Quarterly Report for Quarter Ending December 28, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") reflects information known to management as of the quarter ended December 28, 2025, and the date of filing. This MD&A is intended to supplement and complement our audited consolidated financial statements and notes thereto for the fiscal year ended September 28, 2025 and our unaudited condensed consolidated financial statements and notes thereto for the quarter ended December 28, 2025, prepared in accordance with U.S. generally accepted accounting principles (GAAP). You are encouraged to read our condensed consolidated financial statements in conjunction with this MD&A. The financial information in this MD&A has been prepared in accordance with GAAP, unless otherwise indicated. In addition, we use non-GAAP financial measures as supplemental indicators of our operating performance 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 measure is used in this MD&A, it is clearly identified as a non-GAAP measure and reconciled to the most closely corresponding GAAP measure.

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see "Item 2. Cautionary Note Regarding Forward-Looking Information" and "Item 1A. Risk Factors" for a discussion of the uncertainties, risks and assumptions associates with these forward-looking statements. The operating results for the periods presented were not significantly affected by inflation.

Cautionary Note Regarding Forward-Looking Information

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

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

We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors. Such risks and uncertainties include, but are not limited to, continued funding of defense programs and military spending, the timing of such funding, general economic and business conditions, including unforeseen weakness in the Company's markets, effects of continued geopolitical unrest and regional conflicts, competition, changes in technology and methods of marketing, delays in completing engineering and manufacturing programs, changes in customer order patterns, changes in product mix, continued success in technological advances and delivering technological innovations, changes in the U.S. Government's interpretation of federal procurement rules and regulations, changes in spending due to policy changes in any new federal presidential administration, market acceptance of the Company's products, shortages in components, production delays due to performance quality issues with outsourced components, inability to fully realize the expected benefits from acquisitions and restructurings or delays in realizing such benefits, challenges in integrating acquired businesses and achieving anticipated synergies, changes to export regulations, increases in tax rates, changes to generally accepted accounting principles, difficulties in retaining key employees and customers, unanticipated costs under fixed-price service and system integration engagements, changes in the market for microcap stocks regardless of growth and value and various other factors beyond our control. Some of these risks and uncertainties are identified in this Management's Discussion and Analysis of Financial Condition and Results of Operations and the section "Risk Factors" in our Annual Report on Form 10-K and you are urged to review those sections. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.

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

Background

Our wholly-owned subsidiary, Optex Systems, Inc., manufactures optical sighting systems and assemblies, primarily for United States ("U.S.") Department of Defense ("DoD") applications. Its products are installed on various types of U.S. military land vehicles, such as the Abrams and Bradley fighting vehicles and light armored and advanced security vehicles, and have been selected for installation on the Stryker family of vehicles. Optex Systems, Inc. also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. Optex Systems, Inc. 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 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.

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

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

Many of our contracts are prime or subcontracted directly with the U.S. Government and, as such, are subject to FAR Subpart 49.5, "Contract Termination Clauses" and more specifically FAR 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 material pending terminations for convenience or for default on our existing contracts.

In the event a termination for convenience were to occur, FAR clause 52.249-2 provides for full recovery of all contractual costs and profits reasonably occurred up to and as a result of the terminated contract. 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 FAR clause 52.249-8.

Material Trends and Recent Developments

We have numerous fixed price multi-year contracts covering delivery periods up to five years from the contract award. Since fiscal year 2021, we have experienced substantial increases in the costs of aluminum, steel, gold and acrylic commodities, which has affected both the Optex Richardson and Applied Optics segment margins for deliveries against those orders during the year ended September 28, 2025 and the first fiscal quarter of 2026. Approximately 3% of our contract backlog is for items priced prior to fiscal year 2021 in a loss condition due to costs increases.

See also "Item 1A. Risk Factors - Risks Related to Our Business - Certain of our products are dependent on specialized sources of supply potentially subject to disruption which could have a material, adverse impact on our business" in our Annual Report on Form 10-K for the year ended September 28, 2025.

