is targeted towards long range observation~~fixed charge coverage ratio of at least 1.25:1.

On November 21, 2022, the Borrowers issued an Amended and image recording used by military, border patrol, and select consumer/commercial applications. The device is designed to deliver high definition images with military grade resolution, but at commercial “off the shelf” pricing. Using high grade optics to deliver a 45X magnified image onto a 5 megapixel CMOS sensor, the Red Tail device then transmits this image via Wi-FiRestated Revolving Line of Credit Note (the “Line of Credit Note”) to the ~~user’s smartphone or tablet. Digital still images or videos can then be captured and/or emailed using~~Lender in connection with an increase of the Borrowers’ revolving line of credit facility under the Loan Agreement from $1.125 million to $2.0 million. The maturity date remains April 15, 2023. Obligations outstanding under the credit facility will accrue interest at a ~~custom Red Tail app available for either iOS or Android devices.~~

~~Recent Events~~

~~Changes~~rate equal to the ~~Board~~Lender’s prime rate minus 0.25%.

The Line of ~~Directors~~

~~Effective as~~Credit Note and Loan Agreement contain customary events of ~~January 15, 2018, Owen Naccarato resigned as one of our directors~~default and ~~as a member~~negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The credit facility is secured by substantially all of the ~~Audit Committee.~~operating assets of the Borrowers as collateral. The Borrowers’ obligations under the credit facility are subject to acceleration upon the occurrence of an event of default as defined in the Line of Credit Note and Loan Agreement.

~~Executive and Board Compensation~~Election of New Director

On ~~December~~October 19, ~~2017~~2022, the Board of Directors ~~approved bonuses~~of the Company expanded the size of the Board from four to five members and elected Mr. Dayton Judd as a director, to hold office until the Company’s next annual meeting of shareholders and until his successor has been elected and qualified.

Material Trends

Recent supply chain disruptions have strained our suppliers and extended supplier delivery lead times, affecting their ability to sustain operations. We anticipate market wide material shortages for paint and resin products as well as critical epoxies and chemicals used in our manufacturing process. In addition, we are seeing substantial increases in the ~~amount~~costs of ~~$152,432~~aluminum, steel and acrylic commodities, which has affected our net income in the first three months of fiscal year 2023 and is expected to continue to have a negative effect on our long-term fixed contracts over the next three years.

We have experienced significant material shortages during the three months ended October 2, 2022 and extending into the first three months of fiscal year 2023 from two significant suppliers of our periscope covers and housings. These shortages affect several of our periscope products at the Optex Richardson segment. The delays in key components, combined with labor shortages during the first quarter of fiscal year 2023 have negatively impacted our production levels and have pushed the expected delivery dates into the second and third quarters of fiscal year 2023. We are aggressively seeking alternative sources for ~~Danny Schoening~~these components as well as increasing employee recruitment initiatives and ~~$55,691~~overtime to attempt to mitigate any continuing risks to the periscope line. In addition, one of our major customers for ~~Karen Hawkins. The bonus amounts were paid~~the Applied Optics Center has requested a significant schedule delay pushing their laser filter unit delivery schedules from the first half into the second half of fiscal year 2023.

In November 2022, we increased our line of credit to $2.0 million from $1.125 million to facilitate our working capital requirements due to the delays and increased backlog. As supplier issues and labor shortages abate, we anticipate increased revenue beginning in the second quarter and increased working capital during the second half of fiscal year 2023 with a recovery expected by fiscal year end 2023. Based on ~~January 5, 2018.~~our current backlog, we anticipate an overall increase for fiscal year 2023 revenues as compared to the 2022 levels.

We refer also to “Item 1. Business – Market Opportunity: U.S. Military” in our annual report on Form 10-K for the year ended October 2, 2022 for a description of current trends in U.S. government military spending and its potential impact on Optex, which may be material, including particularly the tables included in that section and disclosure on the significant reduction in spending for U.S ground system military programs, which has a direct impact on the Optex Systems Richardson segment revenue, all of which is incorporated herein by reference.

Results of Operations

~~Dividends~~Segment Information

~~On June 26, 2017,~~We have presented the operating results by segment to provide investors with an additional tool to evaluate our ~~board~~operating results and to have a better understanding of ~~directors approved~~the overall performance of each business segment. Management of Optex Systems Holdings uses the selected financial measures by segment internally to evaluate its ongoing segment operations and to allocate resources within the organization accordingly. Segments are determined based on differences in products, location, internal reporting and how operational decisions are made. Management has determined that the Optex Systems, Richardson plant and the Applied Optics Center, Dallas plant are separately managed, organized, and internally reported as separate business segments. The table below provides a ~~resolution declaring a $0.02 per share dividend payment on July 12, 2017, for common and Series C preferred shareholders and warrant holders~~summary of ~~record as~~selective statement of ~~July 5, 2017 and~~operations data by operating segment for the three ~~subsequent quarters~~months ended January 1, 2023 and January 2, 2022 reconciled to the Condensed Consolidated Results of Operations as presented in Item 1, “Condensed Consolidated Financial Statements.”

Results of Operations Selective Financial Information

(Thousands)

	Three months ended
	January 1, 2023												January 2, 2022
	Optex Richardson			Applied Optics Center Dallas			Other (non-allocated costs and eliminations)			Consolidated			Optex Richardson			Applied Optics Center Dallas			Other (non-allocated costs and eliminations)			Consolidated

Revenue from External Customers	$	1,619		$	2,421		$	-		$	4,040		$	1,857		$	2,483		$	-		$	4,340
Intersegment Revenues		-			116			(116	)		-			-			180			(180	)		-
Total Segment Revenue		1,619			2,537			(116	)		4,040			1,857			2,663			(180	)		4,340

Total Cost of Sales		1,460			1,979			(116	)		3,323			1,667			2,030			(180	)		3,517

Gross Profit		159			558			-			717			190			633			-			823
Gross Margin %		9.8	%		22.0	%		-			17.7	%		10.2	%		23.8	%		-			19.0	%

General and Administrative Expense		863			101			35			999			642			109			57			808
Segment Allocated G&A Expense		(280	)		280			-			-			(236	)		236			-			-
Net General & Administrative Expense		583			381			35			999			406			345			57			808

Operating (Loss) Income		(424	)		177			(35	)		(282	)		(216	)		288			(57	)		15
Operating (Loss) Income %		(26.2	)%		7.0	%		-			(7.0	)%		(11.6	)%		10.8	%		-			0.3	%

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

Our total revenues decreased by $300 thousand, or 6.9%, comparing the three months ended January 1, 2023 with the ~~last dividend payment~~three months ended January 2, 2022. The decrease in revenue was primarily driven by a $238 thousand decrease in external revenue at the Optex Richardson segment and a $62 thousand decrease in external revenue at the Applied Optics Center segment, respectively, over the prior year period. The decrease in revenue was due to ~~occur in April 2018. On October 19, 2017, we paid a second $0.02 per share dividend to holders of record as of October 12, 2017,~~supply chain issues, labor shortage and ~~on January 19, 2018, we paid a third $0.02 per share dividend to holders of record as of January 12, 2018. Our board of directors has determined that it will not authorize declarations beyond~~customer schedule delays across the ~~April 2018 date~~segments.

