What changed in Optex Systems Holdings Inc's 10-K — 2022 vs 2023

Item 1. Business Recent Events ” of this report for updated information on new orders, board changes, executive and board compensation and stock and warrant repurchases. 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.

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 (to which we refer below as the Optex Systems segment or Optex Systems), and the Applied Optics Center, Dallas plant, which was acquired on November 3, 2014 (to which we refer below as the Applied Optics Center segment or Applied Optics Center), 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 years ended October 3, 2021 and September 27, 2020 reconciled to the Audited Consolidated Results of Operations as presented in Item 8, “Financial Statements and Supplementary Data”.

Results of Operations Selective Financial Info (Thousands) Twelve months ended October 3, 2021 September 27, 2020 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 $ 11,827 $ 6,395 $ - $ 18,222 $ 17,233 $ 8,657 $ - $ 25,890 Intersegment Revenues - 1,056 (1,056 ) - - 1,689 (1,689 ) - Total Segment Revenue 11,827 7,451 (1,056 ) 18,222 17,233 10,346 (1,689 ) 25,890 Total Cost of Sales 9,934 6,824 (1,056 ) 15,702 13,517 7,974 (1,689 ) 19,802 Gross Margin 1,893 627 - 2,520 3,716 2,372 - 6,088 Gross Margin % 16.0 % 8.4 % - 13.8 % 21.6 % 22.9 % - 23.5 % General and Administrative Expense 2,319 467 228 3,014 2,439 569 197 3,205 Segment Allocated G&A Expense (677 ) 677 - - (673 ) 673 - - Net General & Administrative Expense 1,642 1,144 228 3,014 1,766 1,242 197 3,205 Operating Income (Loss) 251 (517 ) (228 ) (494 ) 1,950 1,130 (197 ) 2,883 Operating Income (Loss) % 2.1 % (6.9 %) - (2.7 %) 11.3 % 10.9 % - 11.1 % Gain (Loss) on Change in Fair Value of Warrants - - 2,535 2,535 - - (508 ) (508 ) Interest Expense - - (11 ) (11 ) - - (19 ) (19 ) Income (Loss) before taxes $ 251 $ (517 ) $ 2,296 $ 2,030 $ 1,950 $ 1,130 $ (724 ) $ 2,356 Income (loss) before taxes % 2.1 % (6.9 %) - 11.1 % 11.3 % 10.9 % - 9.1 % Our total external sales revenues decreased by $7.7 million in 2021, or 29.6% compared to 2020 revenue levels.

The Optex Systems segment realized a $5.4 million decrease and the Applied Optics Center segment realized a decrease of $2.3 million in external revenue compared to the prior year period. Intersegment revenues decreased by $0.6 million to $1.1 million in 2021 from $1.7 million in 2020.

Intersegment revenues relate primarily to coated filters provided by the Applied Optics Center to Optex Systems in support of the Optex Systems periscope line. 30 Gross margin decreased $3.6 million and the gross margin percentage decreased by 9.7 points from 23.5% in 2020 to 13.8% in 2021.

The Optex Systems gross margin decreased by $1.8 million in 2021 compared to 2020 and the gross margin percentage decreased to 16.0% in 2021 as compared to a gross margin percentage of 21.6% in 2020.

The Applied Optics Center gross margin decreased by $1.7 million and the gross margin percentage decreased by 14.5 points from 22.9% in 2020 to 8.4% in 2021.

The erosion in the gross margin percentage between years is primarily driven by lower revenue across both segments, changes in product mix toward less profitable product groups, and unfavorable manufacturing overhead adjustments on reduced production volume.

During the years ended 2021 and 2020, Applied Optics Center absorbed $0.7 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.

Operating income decreased by $3.4 million, in 2021 to a loss of $(0.5) million, as compared to the prior year operating income of $2.9 million.

The decrease in operating income is primarily attributable to lower revenue and lower gross margin during the year partially offset by slightly lower general and administrative costs of $0.2 million as compared to the prior year. Income before taxes decreased $0.3 million, to $2.0 million in 2021 from a prior year income before taxes of $2.4 million.