A substantial portion of our revenue is derived from U.S. Government contracts, which are subject to annual congressional appropriations. Failure to pass the annual appropriations by October 1, the start of the new fiscal year, often results in a continuing resolution ("CR") which can delay new contract awards, exercising of contract options, and starting of new program initiatives, which could materially and adversely affect our future revenues. From October 1, 2025 to November 12, 2025, the federal government of the United States was in a shutdown as Congress failed to pass appropriations legislation for the 2026 fiscal year. On November 10, 2025, Congress passed a CR, which funded the government at existing spending levels through January 30, 2026. On February 3, 2026 a funding appropriation bill was passed by Congress and signed by the President which covers the majority of U.S. Government spending for the 2026 fiscal year. The funding bill excluded the Department of Homeland Security which is subject to further negotiations. The Company has not experienced a slow-down of total consolidated contract awards during the first three months of fiscal year 2026, however we have experienced a reduction in contract awards for our laser filters at the Applied Optics Center which we attribute to the 2025 government shutdown and CR. While we cannot provide assurances, we are anticipating new contract awards against current outstanding proposal requests for these laser filters as a result of the approved funding.

We currently do not anticipate any significant material risks as a result of the recent tariff uncertainties. Our defense products are primarily sourced domestically, but those which are imported are primarily duty free. We produce some commercial optical assemblies with selective components sourced from Taiwan; however, our existing customer backlog is covered with existing material in inventory. We anticipate any future orders for these commercial products will have updated pricing inclusive of any tariff impact.

We refer also to "Item 1. Business - Market Opportunity: U.S. Military" in our Annual Report on Form 10-K for the year ended September 28, 2025 for a description of current trends in U.S. government military spending and its potential impact on the Company, 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, in combination with the U.S. Government shutdown and CR which has a direct impact on the Company's revenue, all of which is incorporated herein by reference.

Results of Operations

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. 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 Optex Richardson, our Richardson plant, and the Applied Optics Center ("Applied Optex Center" or "AOC"), our Dallas plant, 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 for the three months ended December 28, 2025 and December 29, 2024 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
		December 28, 2025																December 29, 2024
		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		$	5,325				3,820				-				9,145			$	3,415				4,783				-				8,198
Intersegment Revenues			-				217				(217	)			-				-				271				(271	)			-
Total Segment Revenue			5,325				4,037				(217	)			9,145				3,415				5,054				(271	)			8,198
Total Cost of Sales			3,992				3,274				(217	)			7,049				3,088				3,253				(271	)			6,070
Gross Profit			1,333				763				-				2,096				327				1,801				-				2,128
Gross Margin %			25.0	%			18.9	%			-				22.9	%			9.6	%			35.6	%			-				26.0	%
General and Administrative Expense			1,355				380				212				1,947				940				180				92				1,212
Segment Allocated G&A Expense			(415	)			415				-				-				(328	)			328				-				-
Net General & Administrative Expense			940				795				212				1,947				612				508				92				1,212
Operating Income (Loss)			393				(32	)			(212	)			149				(285	)			1,293				(92	)			916
Operating Income (Loss) %			7.4	%			(0.8	)%			-				1.6	%			(8.3	)%			25.6	%			-				11.2	%
Interest Income (Expense)			-				-				48				48				-				-				(13	)			(13	)
Income (Loss) before taxes		$	393				(32	)			(164	)			197				(285	)			1,293				(105	)			903
Income (Loss) before taxes %			7.4	%			(0.8	)%			-				2.2	%			(8.3	)%			25.6	%			-				11.0	%

For the three months ended December 28, 2025, our total revenues increased by $0.9 million, or 11.6%, compared to the prior year period. The increase in revenue was primarily driven by increased revenue at the Optex Richardson segment, partially offset by decreased revenue at the Applied Optics Center segment.

Consolidated gross profit for the three months ended December 28, 2025 was slightly lower during the current year period as compared to the prior year period with changes in mix between segments and product lines combined with a higher mix of shipments against our legacy long-term loss contracts. During the current year period the Applied Optics Center realized increased cost of sales due to contract loss reserves which was driven by higher usage and the price of gold applied during the coating process on one of its product lines. The lower gross profit for the Applied Optics Center segment was somewhat offset by improved gross profit at the Optex Richardson segment on higher revenue, changes in product mix, improved labor performance on our periscope line and a reduction in loss contract deliveries as the long-term loss contracts have completed or are nearing completion. The consolidated gross margin percentage decreased from 26.0% to 22.9% in the current year period as compared to the prior year period.