Consolidated gross profit for the ~~foreseeable future~~three months ended January 1, 2023 decreased by $106 thousand, or 12.9%, compared to the prior year period. The decrease in profit was primarily attributable to a decrease in consolidated revenue across a relatively fixed overhead cost base, changes in revenue mix between the segments, and inflationary material and labor pressure against our long-term fixed price contracts.

Our operating income for the three months ended January 1, 2023 decreased by $297 thousand to a loss of $282 thousand, as ~~Optex Systems Holdings pursues other business opportunities.~~compared to the prior year period operating income of $15 thousand. The ~~board of directors will revisit the issue at the end of calendar year 2018.~~decrease in operating income was primarily driven by lower gross profit combined with an increase in general and administrative spending.

~~Results of Operations~~

~~Non GAAP~~Non-GAAP Adjusted EBITDA

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

Adjusted EBITDA has limitations and should not be considered in isolation or a substitute for performance measures calculated under GAAP. This non-GAAP measure excludes certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate Adjusted EBITDA differently than we do or may not calculate it at all, which limits the usefulness of Adjusted EBITDA as a comparative measure.

The table below summarizes our ~~three month~~three-month operating results for the periods ~~ending December 31, 2017~~ended January 1, 2023 and January ~~1, 2017,~~2, 2022, in terms of both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both measures allows the reader better to ~~have a “complete picture” of~~evaluate our overall performance.

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

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

(Thousands)
Three months ending
December 31, 2017 January 1, 2017

Net (Loss) Income Applicable to Common Shareholders (GAAP) : $ (94 ) $ 354
Add:
Loss (Gain) on Change in Fair Value of Warrants 344 (430 )
Federal Income Taxes - Current 90 —
Depreciation 81 83
Stock Compensation 44 64
Royalty License Amortization 7 7
Interest Expense 3 4
Adjusted EBITDA - Non GAAP $ 475 $ 82

Our ~~adjusted EBITDA increased~~net income decreased by ~~$0.4 million~~$252 thousand to $0.5 million during the three months ending December 31, 2017 as compared $0.1 million during the three months ending January 1, 2017. We attribute the increase in adjusted EBITDA primarily to increased revenuea loss of $1.3 million over the prior year quarter, from $3.5 million in the three months ending January 1, 2017 to $4.8 million during the three months ending December 31, 2017. In addition, we experienced a 1.4% improvement on our gross margins percentage, from 22.0% in the prior year quarter to 23.4% in the current year quarter ending December 31, 2017 and a $0.07 million reduction in general and administrative spending from the prior year level for the first quarter.

~~Segment Information~~

We have presented the operating results by segment to provide investors with an additional tool to evaluate our operating results and to have a better understanding of the overall performance of each business segment and its ability to perform in subsequent periods. Management of Optex Systems Holdings uses the selected financial measures by segment internally to evaluate its ongoing segment operations and to allocate resources within the organization accordingly. Segments are determined based on differences in products, location, internal reporting and how operational decisions are made. Management has determined that the Optex Systems, Richardson plant, and the Applied Optics Center, Dallas plant, which was acquired on November 3, 2014, are separately managed, organized, and internally reported as separate business segments. The table below provides a summary of selective statement of operations data by operating segment$223 thousand for the three months ended ~~December 31, 2017 and~~ January 1, ~~2017 reconciled~~2023, as compared to income of $29 thousand for the three months ended January 2, 2022. Our adjusted EBITDA decreased by $310 thousand to a loss of $166 thousand for the three months ended January 1, 2023, as compared to income of $144 thousand for the three months ended January 2, 2022. The decrease in the three-month period ended January 1, 2023 is primarily driven by lower revenue and operating profit as compared to the ~~Audited Consolidated Results~~prior year. Operating segment performance is discussed in greater detail throughout the previous and following sections.

Backlog

During the three months ended January 1, 2023 the Company booked $11.2 million in new orders, representing a 220.0% increase over the prior year period new orders of ~~Operations~~$3.5 million. Both segments experienced a sizeable growth in orders as ~~presented in Item 8, “Financial Statements~~compared to the prior year period.

The orders for the most recently completed quarter consist of $8.6 million for our Optex Richardson segment and ~~Supplementary Data”.~~

~~Results of Operations Selected Financial Info by Segment~~

~~(Thousands)~~

Three months ending
December 31, 2017 January 1, 2017
Optex
Richardson Applied Optics Center
Dallas Other
(non allocated costs and eliminations) Consolidated Optex
Richardson Applied Optics Center
Dallas Other
(non allocated costs and eliminations) Consolidated

Revenue from External Customers $ 2,665 $ 2,112 $ — $ 4,777 $ 2,039 $ 1,473 $ — $ 3,512
Intersegment Revenues — 371 (371 ) — — 462 (462 ) —
Total Segment Revenue 2,665 2,483 (371 ) 4,777 2,039 1,935 (462 ) 3,512

Total Cost of Sales 2,072 1,960 (371 ) 3,661 1,527 1,675 (462 ) 2,740

Gross Margin 593 523 — 1,116 512 260 — 772
Gross Margin % 22.3 % 21.1 % 0.0 % 23.4 % 25.1 % 13.4 % 0.0 % 22.0 %

General and Administrative Expense⁽¹⁾ 611 118 44 773 655 125 64 844
Segment Allocated G&A Expense (156 ) 156 — — (166 ) 166 — —
Net General & Administrative Expense 455 274 44 773 489 291 64 844

Operating Income (Loss) 138 249 (44 ) 343 23 (31 ) (64 ) (72 )
Operating (Loss) % 5.2 % 10.0 % 11.9 % 7.2 % 1.1 % (1.6 %) 0.0 % (2.1 %)

(Loss) Gain on Change in Fair Value of Warrants — — (344 ) (344 ) — — 430 430
Interest Expense — — (3 ) (3 ) — — (4 ) (4 )

Net Income (Loss) before taxes $ 138 $ 249 $ (391 ) $ (4 ) $ 23 $ (31 ) $ 362 $ 354
Net Income (Loss) % 5.2 % 10.0 % — (0.1 %) 1.1 % (1.6 %) — 10.1 %

~~(1) General and administrative expenses~~$2.6 million attributable to the Applied Optics Center. The following table depicts the new customer orders for the three months ending January 1, 2017 of $64 thousand associated with amortized stock compensation attributeable to executive/director restricted stock units has been restated from Optex Richardson to Other (non allocated costs). Operating income (loss) for Optex Richardson and Other (non allocated costs) has been restated to reflect the change.

