Optex Systems (US:OPXS)2025-08-12 11:01PART I— FINANCIAL INFORMATION Item 1. Unaudited Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and stockholders' equity, along with detailed notes explaining the company's organization, accounting policies, segment performance, commitments, debt, stock-based compensation, asset acquisitions, and subsequent events. The financial statements show significant growth in revenue, net income, and cash from operations for the nine months ended June 29, 2025 Condensed Consolidated Balance Sheets The balance sheets reflect significant increases in cash and stockholders' equity, alongside a decrease in total liabilities | Metric | June 29, 2025 (Thousands) | September 29, 2024 (Thousands) | Change (Thousands) | % Change | | :-------------------------- | :-------------------------- | :----------------------------- | :----------------- | :------- | | Cash and Cash Equivalents | $4,871 | $1,009 | $3,862 | 382.8% | | Total Assets | $29,180 | $25,518 | $3,662 | 14.4% | | Total Liabilities | $6,046 | $6,710 | ($664) | (9.9)% | | Stockholders' Equity | $23,134 | $18,808 | $4,326 | 23.0% | | Retained Earnings (Accumulated Deficit) | $1,458 | ($2,664) | $4,122 | N/A | Condensed Consolidated Statements of Operations The statements of operations show strong revenue and net income growth for both the three and nine months ended June 29, 2025 | Metric | Three months ended June 29, 2025 (Thousands) | Three months ended June 30, 2024 (Thousands) | % Change | | :-------------------- | :--------------------------------------- | :--------------------------------------- | :------- | | Revenue | $11,110 | $9,060 | 22.6% | | Gross Profit | $3,168 | $2,881 | 10.0% | | Operating Income | $1,911 | $1,615 | 18.3% | | Net Income | $1,510 | $1,261 | 19.7% | | Basic income per share | $0.22 | $0.19 | 15.8% | | Diluted income per share | $0.22 | $0.18 | 22.2% | | Metric | Nine months ended June 29, 2025 (Thousands) | Nine months ended June 30, 2024 (Thousands) | % Change | | :-------------------- | :-------------------------------------- | :-------------------------------------- | :------- | | Revenue | $30,038 | $24,552 | 22.3% | | Gross Profit | $8,658 | $7,122 | 21.6% | | Operating Income | $5,065 | $3,523 | 43.8% | | Net Income | $4,122 | $2,754 | 49.7% | | Basic income per share | $0.60 | $0.41 | 46.3% | | Diluted income per share | $0.60 | $0.40 | 50.0% | Condensed Consolidated Statements of Cash Flows The cash flow statements indicate a substantial increase in net cash provided by operating activities and a significant rise in cash and cash equivalents | Cash Flow Activity | Nine months ended June 29, 2025 (Thousands) | Nine months ended June 30, 2024 (Thousands) | Change (Thousands) | % Change | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | :----------------- | :------- | | Net Cash provided by Operating Activities | $5,368 | $1,028 | $4,340 | 422.2% | | Net Cash used in Investing Activities | ($463) | ($1,503) | $1,040 | (69.2)% | | Net Cash used in Financing Activities | ($1,043) | ($243) | ($800) | 329.2% | | Net Increase (Decrease) in Cash and Cash Equivalents | $3,862 | ($718) | $4,580 | N/A | | Cash and Cash Equivalents at End of Period | $4,871 | $486 | $4,385 | 902.3% | Condensed Consolidated Statements of Stockholders' Equity The statements of stockholders' equity detail changes in total equity, retained earnings, and additional paid-in capital | Metric | June 29, 2025 (Thousands) | September 29, 2024 (Thousands) | Change (Thousands) | | :-------------------------- | :-------------------------- | :----------------------------- | :----------------- | | Total Stockholders' Equity | $23,134 | $18,808 | $4,326 | | Retained Earnings (Accumulated Deficit) | $1,458 | ($2,664) | $4,122 | | Additional Paid in Capital | $21,669 | $21,465 | $204 | - The company issued 16,181 shares for vesting of restricted stock units and restricted shares during the three and nine months ended June 29, 202595 Notes to Condensed Consolidated Financial Statements These notes provide essential details on the company's organization, accounting policies, segment performance, and other financial commitments Note 1 - Organization and Operations This note describes the company's primary business, customer base, and revenue sources - Optex Systems Holdings manufactures optical sighting systems and assemblies primarily for the U.S. Department of Defense, foreign military applications, and commercial markets20 - For the nine months ended June 29, 2025, 94% of total revenue was from domestic customers and 6% from foreign customers (Canada and Israel)20 - The company's revenue sources include the U.S. government (32%), four major U.S. defense contractors (18%, 7%, 6%, 5%), and other customers (32%)20 Note 2 - Accounting Policies This note outlines the company's significant accounting policies, including inventory, accounts receivable, and various liabilities | Inventory Component | June 29, 2025 (Thousands) | September 29, 2024 (Thousands) | | :------------------ | :-------------------------- | :----------------------------- | | Raw Material | $7,536 | $9,460 | | Work in Process | $7,577 | $5,954 | | Finished Goods | $466 | $556 | | Gross Inventory | $15,579 | $15,970 | | Less: Inventory Reserves | ($1,065) | ($1,107) | | Net Inventory | $14,514 | $14,863 | - Accounts receivable as of June 29, 2025, are concentrated with U.S. government agencies (17%) and five major U.S. defense contractors (26%, 14%, 13%, 5%, and 5%)25 | Metric | June 29, 2025 (Thousands) | September 29, 2024 (Thousands) | | :-------------------- | :-------------------------- | :----------------------------- | | Accrued Warranty Liability | $173 | $52 | | Contract Loss Reserves | $423 | $259 | | Deferred Tax Asset (Net) | $852 | $947 | | Service Contract Revenue | Three months ended June 29, 2025 (Thousands) | Three months ended June 30, 2024 (Thousands) | Nine months ended June 29, 2025 (Thousands) | Nine months ended June 30, 2024 (Thousands) | | :----------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Service Contract Revenue | $133 | $126 | $385 | $357 | Note 3 - Segment Reporting This note details the company's two reportable segments, their operational differences, and revenue contributions - The company operates two reportable segments: Optex Richardson and Applied Optics Center (AOC), managed separately due to differences in manufacturing technology, equipment, and product mix40 | Segment | Nine months ended June 29, 2025 External Revenue (Thousands) | % of Total Consolidated Revenue | | :-------------------- | :--------------------------------------------------- | :------------------------------ | | Optex Richardson | $16,572 | 55% | | Applied Optics Center | $13,466 | 45% | - Optex Richardson's external segment revenue for the nine months ended June 29, 2025, was approximately 89% domestic military and 11% foreign military42 - Applied Optics Center's external segment revenue for the nine months ended June 29, 2025, was approximately 89% military and 11% commercial44 Note 4 - Commitments and Contingencies This note describes the company's lease obligations and other potential liabilities - The company leases its office and manufacturing facilities for both Optex Richardson and Applied Optics Center locations, with leases extending to May 2028 and December 2028, respectively535455 | Metric | June 29, 2025 (Thousands) | | :-------------------------- | :-------------------------- | | Total Operating Lease Liability | $1,991 | | Short-term portion | $645 | | Long-term portion | $1,346 | | Right-of-use Asset | $1,836 | | Lease Expense | Three months ended June 29, 2025 (Thousands) | Three months ended June 30, 2024 (Thousands) | Nine months ended June 29, 2025 (Thousands) | Nine months ended June 30, 2024 (Thousands) | | :-------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Facility Leases | $233 | $223 | $703 | $681 | | Office Equipment | $6 | $6 | $20 | $19 | Note 5 - Debt Financing This note provides information on the company's revolving credit facility and outstanding debt balances - The company renewed its $3 million revolving credit facility with Texas Capital Bank, extending the commitment period to May 22, 202765 - The outstanding balance under the Texas Capital Facility was zero as of June 29, 2025, compared to $1.0 million as of September 29, 202467 - The interest rate on advances is a variable rate equal to SOFR plus a specified margin, currently 7.10% per annum65 Note 6 - Stock Based Compensation This note details the company's stock-based compensation plans, outstanding awards, and related expenses - As of June 29, 2025, there were 75,000 unvested restricted stock units and 22,800 unvested restricted shares outstanding7578 - All performance shares granted on May 3, 2023, to the CEO and CFO have fully vested as of June 29, 202583 | Stock Compensation Expense | Three months ended June 29, 2025 (Thousands) | Three months ended June 30, 2024 (Thousands) | Nine months ended June 29, 2025 (Thousands) | Nine months ended June 30, 2024 (Thousands) | | :------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Total Stock Compensation | $83 | $90 | $247 | $360 | Note 7 - Asset Purchase of Intellectual Property This note describes the acquisition of intellectual property and its impact on intangible assets - On January 18, 2024, the company acquired intellectual property for the Speedtracker Mach product line for $1 million cash87 - The company decided to move the manufacturing operations for Speedtracker Mach products in-house, discontinuing orders for assembled units from RUB Aluminium s.r.o87155 - The potential earnout payment of $238 thousand was deemed unachievable as of September 29, 2024, and its fair value was set to zero88156 | Intangible Assets | June 29, 2025 (Thousands) | September 29, 2024 (Thousands) | | :-------------------------------- | :-------------------------- | :----------------------------- | | Intangible Assets – Intellectual Property Acquisition | $1,030 | $1,030 | | Software App Development | $30 | $20 | | Amortization of Intangible Assets | ($215) | ($99) | | Net Intangible Assets | $845 | $951 | Note 8 - Stockholders' Equity This note provides details on changes in common shares outstanding and dividend policies - No dividends were declared or paid during the three and nine months ended June 29, 2025, or the twelve months ended September 29, 202492 - Total outstanding common shares increased to 6,912,919 as of June 29, 2025, from 6,873,938 as of September 29, 202496 Note 9 - Subsequent