Our operating income for the three months ended December 28, 2025 decreased by $0.8 million compared to the prior year period. The decrease in operating income was primarily driven by lower gross profit combined with higher general and administrative spending of $0.7 million during the current year period as compared to the prior year period. General and administrative spending increased due to higher labor and labor fringes of $0.5 million, increased stock compensation of $0.1 million and higher legal and IT support services of $0.1 million. Increased labor was primarily driven by the transition of the former and current Chief Executive Officer during the current year period, combined with the addition of the Optex Richardson General Manager position as well as other employee and structural changes within the engineering and administrative departments for both operating segments.

Non-GAAP Adjusted EBITDA

We use adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) as an additional measure for evaluating the performance of our business as "net income" includes the significant impact of noncash compensation expenses related to equity stock 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, 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 operating results for the periods ended December 28, 2025 and December 29, 2024, in terms of both the GAAP net income measure and the non-GAAP Adjusted EBITDA measure. We believe that including both measures allows the reader better to evaluate our overall performance.

		(Thousands) Three months ended
		December 28, 2025				December 29, 2024
Net Income (GAAP)		$	242			$	844
Add:
Non-recurring General and Administrative Expenses			277				-
Depreciation and Amortization			90				129
Federal Income Tax (Benefit) Expense			(45	)			59
Stock Compensation			212				92
Interest (Income) Expense, net			(48	)			13
Adjusted EBITDA - Non-GAAP		$	728			$	1,137

Our net income decreased by $0.6 million to $0.2 million for the three months ended December 28, 2025, as compared to $0.8 million for the prior year period. Our adjusted EBITDA decreased by $0.4 million to $0.7 million for the three months ended December 28, 2025, as compared to $1.1 million for the prior year period.

During the three-month period ending December 28, 2025, the Company incurred $0.3 million in increased general and administrative costs associated with higher salaries and fringes for Chad George, serving as President of Optex Systems Holdings. Danny Schoening retired as Chief Executive Officer effective on December 20, 2025, at which time Chad George assumed the role of the Company CEO. In addition, during the three-month period ending December 28, 2025, there were two senior level positions that were double staffed as retiring employees were training their hired replacements. With the resignation of Danny Schoening in December, and the retirement of the two senior level employees in early January 2026, we do not expect these expenses to recur beyond the first three months of fiscal year 2026.

The decrease is primarily driven by lower gross profit combined with increased general and administrative spending during the current year period as compared to the prior year period. Operating segment performance is discussed in greater detail throughout the following sections.

New Orders and Backlog

Product backlog represents the value of unfulfilled customer manufacturing orders yet to be recognized as revenue. While backlog is not a non-GAAP financial measure, it is also not defined by GAAP. Therefore, our methodology for calculating backlog may not be consistent with methodologies used by other companies. The booked backlog by period may also not be fully indicative of the predicted revenues for those periods as many of our orders provide for accelerated delivery without penalty and may additionally provide customers the option to adjust schedules to meet their most recent projected demand quantities. However, we provide customer order and backlog information as we believe it provides significant insight into forward demand, with some predictive power to short term future revenues.

During the three months ended December 28, 2025, the Company booked $7.9 million in new orders, representing a 31.7% increase over the prior year period orders of $6.0 million. The orders for the most recently completed three months consist of $3.8 million for our Optex Richardson segment and $4.1 million attributable to the Applied Optics Center segment.