~~Our total revenues increased by $1.3 million or 37.1% during the three months ending December 31, 2017~~2023 as compared to the three-month period ending January 2, 2022 in millions of dollars:

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

The Company has seen significant increases in orders for many of its defense and commercial products during the first three months ~~ending January~~of fiscal year 2023 inclusive of two new customers for our sighting systems and filter programs. On November 1, ~~2017. Increased revenues during~~2022, the ~~quarter were primarily driven by increased revenue~~Company announced it has been awarded a $3.4 million order to repair and refurbish night vision equipment for the Government of ~~$0.63 at the~~Israel. The order represents a significant increase in our Optex Richardson ~~plant~~sighting systems business base for a new customer and ~~increased revenues of $0.64~~includes an additional potential award value with a 100% optional award quantity clause. In October 2023 the Company booked a $0.9 million ~~at the~~award for Applied Optics Center ~~plant. Intersegment revenues decreased by ($0.1) million during the period, from $0.5 million to $0.4 million. Intersegment revenues relate primarily to coated~~laser interface filters ~~provided by the Applied Optics Center to Optex Systems in support of the Optex Systems periscope line.~~

~~Both the gross margin and the gross margin percentages increased on~~for a consolidated basis during the three months ending December 31, 2017 as compared to the prior year period. Total gross margin increased by $0.3 million, and 1.4% to 23.4% from 22.0%. The gross margin percentage for the Applied Optics Center increased from 13.4% to 21.1% and by $0.26 million from the prior year period. The increased Applied Optics Center margins are primarily driven by increased revenue and the corresponding contribution margin towards fixed costs, a more favorable pricing structurenew defense customer in addition to ~~improvements in labor and product yield efficiencies~~increased purchase orders for our commercial optical assembly and laser interface filters. The Optex Richardson gross margin increased by $0.08 million on higher revenue, while the gross margin percentage decreased by (2.8%) from 25.1% to 22.3% on changes in product mix in the current period as compared to the prior year period. We expect the gross marginsassemblies for both segments to continue to improve throughout the fiscal year as revenues grow and labor efficiencies continue to improve on the Applied Optics Center optical assembly line and the product line mix on Optex Systems shifts toward newer orders with higher pricing.our existing customer.

During the three months ending December 31, 2017 and January 1, 2017, the Applied Optics Center absorbed $0.2 million of fixed general and administrative costs incurred by Optex Systems for support services. 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.

Our operating income increased by $0.4 million, in the three months ending December 31, 2017, to $0.3 million, as compared to the prior year period operating loss of ($0.1) million as a result of increased gross margin in our Applied Optics Center and lower general and administrative spending of $0.1 million on a consolidated based across both segments. We expect continued improvements in the operating profits across both segments during the year as compared to 2017 levels as we increase revenues and gross margins across our product groups.

During the three months ending December 31, 2017 we recognized a ($0.3) million loss on change in valuation of warrant liabilities as compared to a $0.4 million gain in the prior year quarter. The changes in valuation on warrants are not allocated by segment as they relate to non-cash expenses which recognize fair value changes on warrants based on market changes beyond the control of the segment operating activities.

~~Backlog~~

Backlog as of ~~December 31, 2017,~~January 1, 2023, was ~~$14.6~~$40.1 million as compared to a backlog of ~~$15.7~~$26.5 million as of ~~October 1, 2017,~~January 2, 2022, representing an ~~decrease~~increase of ~~($1.1)~~$13.6 million or ~~(7.0%)~~51.3%. During the three months ending December 31, 2017, Optex Systems booked $3.6 million in new orders, representing a ($3.1) million, or (46.3%), decrease from the booked orders of $6.7 million in the prior year quarter. We attribute the lower orders in the current year periodBacklog as compared to ~~the prior year period to timing of government contract awards on periscopes and delays in new optical assembly orders~~October 2, 2022 increased by $7.2 million, or 21.9% from ~~one of our major Applied Optics Customers.~~

$32.9 million. The following table depicts the current expected delivery by period of all contracts awarded as of ~~December 31, 2017~~January 1, 2023 in millions of dollars:

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

(Millions)
Product Line Q2
2018 Q3
2018 Q4
2018 2018
Delivery 2019+
Delivery Total Backlog
12/31/2017 Total Backlog
10/1/2017 Variance % Chg
Periscopes                 2.3                  1.2                 0.2                   3.7                 1.5                     5.2              4.9            0.3 6.1%
Sighting Systems                 0.6                  0.7                 0.3                   1.6                 2.1                     3.7              4.1          (0.4) (9.8%)
Other                 0.4                  0.2 —                   0.6                 1.0                     1.6              0.6            1.0 166.7%
Optex Systems - Richardson                 3.3                  2.2                 0.5                   5.9                 4.6                   10.5              9.6            0.9 9.4%
Applied Optics Center - Dallas                 2.4                  0.9                 0.6                   3.9                 0.2                     4.1              6.1          (2.0) (32.8%)
Total Backlog                5.7                  3.1                1.1                   9.8                4.8                  14.6           15.7          (1.1) (7.0%)

~~Optex Systems - Richardson:~~

~~During the three months ending December 31, 2017, backlog for our~~ Optex Systems Richardson ~~segment has increased by $0.9~~backlog as of January 1, 2023, was $22.0 million as compared to a backlog of $11.7 million as of January 2, 2022, representing an increase of $10.3 million or 9.4%, to $10.5 million from our fiscal year-end backlog of $9.6 million. The increased backlog was primarily driven by increased backlog of $1.0 million, or 166.7% in our other product group. The increase was primarily driven by new orders in our from the U.S. government for MRS collimator assemblies in support of the M1A2 Abrams tank. Sighting Systems backlog declined by ($0.4) million, or (9.8%) from our fiscal year-end backlog as we continue to ship sighting systems against our existing contracts. Backlog for our periscope product line has increased by 6.1% or $0.3 million to $5.1 million, from our ending 2017 fiscal year level of $4.9 million.88.0%.