The decrease in income before taxes year over year is primarily due to decreased operating income of $3.4 million, offset by an increase in income for non-cash related changes to the fair value of warrants of $3.0 million.

Backlog Backlog as of October 3, 2021 was $27.3 million as compared to a backlog of $16.3 million as of September 27, 2020, representing an increase of 67.5%. The following table depicts the current expected delivery by quarter of all contracts awarded as of October 3, 2021. The increased backlog was primarily within our Applied Optics Center segment.

(Millions) Product Line Q1 2022 Q2 2022 Q3 2022 Q4 2022 2022 Delivery 2023+ Delivery Total Backlog 10/3/2021 Total Backlog 9/27/2020 Variance % Chg Periscopes $ 1.0 $ 0.9 $ 1.8 $ 0.7 $ 4.4 $ 1.2 $ 5.6 $ 5.3 $ 0.3 5.7 % Sighting Systems 0.3 0.1 0.1 0.1 0.6 1.1 1.7 2.9 (1.2 ) (41.4 )% Howitzer - - 0.1 0.2 0.3 2.0 2.3 2.5 (0.2 ) (8.0 )% Other 0.4 0.5 0.1 0.2 1.1 0.3 1.4 2.5 (1.1 ) (44.0 )% Optex Systems - Richardson 1.7 1.5 2.1 1.2 6.4 4.6 11.0 13.2 (2.2 ) (16.7 )% Applied Optics Center - Dallas 2.4 3.1 2.5 2.8 10.9 5.4 16.3 3.1 13.2 425.8 % Total Backlog $ 4.1 $ 4.6 $ 4.6 $ 4.0 $ 17.3 $ 10.0 $ 27.3 $ 16.3 $ 11.0 67.5 % During fiscal year 2021, Optex Systems Holdings received new orders totaling $29.2 million, a 65.9% increase, as compared to new orders of $17.6 million during the prior year.

The 2021 orders consist of $7.6 million in support of our periscope product line, $19.6 million attributable to the Applied Optics Center and $1.2 million attributable to sighting systems and support, and $0.8 million in other products.

During the eighteen months through October 3, 2021, we experienced a reduction in new orders and ending customer backlog in our Optex Richardson segment.

We attribute the lower orders to a combination of factors including a COVID-19 driven slow-down of contract awards for both U.S. military sales and foreign military sales (FMS), primarily during the second half of fiscal year 2020, combined with significant shifting in defense spending budget allocations in US military sales and FMS away from Army ground system vehicles toward other military agency applications.

In addition, the pandemic has caused several program delays throughout the defense supply chain as a result of plant shutdowns, employee illnesses, travel restrictions, remote work arrangements and similar supplier chain issues.

Our Applied Optics Center segment experienced a significant decline in orders during the second half of fiscal year 2020, however during the last twelve months, the segment has seen a sizable increase in new orders as a result of increased military spending in Army infantry optical equipment and an increased customer base. 31 Optex Systems - Richardson: During the twelve months ended October 3, 2021, backlog for our Optex Richardson segment decreased by 16.7%, or 2.2 million to $11.0 million, as compared to the prior year ending backlog of $13.2 million.

Backlog for our periscope product line has increased 5.7% or $0.3 million to $5.6 million, from our 2020 fiscal year end level of $5.3 million. Our total periscope contract awards for fiscal 2021 totaled $7.6 million as compared to $6.2 million in the fiscal year 2020, an increase of $1.4 million, or 22.6% from the prior year.

Sighting Systems backlog decreased by $1.2 million or 41.4% from $2.9 million in fiscal year 2020 to $1.7 million as of the end of fiscal year 2021. The decrease in backlog is primarily attributable shipments against several of our long running Commander Weapon Sighting Systems “CWSS”, Digital Day and Night Sighting Systems “DDAN” contracts awarded during the prior years.

During 2021, we booked $1.2 million in new orders, an increase of $0.2 million from the prior year orders of $1.0 million. Howitzer backlog decreased by $0.2 million, or 8.0%, from $2.5 million to $2.3 million, on shipments against our Aiming Circle XM10 contract for optical assemblies which was awarded in fiscal year 2020.