The following table depicts the new customer orders for the three months ending December 28, 2025 as compared to the prior year period in millions of dollars:

		(Millions)
Product Line		Three months ended December 28, 2025				Three months ended December 29, 2024				Variance				% Chg
Periscopes		$	3.1			$	1.5			$	1.6				106.7	%
Sighting Systems			0.3				0.1				0.2				200.0	%
Other			0.4				1.0				(0.6	)			(60.0	)%
Optex Systems - Richardson			3.8				2.6				1.2				46.2	%
Optical Assemblies			2.5				0.7				1.8				257.1	%
Laser Filters			0.7				2.4				(1.7	)			(70.8	)%
Other			0.9				0.3				0.6				200.0	%
Applied Optics Center - Dallas			4.1				3.4				0.7				20.6	%
Total Customer Orders		$	7.9			$	6.0			$	1.9				31.7	%

Orders for the Optex Richardson segment increased by $1.2 million, or 46.2%, from the prior year period, primarily as a result of increased demand for our periscope products.

Orders for the Applied Optics Center increased by $0.7 million, or 20.6%, from the prior year period, primarily as a result of increased orders for our optical assemblies. Orders for the Applied Optics Center can be somewhat volatile from quarter to quarter depending on factors such as government funding and commercial sales levels of key customers. We are anticipating an increase in laser filter awards over the next three quarters as a result of the approved government appropriations bill in combination with our outstanding requests for proposals for or laser interface filters (LIF) and laser filter units (LFU) programs.

Backlog as of December 28, 2025 was $37.9 million as compared to a backlog of $42.0 million as of December 29, 2024, representing a decrease of 9.8%. The following table depicts the current expected delivery by quarter of all contracts awarded as of December 28, 2025, as well as the December 28, 2025 backlog as compared to the backlog on December 29, 2024.

		(Millions)
Product Line		Q2 2026				Q3 2026				Q4 2026				2026 Delivery				2027+ Delivery				Total Backlog 12/28/2025				Total Backlog 12/29/2024				Variance				% Chg
Periscopes		$	3.5			$	4.3			$	3.2			$	11.0			$	2.7			$	13.7			$	21.3			$	(7.6	)			(35.7	)%
Sighting Systems			1.2				2.5				0.7				4.4				1.1				5.5				3.4				2.1				61.8	%
Howitzer			-				-				-				-				2.3				2.3				2.3				-				-	%
Other			0.6				2.4				2.6				5.6				0.8				6.4				4.0				2.4				60.0	%
Optex Systems - Richardson			5.3				9.2				6.5				21.0				6.9				27.9				31.0				(3.1	)			(10.0	)%
Optical Assemblies			0.2				0.8				0.5				1.5				0.9				2.4				0.9				1.5				166.7	%
Laser Filters			1.8				1.1				1.3				4.2				1.3				5.5				8.3				(2.8	)			(33.7	)%
Day Windows			0.3				0.1				0.2				0.6				0.1				0.7				0.8				(0.1	)			(12.5	)%
Other			0.7				0.7				-				1.4				-				1.4				1.0				0.4				40.0	%
Applied Optics Center - Dallas			3.0				2.7				2.0				7.7				2.3				10.0				11.0				(1.0	)			(9.1	)%
Total Backlog		$	8.3			$	11.9			$	8.5			$	28.7			$	9.2			$	37.9			$	42.0			$	(4.1	)			(9.8	)%

Optex Richardson backlog as of December 28, 2025, was $27.9 million as compared to a backlog of $31.0 million as of December 29, 2024, representing an decrease of $3.1 million or 10.0%. The decreased backlog for the Optex Richardson segment is primarily driven by lower customer demand for periscopes.

Applied Optics Center backlog as of December 28, 2025 was $10.0 million as compared to a backlog of $11.0 million as of December 29, 2024, representing a decrease of $1.0 million or 9.1%. The decrease in backlog for the Applied Optics Center is primarily due to lower customer demand for laser filters. We attribute the lower demand to program delays resulting from the 2025 government shutdown and delay in funding the government appropriations bill for fiscal year 2026.

Subsequent to the period ended December 28, 2025, on February 6, 2026, the Applied Optics Center received a new order from a prime military contractor for laser interface filters valued at $2.2 million with deliveries to begin in the third fiscal quarter of 2026 and extend into the second fiscal quarter of 2027. We anticipate additional awards since the appropriations bill was approved on February 3, 2026.