During the three months ending December 31, 2017 we booked new periscope orders of $1.8 million, a reduction of ($1.9) million from the prior year period. In the prior year first quarter, the periscope orders of $3.7 million were exceptional high as a result of delays in government procurements during the fourth quarter of fiscal year 2016 which pushed awards into the first quarter of 2017. We have booked an additional $1.2 million in new periscope orders subsequent to the current quarter ended December 31, 2017 and are currently in price negotiations on two additional substantial contracts which we hope to finalize in the near term.

We experienced increases in orders for Sighting Systems of $0.2 million and other product line orders of $0.9 million for a total increase of $1.1 million during the three months ending December 31, 2017 to $1.6 million in new orders from the prior year levels of $0.5 million in new orders, offsetting a portion of the lower orders in periscopes and Applied Optics optical assemblies. We anticipate additional new orders throughout the year across all product lines to maintain for deliveries within the current fiscal year and beyond.

~~Applied Optics Center – Dallas~~

~~During the three months ending December 31, 2017, the~~ Applied Optics Center backlog ~~decreased by (32.8%), or ($2.0) million, to $4.1 million from the fiscal year end level~~as of $6.1 million. New orders for our Applied Optics Center were $0.2 million in the three months ending December 31, 2017 as compared to $2.5 million in the prior year quarter, a reduction of ($2.3) million. We have experienced a delay in expected purchase orders from one of our major customers during the first quarter of fiscal year 2018. We anticipate increased orders during the next two quarters to satisfy the customers total estimated 2018 production requirements.

The Applied Optics Center also serves as a primary filter supplier to the Optex Systems – Richardson plant. During the three months ending December 31, 2017, the Applied Optex Center received intracompany orders for laser coated filters in support of the Optex periscope product line of $0.4January 1, 2023, was $18.1 million as compared to ~~$0.5~~a backlog of $14.8 million ~~in the prior year quarter.~~ as of January 2, 2022, representing an increase of $3.3 million, or 22.3%.

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

The ~~decrease in intercompany orders is primarily related to changes in periscope mix and production schedules as compared to the prior year quarter.~~

~~Optex Systems Holdings~~Company continues to aggressively pursue international and commercial opportunities in addition to maintaining its current footprint with U.S. vehicle manufactures, with existing as well as new product lines. We continue ~~exploring new market opportunities for our M17 day/thermal periscopes~~to review and ~~digital optics for commercial applications. We are also reviewing~~seek potential products, outside our traditional product lines, which could be manufactured using our current production facilities in order to capitalize on our existing excess capacity. ~~Further, we continue to look for strategic businesses to acquire that will strengthen our existing product line, expand our operations, and enter new markets.~~

~~Three Months Ended December 31, 2017 Compared to the~~ Three Months Ended January 1, ~~2017~~2023 Compared to Three Months Ended January 2, 2022

Revenues. InFor the three months ended ~~December 31, 2017,~~January 1, 2023, revenues ~~increased~~decreased by ~~$1.3 million~~$300 thousand or ~~37.1% from~~6.9% compared to the ~~respective~~ prior ~~period in fiscal~~ year ~~2017~~period as set forth in the table below:

	Three months ended										Three months ended
	(Millions)										(Thousands)
Product Line	December 31, 2017		January 1, 2017		Variance			% Chg			January 1, 2023		January 2, 2022		Variance			% Chg
Periscopes	$	1.6	$	1.6	$	—			—		$	1,325	$	1,065	$	260			24.4
Sighting Systems		0.9		0.1		0.8			800.0			189		274		(85	)		(31.0	)
Howitzers												-		-		-			-
Other		0.2		0.3		(0.1	)		(33.3	)		105		518		(413	)		(79.7	)
Optical Systems – Richardson		2.7		2.0		0.7			35.0
Optex Systems – Richardson												1,619		1,857		(238	)		(12.8	)
Optical Assemblies												1,508		1,145		363			31.7
Laser Filters												557		937		(380	)		(40.6	)
Day Windows												161		220		(59	)		(26.8	)
Other												195		181		14			7.7
Applied Optics Center – Dallas		2.1		1.5		0.6			40.0			2,421		2,483		(62	)		(2.5	)
Total Revenue	$	4.8	$	3.5	$	1.3			37.1		$	4,040	$	4,340	$	(300	)		(6.9	)

~~Revenues on our periscope line remained flat during~~Optex Systems Richardson revenue decreased by $238 thousand or 12.8% for the three months ended ~~December 31, 2017~~January 1, 2023 as compared to the three months ended January ~~1, 2017. Based~~2, 2022 on ~~our current backlog~~lower customer demand for sighting system repairs and ~~customer delivery schedule, we anticipate an increase in~~muzzle reference systems (other) as compared to the prior year period. In addition, shipments against existing periscope ~~revenues during~~orders have been delayed into the next quarter due to supplier and ~~our~~manpower shortages. We anticipate higher revenue beginning during the second quarter and increasing through the second half of fiscal year ~~2018 revenues to be consistent with~~2023 as the supplier and labor shortages are resolved and the backlog has significantly increased on new orders. We anticipate additional periscope orders for delivery in the last fiscal quarter of 2023.

Applied Optics Center revenue decreased by $62 thousand or ~~slightly above the fiscal year 2017 level.~~

~~Sighting systems revenues~~2.5% for the three months ending December 31, 2017 increased by $0.8 million or 800.0% from revenues in the prior year period. Deliveries on our current backlog for DDAN sighting systems were delayed during the first quarter of 2017 pending product configuration changes and export licenses. We have resumed full production on the current orders and expect to continue shipments at a higher pace through the third quarter of fiscal 2018.