During the year, there were no new orders for howitzer assemblies as compared to $2.3 million in the prior year. Our backlog in other product groups decreased by $1.1 million or 44.0% from $2.5 million in 2020 to $1.4 million in 2021 on shipments against our long running Muzzle Reference Sensor Collimator Assembly “MRS” contracts.

During 2021, we booked new orders of $0.8 million as compared to the prior year orders of $2.7 million.

The Optex Systems Richardson segment, currently has seven open US Government IDIQ type military contracts for periscopes with substantial unspent funding which covers government base year and option year requirement periods into 2025, in addition to a significant pricing proposal in process for sighting system support with an expected award during the next six months.

Applied Optics Center – Dallas The Applied Optics Center backlog increased by $13.2 million, or 425.8%, for the year ended October 3, 2021, from $3.1 million in 2020 to $16.3 million in 2021.

New orders for the Applied Optics Center during the 2021 fiscal year were $19.6 million as compared to the fiscal year 2020 orders of $5.4 million, an increase of $14.2 million or 263.0%.

We are seeing increases in demand and proposal activity for both laser coated filters and optical assemblies and anticipate additional order bookings for both our commercial and military products for deliveries beginning in fiscal year 2022.

On August 2, 2021, the Company announced a contract award of $8.4 million with a new customer as part of a twenty-four-month purchase order for laser filter units and on September 21, 2021, the Company announced a $3 million commercial order for optical devices.

Optex Systems Holdings continues to pursue new international and commercial opportunities in addition to maintaining its current footprint with U.S. military vehicle manufactures, 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 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. 32 Twelve month period ended October 3, 2021 compared to the twelve month period ended September 27, 2020 Revenues: The table below details the revenue changes by segment and product line for the year ended October 3, 2021 as compared to the year ended September 27, 2020.

Twelve months ended (Millions) Product Line October 3, 2021 September 27, 2020 Variance % Chg Periscopes $ 7.2 $ 11.3 $ (4.1 ) (36.3 ) Sighting Systems 2.3 2.2 0.1 4.5 Howitzers 0.2 - 0.2 - Other 2.1 3.7 (1.6 ) (43.2 ) Optical Systems – Richardson 11.8 17.2 (5.4 ) (31.4 ) Applied Optics Center – Dallas 6.4 8.7 (2.3 ) (26.4 ) Total Revenue $ 18.2 $ 25.9 $ (7.7 ) (29.7 ) Our total revenues decreased by $7.7 million, or 29.7% in 2021 compared to 2020 revenue levels.

The Optex Systems Richardson segment realized a $5.4 million, or 31.4%, decrease in revenue and the Applied Optics Center segment realized a decrease of $2.3 million, or 26.4%, in revenue compared to the prior year period.

Revenues decreased by $4.1 million or 36.3% on our periscope line during the twelve months ended October 3, 2021 as compared to the twelve months ended September 27, 2020 based on lower customer demand between the respective periods.

Revenues on sighting systems increased by $0.1 million, or 4.5% from the prior year period due to shipments of Commander Weapon Sighting Systems against existing prior year contracts. Revenue on Howitzers increased by $0.2 million, compared to revenues of zero in the prior year due to shipments against our Aiming Circle XM10 optical assemblies contract awarded in 2020.

Revenue on other product lines decreased by $1.6 million, or 43.2%, compared to revenues in the prior year due to lower contract demand on MRS collimators and cell assemblies. The Applied Optics Center external revenue decreased by $2.3 million, or 26.4%, during 2021 as compared to the prior year period.

The lower revenue was primarily driven by lower customer orders across coated filter and optical assembly lines. We expect revenue for the Applied Optics Center to increase in the next year consistent with recent increases in customer demand for optical assemblies and laser filter units. Gross Margin .

The gross margin for the year ended October 3, 2021 was 13.8% of revenue as compared to a gross margin of 23.5% of revenue for the year ended September 27, 2020. Cost of sales decreased by $4.1 million to $15.7 million for 2021 compared to $19.8 million for 2020 on reduced revenue.

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 .