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

Three Months Ended December 28, 2025 Compared to the Three Months Ended December 29, 2024

Revenue. For the three months ended December 28, 2025, revenue increased by $0.9 million or 11.6% compared to the prior year period as set forth in the table below:

		Three months ended
		(Thousands)
Product Line		December 28, 2025				December 29, 2024				Variance				% Chg
Periscopes		$	4,262			$	2,903			$	1,359				46.8	%
Sighting Systems			542				414				128				30.9	%
Other			521				98				423				431.6	%
Optex Systems - Richardson			5,325				3,415				1,910				55.9	%
Optical Assemblies			232				473				(241	)			(51.0	)%
Laser Filters			2,462				3,602				(1,140	)			(31.6	)%
Day Windows			312				292				20				6.8	%
Other			814				416				398				95.7	%
Applied Optics Center - Dallas			3,820				4,783				(963	)			(20.1	)%
Total Revenue		$	9,145			$	8,198			$	947				11.6	%

Optex Richardson revenue increased by $1.9 million or 55.9% for the three months ended December 28, 2025 as compared to the prior year period with increased production levels on the periscope product line combined with higher sighting system deliveries against our new XM30 display periscope assemblies and higher customer demand for muzzle reference systems and big eye binoculars in our other product group.

Applied Optics Center revenue decreased by $1.0 million or 20.1% for the three months ended December 28, 2025 as compared to the prior year period. The revenue decrease is primarily attributable to lower customer demand for laser filters and optical assemblies. We expect revenues to increase across laser filters and optical assemblies during the second half of fiscal year 2026 based on new order bookings and anticipated contract awards.

Gross Margin. The gross margin during the three-month period ended December 28, 2025 was 22.9% of revenue as compared to a gross margin of 26.0% of revenue for the prior year period. The decrease in gross profit is primarily attributable to changes in product mix between segments combined with increased losses on our AOC day window program with higher material usage and increased gold pricing associated with the coating process. Cost of sales increased to $7.0 million for the recently completed period as compared to the prior year period of $6.1 million due to increased revenue and material costs.

G&A Expenses. During the three months ended December 28, 2025 and December 29, 2024, we recorded operating expenses of $1.9 million and $1.2 million, respectively. Operating expenses increased by 58.3% over the prior year period primarily due to increased labor and fringes of $0.5 million, increased stock compensation of $0.1 million and increased legal and IT service costs of $0.1 million.

Operating Income. During the three months ended December 28, 2025, we recorded operating income of $0.1 million, as compared to operating income of $0.9 million during the three months ended December 29, 2024. The $0.8 million decrease in operating income is primarily due to lower gross profit and higher general and administrative costs.

Liquidity and Capital Resources

As of December 28, 2025, Optex Systems Holdings had working capital of $21.2 million, as compared to $21.1 million as of September 28, 2025. During the three months ended December 28, 2025, we used operating cash of $(0.1) million, primarily driven by increased inventory and payments against accounts payable. During the three months ended December 28, 2025, there were no borrowings or payments against the Texas Capital Facility (as defined below).

The Company has capital commitments of $0.5 million for the purchase of property and equipment including a DLC coater and prototype metal machining center.

Backlog as of December 28, 2025 was $37.9 million as compared to $42.0 million as of December 29, 2024, representing a decrease of 9.8%. For further details, see "Results of Operations - New Orders and Backlog" above.

The Company has historically funded its operations through cash from operations, convertible notes, common and preferred stock offerings and bank debt. The Company's ability to generate positive cash flows depends on a variety of factors, including the continued development and successful marketing of the Company's products.

At December 28, 2025, the Company had approximately $5.8 million in cash and no outstanding balance on our revolving credit line. As of December 28, 2025, our outstanding accounts receivable balance was $4.4 million, of which $4.1 million has been collected during January 2026.

In the short term, the Company plans to utilize its current cash, available line of credit and operating cash flow to fund the purchase of capital equipment, inventory, engineering resources and research and development in support of new programs and higher anticipated revenue during the next twelve months. Short term cash in excess of our working capital needs may be also be used to fund the purchase of product lines and other assets. We may also repurchase common stock under our stock repurchase plan. Longer term, excess cash beyond our operating needs may be used to fund new product development, company, product line or other asset acquisitions, or additional stock purchases as attractive opportunities present themselves.