~~Applied Optics Center revenue increased $0.6 million or 40.0% during the three months~~ ended ~~December 31, 2017~~January 1, 2023 as compared to the three months ended January ~~1, 2017~~2, 2022. The revenue decrease is primarily ~~due~~attributable to ~~increased deliveries~~customer requested shipment delays for our laser filter units for a large defense contractor to accommodate their ongoing facility move. Based on ~~commercial optical assemblies~~current backlog and ~~government laser interface filters (LIFs). We~~the post-move adjusted customer delivery schedule, we are ~~currently expecting several new orders for additional optical assemblies and LIFs from several customers~~anticipating revenue to ~~be delivered in~~begin increasing during the next quarter with more significant increases occurring during the second half of fiscal year 2018. We expect the optical assembly revenues to increase steadily throughout the year over 2017 levels, as we continue to ship against existing backlog and anticipate new orders in the near term.

Other product revenues declined by ($0.1) million to $0.2 million during the three months ending December 31, 2017 as compared to $0.3 million in the prior year period primarily due to reductions in component spare orders from the prior year level. Based on our current backlog as compared to our backlog level at the end of the first quarter in 2017, we expect lower revenues in the other product group during the fiscal ~~year 2018 as compared to the prior~~ year. Many of these orders have a long material lead time and often require first article testing prior to production. Reductions in other revenues are expected to be fully offset by increased revenues in each of the other product groups.

Gross ~~Margin~~Profit. The gross margin during the three-month period ~~ending December 31, 2017~~ended January 1, 2023 was ~~23.4%~~17.7% of revenue as compared to a gross margin of ~~22.0%~~19.0% of revenue for the period ~~ending~~ended January 2, 2022. The gross profit decreased by $106 thousand to $717 thousand for the three months ended January 1, ~~2017.~~2023 as compared to $823 thousand in the prior year three months. The decrease in gross profit is primarily attributable to lower revenue spread across a relatively fixed cost base, changes in mix between products and operating segments and material and labor inflationary pressure on our long-term contracts. Cost of sales ~~increased~~decreased to ~~$3.7~~$3.3 million for the current period as compared to the prior year period of ~~$2.7~~$3.5 million on lower period revenue and increased revenues of $1.3 million. The gross margin increased by $0.3 million in the current year period to $1.1 million as compared to the prior year period of $0.8 million. We attribute the improvement in gross margin to higher revenue combined with cost efficiency improvements and changes in product mix between the respective periods.cost.

G&A Expenses. During the three months ended ~~December 31, 2017,~~January 1, 2023 and January 2, 2022, we recorded operating expenses of ~~$0.77 million~~$999 thousand and $808 thousand, respectively. Operating expenses increased by 23.6% between the respective periods primarily due to increased labor costs, office expenses, legal and audit fees.

Operating (Loss) Income. During the three months ended January 1, 2023, we recorded an operating loss of ($282) thousand, as ~~opposed~~compared to ~~$0.84 million,~~operating income of $15 thousand during the three months ended January ~~1, 2017, a net~~2, 2022. The $297 thousand decrease ~~of $0.07 million. Decreased general and administrative costs during~~in operating income for the current year period were primarily driven by decreases in accrued executive bonus pay, stock compensation expenses and investor relations costs in the current year quarter as compared to the prior year quarter. We expect our total fiscal year 2018 general and administrative spending to approximate the spending in fiscal year 2017.

~~Operating Income (Loss)~~. During the three months ended December 31, 2017, we recorded an operating income of $0.3 million, as compared to an operating loss of ($0.1) million during the three months ended January 1, 2017. The $0.4 million increased operating income in the current year period overfrom the prior year period is primarily due to ~~increased~~lower gross ~~margin on higher revenue~~profit and ~~lower~~increased general and administrative costs in the current year quarter as compared to the prior year quarter.

Net (Loss) Income applicable to common shareholders. During the three months ended ~~December 31, 2017,~~January 1, 2023, we recorded a net loss applicable to common shareholders of ($~~0.1) million~~223) thousand as compared to a net income applicable to common shareholders of ~~$0.4 million~~$29 thousand during the three months ended January ~~1, 2017.~~2, 2022. The ~~increase~~change in net ~~loss~~income of ~~($0.5) million~~$252 thousand is primarily attributable to lower revenue and gross profit combined with increased operating income of $0.3 million, offset by recognition of a loss on changes in the fair value of warrant liabilities of ($0.3) million in the current year period as compared to a gain of $0.4 million in the prior year period,general and ~~a current federal income tax expense of ($0.1) million in the current year period as compared to zero in the prior year period.~~administrative costs.

Liquidity and Capital Resources

As of ~~December 31, 2017, Optex Systems Holdings~~January 1, 2023, the Company had working capital of ~~$8.1~~$9.7 million, as compared to ~~$8.0~~$10.0 million as of October ~~1, 2017.~~ 2, 2022.

During the three months ended December 31, 2017, the Company experienced a net loss of ($0.1) million and an increase of 37.1%, or $1.3 million in revenues to $4.8 million in the current year period as compared to $3.5 million in the prior year period ending January 1, ~~2017.~~ 2023, we generated operating cash flow of $451 thousand and spent ($90) thousand on acquisitions of property and equipment.

The ~~Company’s adjusted EBITDA increased by $0.4 million~~Company has capital commitments of $209 thousand for the purchase of property and equipment consisting of an ultrasonic aqueous system and a reflectometer device during the ~~three months ending December 31, 2017 to $0.5 million from $0.1 million during the three months ending January 1, 2017.~~ next ninety days.

Backlog as of ~~December 31, 2017 has decreased by ($1.1) million or (7.0%) to $14.6~~January 1, 2023 was $40.1 million as compared to a backlog of ~~$15.7~~$32.9 million and $26.5 million as of October ~~1, 2017. Approximately 39.1%~~2, 2022 and January 2, 2022, respectively, and representing an increase of ~~annual revenue is derived from new orders booked during the fiscal year.~~21.9% and 51.3%, respectively.