Events This note reports significant events occurring after the balance sheet date, including executive appointments - Effective August 10, 2025, the Board amended the company's Bylaws to create a new Chief Executive Officer position, allowing for separate CEO and President roles97 - Effective August 11, 2025, Chad George was appointed as the new President, while Danny Schoening continues as Chairman and Chief Executive Officer98 - Mr. George's employment agreement includes an initial annual base salary of $300,000, eligibility for a performance bonus, and a grant of 10,000 restricted shares vesting on January 1, 202699100102 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, liquidity, and capital resources. It highlights significant increases in revenue, net income, and Adjusted EBITDA, driven by increased customer demand and improved production. Challenges include commodity cost increases and past supply chain issues, but the company is actively managing these. New orders and backlog have seen some fluctuations, with a decrease in overall orders but strategic new contract awards. The company maintains a strong liquidity position and has renewed its credit facility Cautionary Note Regarding Forward-Looking Information This note advises readers about forward-looking statements, their inherent risks, and uncertainties that could affect actual results - The report contains forward-looking statements about future events, including growth strategy, financial performance, orders, and product development107 - These statements involve risks and uncertainties, such as defense funding, economic conditions, competition, supply chain challenges, and integration of acquisitions, which could cause actual results to differ materially108 - Readers are cautioned not to place undue reliance on forward-looking statements and are advised to review the 'Risk Factors' section in the Annual Report on Form 10-K108109 Background This section provides an overview of Optex Systems' core business, its primary customers, and the regulatory environment for its contracts - Optex Systems, Inc. manufactures optical sighting systems and assemblies primarily for the Department of Defense, serving as both a prime and sub-prime contractor110 - Products are installed on U.S. military land vehicles (e.g., Abrams, Bradley, Stryker) and supplied to foreign governments (e.g., Israel, Australia)110111 - Contracts are subject to Federal Acquisition Regulation (FAR) clauses, including those for termination for convenience or default113114 Material Trends and Recent Developments This section discusses key operational trends, including commodity cost impacts, past supply chain issues, and improvements in production levels - Increased costs of aluminum, steel, and acrylic commodities since 2021 have negatively affected Optex Richardson segment margins for older fixed-price contracts, with impacts expected through Q1 2026115 - Past material and labor shortages in fiscal year 2023 and early 2024 impacted periscope production and delivery dates116 - Periscope production levels increased by 74% in the first nine months of fiscal year 2025 compared to the prior year, due to improvements in supplier performance and increased labor force117 - The company does not anticipate significant material risks from recent tariff uncertainties, as defense products are primarily domestically sourced or duty-free118 Results of Operations This section analyzes the company's financial performance, including revenue, gross profit, operating income, and net income trends Non-GAAP Adjusted EBITDA This section presents Adjusted EBITDA as a non-GAAP measure to evaluate business performance, excluding specific non-cash and financing items - Adjusted EBITDA is used as a supplemental measure to evaluate business performance, excluding non-cash compensation, depreciation, amortization, interest, and taxes120 | Metric | Three months ended June 29, 2025 (Thousands) | Three months ended June 30, 2024 (Thousands) | % Change | | :-------------------- | :--------------------------------------- | :--------------------------------------- | :------- | | Net Income (GAAP) | $1,510 | $1,261 | 19.7% | | Adjusted EBITDA (Non-GAAP) | $2,125 | $1,837 | 15.7% | | Metric | Nine months ended June 29, 2025 (Thousands) | Nine months ended June 30, 2024 (Thousands) | % Change | | :-------------------- | :-------------------------------------- | :-------------------------------------- | :------- | | Net Income (GAAP) | $4,122 | $2,754 | 49.7% | | Adjusted EBITDA (Non-GAAP) | $5,698 | $4,224 | 34.9% | Selective Financial Information This section provides a detailed breakdown of key financial metrics, including revenue, gross profit, and operating income, for specific periods | Metric | Three months ended June 29, 2025 (Thousands) | Three months ended June 30, 2024 (Thousands) | % Change | | :-------------------- | :--------------------------------------- | :--------------------------------------- | :------- | | Total Revenue | $11,110 | $9,060 | 22.6% | | Gross Profit | $3,168 | $2,881 | 10.0% | | Gross Margin % | 28.5% | 31.8% | (3.3) pp | | Operating Income | $1,911 | $1,615 | 18.3% | | Metric | Nine months ended June 29, 2025 (Thousands) | Nine months ended June 30, 2024 (Thousands) | % Change | | :-------------------- | :-------------------------------------- | :-------------------------------------- | :------- | | Total Revenue | $30,038 | $24,552 | 22.3% | | Gross Profit | $8,658 | $7,122 | 21.6% | | Gross Margin % | 28.8% | 29.0% | (0.2) pp | | Operating Income | $5,065 | $3,523 | 43.8% | - Optex Richardson revenue increased by 46.3% for the three months and 34.3% for the nine months ended June 29, 2025, primarily due to increased periscope production141146 - Applied Optics Center revenue decreased by 2.6% for the three months but increased by 10.3% for the nine months ended June 29, 2025, driven by military filters, day windows, and other products, partially offset by lower optical assembly demand142147 New Orders and Backlog This section discusses trends in new customer orders and the company's total backlog, highlighting segment-specific changes and recent contract awards - New orders for the nine months ended June 29, 2025, decreased by 14.8% to $24.1 million compared to the prior year period135136 - The decrease in new orders was primarily due to a 43.2% decrease in Optex Richardson segment orders, partially offset by a 38.8% increase at the Applied Optics Center135 | Metric | June 29, 2025 (Millions) | June 30, 2024 (Millions) | % Change | | :-------------------- | :----------------------- | :----------------------- | :------- | | Total Customer Orders | $24.1 | $28.3 | (14.8)% | | Total Backlog | $38.3 | $45.6 | (16.0)% | - Optex Richardson backlog decreased by 21.4% to $25.7 million, while Applied Optics Center backlog decreased by 2.3% to $12.6 million138 - The company announced a $2.8 million order for the XM30 combat vehicle and a five-year requirement-type contract for Abrams-based optical sighting systems in July 2025136 Liquidity and Capital Resources This section assesses the company's working capital, cash flow generation, available credit, and future capital allocation plans - Working capital increased to $19.4 million as of June 29, 2025, from $15.1 million as of September 29, 2024150 - The company generated $5.4 million in operating cash flow for the nine months ended June 29, 2025, driven by increased net income, inventory reductions, and higher accounts payable150 - As of June 29, 2025, the company had $4.9 million in cash and no outstanding draws against its $3 million revolving credit line, which was renewed until May 22, 2027153161163 - Future plans include utilizing cash and credit for inventory purchases, potential product line acquisitions, and common stock repurchases154 Critical Accounting Estimates This section explains the company's critical accounting estimates, including warranty costs, contract loss reserves, and deferred tax asset valuation - Critical accounting estimates include warranty costs, contract loss reserves, and deferred tax asset valuation164 - Accrued warranty costs increased to $173 thousand as of June 29, 2025, primarily due to a potential warranty issue on Applied Optics Day Windows165 - Contract loss reserves increased to $423 thousand as of June 29, 2025, due to inflationary pressures on material and labor, increased manufacturing overhead, rework, and labor inefficiencies on older fixed-price contracts167 - A deferred tax asset valuation allowance of ($0.8) million is maintained against deferred tax assets of $1.6 million due to historical losses and IRS Section 382 limitations168 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that this item is not applicable, indicating no material quantitative or qualitative disclosures about market risk are required - This section is not applicable to the company169 Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 29, 2025. No material changes in internal control over financial reporting occurred during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 29, 2025170 - There were no material changes in internal control over financial reporting during the three months ended June 29, 2025171 PART II— OTHER INFORMATION Item 1. Legal Proceedings The company is not aware of any material litigation pending or threatened against it - The company is not aware of any material litigation pending or threatened172 Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Form 10-K for the year ended September 29, 2024 - No material changes in risk factors since the Form 10-K filed for the year ended September 29, 2024173 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no purchases of equity securities by the issuer or any affiliated purchaser during the three months ended June 29, 2025 - No purchases of equity securities by the issuer or any affiliated purchaser during the three months ended June 29, 2025174 Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities175 Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine safety disclosures are not applicable to the company176 Item 5. Other Information This item is not applicable to the company - This item is not applicable to the company177 Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including the Business Loan Agreement, certifications, and XBRL documents - Key exhibits include the Business Loan Agreement (effective May 22, 2025), Certifications pursuant to Section 302 and 906 of Sarbanes Oxley Act of 2002, and Inline XBRL documents178