On January 18, 2024, the Company acquired certain intellectual property and technical and marketing information relating to the Speedtracker Mach product line and entered into an asset purchase agreement and a contract manufacturing agreement with RUB Aluminium s.r.o. ("RUB"). The Company acquired the assets using $1 million cash on hand, with potential additional future cash payments based on successful completion of defined milestones. The initial term of the contract manufacturing agreement was one year, subject to additional one-year renewal terms. After the acquisition, the Company determined it would be more economical to move the manufacturing operations in house and is no longer ordering assembled units under the original contract manufacturing agreement. RUB will continue to provide the Company with purchased kit parts for the manufacture of the Speedtracker Mach products.

The acquisition included transaction costs of $30 thousand. Pursuant to the asset purchase agreement, the total earnout payment will be $238 thousand only if the earnout revenue milestone is achieved during the earnout period, otherwise the earnout will be zero. As of September 28, 2025, it was determined that the earnout revenue milestone was unlikely to be achieved during the earnout period and the fair value of the contingent liability was zero. The asset was amortized on a straight-line basis over a seven-year period through September 28, 2025. On September 28, 2025, the Company reviewed the intangible asset value based on the anticipated revenues and cash flow of the product line over the next five years and determined that the remaining asset value could not be recovered. As a result, the remaining $0.8 million of unamortized intangible assets was impaired and as of September 28, 2025 and December 28, 2025, the remaining balance of intangible assets is zero.

We refer to "Note 5 - Commitments and Contingencies - Non-cancellable Operating Leases" for a tabular depiction of our remaining minimum lease and estimated Common Area Maintenance ("CAM") payments under such leases as of December 28, 2025, which disclosure is incorporated herein by reference.

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

On March 22, 2023, the Company and its subsidiary, Optex Systems, Inc. (collectively, the "Borrowers"), entered into a Business Loan Agreement with Texas Capital Bank (the "Lender"), pursuant to which the Lender will make available to the Borrowers a revolving line of credit in the principal amount of $3 million.

The commitment period for advances under the credit facility expired on May 22, 2025. We refer to the expiration of that time period as the "Maturity Date." Outstanding advances under the facility accrued interest at a rate equal to the secured overnight financing rate ("SOFR") plus a specified margin, subject to a specified floor interest rate. The related agreement provided for a $125 thousand letter of credit sublimit.

On May 21, 2025, the Company and Optex Systems, Inc. renewed their existing credit facility with the Lender by entering into a new Business Loan Agreement (the "Loan Agreement"), effective May 22, 2025, pursuant to which the Lender will continue to make available a revolving line of credit in the principal amount of $3 million (the "Texas Capital Facility"). The commitment period for advances under the Texas Capital Facility is twenty-four months, expiring on May 22, 2027 (the "Maturity Date"). Outstanding advances under the Texas Capital Facility will accrue interest at a variable rate equal to SOFR plus a specific margin. The interest rate is currently at 6.4% per annum.

The Loan Agreement contains customary events of default and negative covenants, including but not limited to those governing capital expenditures (limited to $1 million per year), indebtedness and liens, affiliate transactions, fundamental changes (including change in management), investments, and restricted payments (including dividends). The Loan Agreement also requires the Borrowers to maintain a fixed charge coverage ratio of at least 1.25:1 and a total leverage ratio of 3.00:1. The Texas Capital Facility is secured by substantially all of the operating assets of the Borrowers as collateral. The Borrowers' obligations under the Texas Capital Facility are subject to acceleration upon the occurrence of an event of default as defined in the Loan Agreement. The Loan Agreement further provides for a $125,000 letter of Credit sublimit. As of December 28, 2025, the Company was in compliance with all covenants under the Texas Capital Facility.

As of December 28, 2025, the outstanding balance under the Texas Capital Facility was zero. For the quarter ended December 28, 2025, the total interest expense under the Texas Capital Facility was zero.

During the three months ended December 28, 2025 the Company declared and paid no dividends. As of December 28, 2025, there are no outstanding declared and unpaid dividends.