U.S. military spending has been significantly reduced from the 2011 peak spending levels as a result of a decrease in military operations in Iraq and Afghanistan and due to Congressional sequestration cuts to defense spending created by the Budget Control Act of 2011, which began in fiscal year 2013. As a result of lower U.S. government defense spending, the Company has continued to explore other opportunities for manufacturing outside of our traditional product lines for products which could be manufactured using our existing lines in order to fully utilize our existing capacity. On November 16, 2017, the National Defense Authorization Act (NDAA) for fiscal year 2018 was sent to President Trump to sign into law after passing both the House of Representatives and the Senate. The 2018 NDAA authorizes total spending of $700 billion which includes a base spending authorization of $634 billion plus the authorization of $65.8 billion in additional funding for the Overseas Contingency Operation (OCO) account. The bill authorizes a major hike in military spending over the 2017 NDAA authorization amount of $619 billion and sets defense spending well above the $549 billion base authorization cap under the 2011 Budget Control Act. On February 9, 2018, Congress passed a budget stop gap resolution which was signed by the president. The resolution lifts the sequestration limits on military spending by $165 billion over the next two years in line with the 2018 NDAA authorization of $700 billion. We are cautiously optimistic that the defense industry effects of the sequestration from 2011 have reached a plateau and we will begin to see small but steady increases in defense military procurement orders in fiscal year 2018 and upcoming fiscal years. Further, we continue to look for additional strategic businesses to acquire that will strengthen our existing product line, expand our operations, and enter new markets.

The Company has historically funded its operations through ~~working capital,~~cash from operations, convertible notes, common and preferred stock offerings and bank debt. The Company’s ability to generate positive cash flows depends on a variety of factors, including the continued development and successful marketing of the Company’s products. At ~~December 31, 2017,~~January 1, 2023, the Company had approximately ~~$1.5~~$1.3 million in cash and an outstanding payable balance of ~~$0.8~~zero against its $2.0 million ~~against our working~~ line of credit. ~~The line of credit allows for borrowing up to a maximum of $2.2 million, which fluctuates based on our open accounts receivable balance.~~ As of ~~December 31, 2017~~January 1, 2023, our outstanding accounts receivable was ~~$2.4~~$1.6 million. We expect the accounts to be collected during the second quarter of fiscal 2023.

Recently experienced supplier delays, labor shortages, and customer schedule changes negatively impacted our revenue during the three months ended January 1, 2023 but are expected to abate during the second quarter of fiscal year 2023. As described in more detail below, in November 2022, we increased our line of credit to $2.0 million from $1.125 million, to facilitate our working capital requirements due to the delays and increased backlog. We anticipate higher revenue beginning during the second quarter and increasing through the second half of fiscal year 2023 as the supplier and labor shortages combined with customer schedule delays are resolved and the backlog has significantly increased on new orders.

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

In some instances, new government contract awards may allow for contract financing in the form of progress payments pursuant to Federal Acquisition Regulation 52.232-16, “Progress Payments.” Subject to certain limitations, this clause provides for government payment of up to 90% of incurred program costs prior to product delivery for small businesses like us. To the extent any contracts allow for progress payments and the respective contracts would result in significant preproduction cash requirements for design, process development, tooling, material or other resources which could exceed our current working capital or line of credit availability, we intend to utilize this benefit to minimize any potential negative impact on working capital prior to receipt of payment for the associated contract deliveries. Currently none of our existing contracts allow for progress payments.

The Company expects to ~~incur~~generate net income ~~increased adjusted EBITDA~~ and positive cash flow from operating activities ~~throughout 2018 on higher projected revenue growth combined with increased gross margin related~~over the next nine months. To achieve and retain profitability, we need to ~~existing and planned productivity and cost efficiency improvements. Successful transition to attaining and maintaining profitable operations is dependent upon maintaining~~maintain a level of revenue adequate to support ~~the Company’s~~our cost structure. Management intends to manage operations commensurate with its level of working capital and ~~facilities~~ line of credit during the next nine ~~months;~~months and beyond; however, uneven revenue levels driven by changes in customer delivery demands, first article inspection requirements or other program delays ~~combined~~associated with ~~increasing inventory~~the pandemic, labor shortages and ~~production costs required to support the increases in backlog~~supply chain issues could create a working capital shortfall. In the event the Company does not successfully implement its ultimate business plan, certain assets may not be recoverable.

On ~~August 26, 2016, we consummated~~April 12, 2022, the Company and its subsidiary, Optex Systems, Inc. (collectively with the Company, the “Borrowers”), entered into an Amended and Restated Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, successor to BBVA USA (the “Lender”), pursuant to which the Borrowers’ existing revolving line of credit facility was decreased from $2.25 million to $1.125 million, and the maturity date was extended from April 15, 2022 to April 15, 2023.

The Loan Agreement requires the Borrowers to maintain a ~~public offering~~fixed charge coverage ratio of ~~2,291,000 Class A units consisting~~at least 1.25:1.

On November 21, 2022, the Borrowers issued an Amended and Restated Revolving Line of ~~common stock and warrants and 400 Class B units consisting~~Credit Note (the “Line of ~~shares~~Credit Note”) to the Lender in connection with an increase of ~~Series C convertible stock and warrants for a total gross purchase price~~the Borrowers’ revolving line of ~~$4.8~~credit facility under the Loan Agreement from $1.125 million to $2.0 million. The ~~net cash proceeds~~maturity date remains April 15, 2023. Obligations outstanding under the credit facility will accrue interest at a rate equal to the Lender’s prime rate minus 0.25%.

The Line of Credit Note and Loan Agreement contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and restricted payments. The credit facility is secured by substantially all of the ~~offering were $4.2 million after underwriter expenses of $0.5 million. We used $0.3 million~~operating assets of the ~~proceeds~~Borrowers as collateral. The Borrowers’ obligations under the credit facility are subject to acceleration upon the occurrence of an event of default as defined in the Line of Credit Note and Loan Agreement.

We intend to renew or replace the line of credit facility. If adequate funds are not available on acceptable terms, or at all, we may be unable to finance our operations, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures.

On September 22, 2021 the Company announced authorization for ~~offering expenses paid by Optex Systems Holdings and $1.7~~an additional $1 million of the proceeds for the redemption of Series A and Series B preferred shares which were a condition of the offering. The remaining $2.2 million of funds is being used to fund working capital needs to support revenue growth and acquisitions.

~~On April 27, 2017, the Board of Directors of Optex Systems Holdings approved a purchase of 700,000 shares of its common~~ stock ~~in a private transaction from The Longview Fund, L.P. The transaction was priced at the closing sale price on April 28, 2017 of $0.74 per share for a total transaction amount of $518,000. Upon~~ repurchase ~~on May 1, 2017, the shares were cancelled thereby reducing the total shares outstanding of its common stock.~~

On June 26, 2017, our board of directors approved a resolution declaring a $0.02 per share dividend payment on July 12, 2017, for common and Series C preferred shareholders and warrant holders of record as of July 5, 2017 and for the three subsequent quarters with the last dividend payment to occur in April 2018. On October 19, 2017, we paid a second $0.02 per share dividend to holders of record as of October 12, 2017, and on January 19, 2018, we paid a third $0.02 per share dividend to holders of record asprogram. As of January ~~12, 2018. Optex recorded $262~~1, 2023, there was an authorized balance of $560 thousand ~~in dividends payable as of December 31, 2017 which were in paid on January 19, 2018. The Company expects~~remaining to ~~pay~~be spent against the fourth dividend payment totaling $262 thousand in April 2018. Our board of directors has determined that it will not authorize declarations beyond the April 2018 date for the foreseeable future as Optex Systems Holdings pursues other business opportunities. The board of directors will revisit the issue at the end of calendar year 2018.

~~Cash Flows for the Period from October 1, 2017 through December 31, 2017~~

~~Cash and Cash Equivalents:~~ ~~As of December 31, 2017, we had cash and cash equivalents of $1.5 million which representing a decrease of ($0.1) million during~~repurchase program. During the three months ended ~~December 31, 2017.~~January 1, 2023, there were no stock repurchases against the plan.

~~Net Cash Provided by Operating Activities~~~~. Net cash provided by operating activities during the three months from October 1, 2017 to December 31, 2017 totaled $0.1 million. The primary sources of cash during the period relate to~~Critical Accounting Estimates

A critical accounting estimate is an ~~collections against accounts receivable of $0.7 million, offset by increased in accounts payable and accrued expenses of ($0.8 million) and other working capital changes of ($0.2) million.~~estimate that:

	●	is made in accordance with generally accepted accounting principles,

	●	involves a significant level of estimation uncertainty, and

	●	has had or is reasonably likely to have a material impact on the company’s financial condition or results of operation.

~~Net Cash Used in Investing Activities~~~~. In the three months ended December 31, 2017, cash used in investing activities was zero.~~

~~Net Cash Used in Financing Activities~~~~. Net cash used in financing activities was ($0.3) million during the three months ended December 31, 2017 and relate to dividends paid to shareholders on October 19, 2017.~~

~~Critical Policies and Accounting Pronouncements~~

Our significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies are described in ~~“Critical Policies and Accounting Pronouncements” and~~ Note 2 (Accounting Policies) to consolidated financial statements in our Annual Report on Form 10-K for the year ended October 2, 2022.

Our critical accounting estimates include warranty costs, contract losses and the deferred tax asset valuation. Future warranty costs are based on the estimated cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of warranty covered sales. Our warranty covered sales primarily include the Applied Optics Center optical assemblies. While our warranty period is 12 months, our reserve balances assume a general 90-day return period for optical assemblies previously delivered plus any returned backlog inhouse that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of January 1, ~~2017.~~2023, the Company had accrued warranty costs of $229 thousand, as compared to $169 thousand as of October 2, 2022. The primary reason for the $60 thousand increase in reserve balances relates to an increase in customer returned backlog pending repair or replacement to our customer during the preceding three-month period.

~~Cautionary Factors That May Affect Future Results~~As of January 1, 2023 and October 2, 2022, we had $282 thousand, and $289 thousand, respectively, of contract loss reserves included in our balance sheet accrued expenses. These loss contracts are related to some of our older legacy periscope IDIQ contracts which were priced in 2018 through early 2020, prior to COVID-19 and the significant downturn in defense spending on ground system vehicles. Due to inflationary price increases on component parts and higher internal manufacturing costs (as a result of escalating labor costs and higher burden rates on reduced volume), some of these contracts are in a loss condition, or at marginal profit rates. These contracts are typically three-year IDIQ contracts with two optional award years, and as such, we are obligated to accept new task awards against these contracts until the contract expiration. Should contract costs continue to increase above the negotiated selling price, or in the event the customer should release substantial quantities against these existing loss contracts, the losses could be material. For contracts currently in a loss status based on the estimated per unit contract costs, losses are booked immediately on new task order awards. Some of these long-term contracts have option year ordering periods ending in February 2025 with deliveries that may extend into February 2026. During the three months ended January 1, 2023, the Company recognized additional expenses for contract loss reserves of $51 thousand on new task awards against the long-term fixed contracts and applied $58 thousand of the reserves against revenues booked during the period. There is no way to reasonably estimate future inflationary impacts, or customer awards on the existing loss contracts.

~~This Quarterly Report on Form 10-Q~~As of January 1, 2023 and ~~other written reports and oral statements made from time~~October 2, 2022, our deferred tax assets consisted of $1.8 million, partially offset by a valuation reserve of $0.8 million against those assets for a net deferred tax asset of $1.0 million. The valuation allowance covers certain deferred tax assets where we believe we will be unlikely to ~~time by Optex Systems Holdings may contain so-called “forward-looking statements,” all~~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 ~~which~~the uncertainties of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are subject to risks and uncertainties. You can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. You can identify them by the fact that they do not relate strictly to historical orchange over time. While we believe our current facts. These statements are likely to address Optex Systems Holdings’ growth strategy, financial results and product and development programs. You must carefully consider any such statement and should understand that many factors could cause actual results to differ from Optex Systems Holdings’ forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially.

Optex Systems Holdings does not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this Form 10-Q. In various filings Optex Systems Holdings has identified important factors that could cause actual results to differ from expected or historic results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such listestimate to be ~~a complete list of all potential risks or uncertainties.~~reasonable, changing market conditions and profitability, changes in equity structure and changes in tax regulations may impact our estimated reserves in future periods.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by our Quarterly Report on Form 10-Q for the quarter ended ~~December 31, 2017,~~January 1, 2023, management performed, with the participation of our Principal Executive Officer and Principal Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the ~~report~~reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, to allow timely decisions regarding required disclosures. Based upon the evaluation described above, our Principal Executive Officer and our Principal Financial Officer concluded that, as of ~~December 31, 2017,~~January 1, 2023, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the ~~quarter~~three months ended ~~December 31, 2017,~~January 1, 2023, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A.Risk Factors

There have been no material changes in risk factors since the risk factors set forth in the Form 10-K filed for the year ended October 2, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

There were no purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of its common shares during the three months ended January 1, ~~2017.~~2023. As of January 1, 2023, the maximum dollar value that may yet be purchased against the Company’s stock repurchase plan is $560 thousand.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 6. Exhibits

Exhibit No.		Description

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

31.1 and31.2		Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

32.1 and32.2		Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

EX-101.INS		Inline XBRL Instance Document
EX-101.SCH		Inline XBRL Taxonomy Extension Schema Document
EX-101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
EX-101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
EX-101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
EX-101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Previously filed

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	OPTEX SYSTEMS HOLDINGS, INC.