On February 9, 2026, the Board of Directors of the Company terminated the Company's existing stock repurchase program and approved a new stock repurchase program pursuant to which the Company may purchase up to $10,000,000 in shares of the Company's outstanding common stock (the "Repurchase Program"). The Repurchase Program allows the Company to purchase common stock from time to time through, among other methods, open market purchases, privately negotiated transactions, and/or pursuant to Rule 10b5-1 trading plans, subject to applicable securities laws and other legal requirements and relevant factors. The number of shares purchased and the timing of any purchases will depend upon a number of factors, including the price and availability of the Company's common stock and general market conditions. The Repurchase Program may be modified, suspended or terminated at any time, without prior notice.

Critical Accounting Estimates

A critical accounting estimate is an estimate that:

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is made in accordance with generally accepted accounting principles,

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involves a significant level of estimation uncertainty, and

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

Our significant accounting policies are fundamental to understanding our results of operations and financial condition. Some accounting policies require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. These policies are described in "Critical Policies and Accounting Pronouncements" and Note 2 (Accounting Policies) to consolidated financial statements in our Annual Report on Form 10-K for the year ended September 28, 2025.

Our critical accounting estimates include warranty costs, contract losses and the deferred tax asset valuation. Future warranty costs are based on the estimated cost of replacement for expected returns based upon our most recent experience rate of defects as a percentage of warranty covered sales. Our warranty covered sales primarily include the Applied Optics Center optical assemblies. While our warranty period is 12 months, our reserve balances assume a general 90-day return period for optical assemblies previously delivered plus any returned backlog in-house that has not yet been repaired or replaced to our customer. If our actual warranty returns should significantly exceed our historical rates on new customer products, significant production changes, or substantial customer changes to the 90-day turn-around times on returned goods, the impact could be material to our operating profit. We have not experienced any significant changes to our warranty trends in the preceding three years and do not anticipate any significant impacts in the near term. We monitor the actual warranty costs incurred to the expected values on a quarterly basis and adjust our estimates accordingly. As of December 28, 2025, the Company had accrued warranty costs of $168 thousand, as compared to $162 thousand as of September 28, 2025. The primary reason for the $6 thousand increase in reserve balances relates to estimated warranties accrued for shipments of the Applied Optics Center optical assemblies during the three month period ended December 28, 2025.

As of December 28, 2025 and September 28, 2025, we had $185 thousand, and $132 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 and day window contracts which were priced in 2019 to the early part of 2021, prior to Covid-19. Due to inflationary price increases on component parts and commodities and higher internal manufacturing costs (as a result of escalating labor costs and higher burden rates), two of our contracts are in a loss condition. These contracts are three-year Indefinite Delivery Indefinite Quantity ("IDIQ") contracts with two optional award years, and as such, we are obligated to accept new task awards against these contracts until the contract expiration. Should contract costs continue to increase above the negotiated selling price, or in the event the customer should release substantial quantities against these existing loss contracts, the losses could be material. For contracts currently in a loss status based on the estimated per unit contract costs, losses are booked immediately on new task order awards. During the three months ended December 28, 2025, the Company recognized $174 thousand in new loss reserves against the long term IDIQs, and made shipments resulting in reductions of $121 thousand against existing loss reserves. During the three months ended December 29, 2024, the Company recognized $7 thousand in loss reserves on new contract awards and made shipments resulting in reductions of $53 thousand against existing loss reserves. Both contracts have ordering periods which have expired and are no longer subject to new contract task awards.

As of December 28, 2025 and September 28, 2025, Optex Systems, Holdings Inc. had a net carrying value of $1.2 million in deferred tax assets represented by deferred tax assets of $2.0 and a deferred tax asset valuation allowance of $0.8 million against those assets. The valuation allowance covers certain deferred tax assets where we believe we will be unlikely to recover those tax assets through future operations. The valuation reserve includes assumptions related to future taxable income which would be available to cover net operating loss carryforward amounts. Because of the uncertainties of future income forecasts combined with the complexity of some of the deferred assets, these forecasts are subject to change over time. While we believe our current estimate to be reasonable, changing market conditions and profitability, changes in equity structure and changes in tax regulations may impact our estimated reserves in future periods.