Date: February ~~14, 2018~~13, 2023	By:	/s/ Danny Schoening
		Danny Schoening
		Principal Executive Officer

	OPTEX SYSTEMS HOLDINGS, INC.

Date: February ~~14, 2018~~13, 2023	By:	/s/ Karen Hawkins
		Karen Hawkins
		Principal Financial Officer and
		Principal Accounting Officer

	Reportable Segment Financial Information (thousands)
	Three months ending December 31, 2017
		Optex Systems Richardson			Applied Optics Center Dallas		Other (non allocated costs and intersegment eliminations)			Consolidated Total

Revenues from external customers	$	2,665		$	2,112	$	—		$	4,777
Intersegment revenues		—			371		(371	)		—
Total Revenue	$	2,665		$	2,483	$	(371	)	$	4,777

Interest expense	$	—		$	—	$	3		$	3

Depreciation and Amortization	$	10		$	71	$	—		$	81

Income (Loss) before taxes	$	48		$	249	$	(391	)	$	(94	)

Other significant noncash items:
Allocated home office expense	$	(156	)	$	156	$	—		$	—
Loss on change in fair value of warrants	$	—		$	—	$	344		$	344
Stock compensation expense	$	—		$	—	$	44		$	44
Royalty expense amortization	$	7		$	—	$	—		$	7
Warranty Expense	$	—		$	77	$	—		$	77

Segment Assets	$	8,477		$	4,708	$	—		$	13,185

	(Thousands)
		Optex Systems Richardson				Applied Optics Center Dallas
Fiscal Year		Lease Payments		CAM Estimate		Lease Payments		CAM Estimate		Total Payments
2018		$	205	$	81	$	180	$	45	$	511
2019			281		110		248		61		700
2020			291		112		255		62		720
2021			147		57		262		63		529
2022			—		—		22		5		27
Total minimum lease payments		$	924	$	360	$	967	$	236	$	2,487

Binomial Assumptions	Issuance date ⁽¹⁾ August 26, 2016			Period ending October 2, 2016			Period ending October 1, 2017			Period ending December 31, 2017
Exercise Price⁽¹⁾	$	1.5		$	1.5		$	1.5		$	1.5
Warrant Expiration Date⁽¹⁾		8/26/2021			8/26/2021			8/26/2021			8/26/2021
Stock Price⁽²⁾	$	0.95		$	0.77		$	0.98		$	1.1
Interest Rate (annual)⁽³⁾		1.23	%		1.14	%		1.62	%		1.98	%
Volatility (annual)⁽⁴⁾		246.44	%		242.17	%		179.36	%		171.04	%
Time to Maturity (Years)		5			4.9			3.9			3.7
Number of Steps (Quarters)		20			20			16			15
Calculated fair value per share	$	0.93		$	0.76		$	0.87		$	0.96

Warrant Liability	Warrants Outstanding		Fair Value per Share		Fair Value (000’s)
Fair Value at initial measurement date of 8/26/2016		4,125,200	$	0.93	$	3,857
(Gain) on Change in Fair Value of Warrant Liability						(739	)
Fair Value as of period ending 10/2/2016		4,125,200	$	0.76	$	3,118
Loss on Change in Fair Value of Warrant Liability						489
Fair Value as of period ending 10/01/2017		4,125,200	$	0.87	$	3,607
Loss on Change in Fair Value of Warrant Liability						344
Fair Value as of period ending 12/31/2017		4,125,200	$	0.96	$	3,951

	Number			Weighted
	of Shares			Average		Weighted		Aggregate
	Remaining			Fair		Average		Value
Subject to Exercise	Options			Value		Life (Years)		(Thousands)
Outstanding as of October 2, 2016		60,340		$	—		1.4	$	—
Granted – 2017		—
Forfeited – 2017		(330	)						—
Exercised – 2017		—							—
Outstanding as of October 1, 2017		60,010		$	—		0.76	$	—
Granted – 2018		—
Forfeited – 2018		(10	)						—
Exercised – 2018		—							—
Outstanding as of December 31, 2017		60,000		$	—		0.62	$	—

Exercisable as of October 1, 2017		56,260		$	—		0.60	$	—

Exercisable as of December 31, 2017		60,000		$	—		0.62	$	—

	Number of Non-vested Shares Subject to Options			Weighted- Average Grant- Date Fair Value
Non-vested as of October 2, 2016		7,500		$	8.00
Non-vested granted — year ended October 1, 2017		—			—
Vested — year ended October 1, 2017		(3,750	)		8.00
Forfeited — year ended October 1, 2017					—
Non-vested as of October 1, 2017		3,750		$	8.00
Non-vested granted — three months ended December 31, 2017		—			—
Vested — three months ended December 31, 2017		(3,750	)		8.00
Forfeited — three months ended December 31, 2017					—
Non-vested as of December 31, 2017		-0-		$	—

	(Thousands)
	Three months ending
	December 31, 2017			January 1, 2017

Net (Loss) Income Applicable to Common Shareholders (GAAP) :	$	(94	)	$	354
Add:
Loss (Gain) on Change in Fair Value of Warrants		344			(430	)
Federal Income Taxes - Current		90			—
Depreciation		81			83
Stock Compensation		44			64
Royalty License Amortization		7			7
Interest Expense		3			4
Adjusted EBITDA - Non GAAP	$	475		$	82

	(Millions)
Product Line	Q2 2018	Q3 2018	Q4 2018	2018 Delivery	2019+ Delivery	Total Backlog 12/31/2017	Total Backlog 10/1/2017	Variance	% Chg
Periscopes	2.3	1.2	0.2	3.7	1.5	5.2	4.9	0.3	6.1%
Sighting Systems	0.6	0.7	0.3	1.6	2.1	3.7	4.1	(0.4)	(9.8%)
Other	0.4	0.2	—	0.6	1.0	1.6	0.6	1.0	166.7%
Optex Systems - Richardson	3.3	2.2	0.5	5.9	4.6	10.5	9.6	0.9	9.4%
Applied Optics Center - Dallas	2.4	0.9	0.6	3.9	0.2	4.1	6.1	(2.0)	(32.8%)
Total Backlog	5.7	3.1	1.1	9.8	4.8	14.6	15.7	(1.1)	(7.0%)