Note 1 - Organization and Operations

On March 30, 2009, Optex Systems Holdings, Inc. (formerly known as Sustut Exploration, Inc.), a Delaware corporation (“Optex Systems Holdings” or the “Company”), along with Optex Systems, Inc., a privately held Delaware corporation (“Optex Systems, Inc.”), which is a wholly-owned subsidiary of Optex Systems Holdings, entered into a reorganization agreement, pursuant to which Optex Systems, Inc. was acquired by Optex Systems Holdings in a share exchange transaction. Optex Systems Holdings became the surviving corporation. At the closing, there was a name change from Sustut Exploration, Inc. to Optex Systems Holdings, Inc., and its year end changed from December 31 to a fiscal year ending on the Sunday nearest September 30.

Optex Systems Holdings’ operations are based in Dallas and Richardson, Texas in leased facilities comprising approximately 93,733 square feet. As of June 28, 2015, Optex Systems Holdings operated with 82 full-time equivalent employees.

Optex Systems Holdings manufactures optical sighting systems and assemblies, primarily for Department of Defense and foreign military applications. 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 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. On November 3, 2014, Optex Systems, Inc. purchased the assets comprising the Applied Optics Products Line of L-3 Communications, Inc., a thin film coating manufacturer for lenses used primarily in the defense industry.

On May 26, 2015, and effective as of May 21, 2015, Optex Systems Holdings entered into a supply agreement with Nightforce Optics, Inc. for supply by Optex Systems Holdings to Nightforce of certain critical optical assemblies through the Applied Optics Center Division. The production rate and delivery schedule shall be agreed upon by the parties and are subject to aggregate annual minimum order values of $3,000,000 in 2015 and $3,900,000 in 2016. The initial term of the agreement is two years, and can be extended by Nightforce for an additional year which continues the forecasted volumes for three years. Optex Systems Holdings is the premium supplier of the covered products to Nightforce, and Optex Systems Holdings agrees to work exclusively with Nightforce on its markets of interest in commercial sporting optics and select military optics; however, Optex Systems Holdings’ existing business arrangements with certain Department of Defense manufacturers are not subject to this exclusivity covenant.

On May 5, 2015, Optex Systems Holdings received a written notification from OTC Markets that its bid price for its common stock closed below $0.01 for more than 30 consecutive calendar days and no longer meets the Standards for Continued Eligibility for OTCQB as set forth in Section 2.3(2) of the OTCQB Standards.

The notification does not result in the immediate removal of the Company's common stock, and its common stock will continue to trade uninterrupted on the OTCQB. Pursuant to the OTCQB Standards, the Company has been granted a period of 180 calendar days in which to regain compliance with this minimum bid price standard. The 180 calendar day grace period ends on November 1, 2015, and if the Company’s bid price has not closed at or above $0.01 for any ten day consecutive period.

On May 15 2015, our board of directors and the shareholders holding a majority of our issued and outstanding Common Stock approved an amendment to our Certificate of Incorporation to effect a reverse stock split which combines the outstanding shares of our common stock into a lesser number of outstanding shares in a ratio of not less than 1:400 nor more than 1:600. On July 22, 2015, our Board of Directors unanimously confirmed our reverse split in the ratio of 1:600 to all shareholders which will take effect on a future date, yet to be determined.

As of June 28, 2015, Optex Systems Holdings had working capital of $5.4 million, as compared to $6.5 million as of September 28, 2014. During the nine-months ended June 28, 2015, the Company experienced a net loss of ($202) thousand and a 5.7% or $0.4 million increase in revenues, to $7.8 million from $7.4 million, as compared to the nine-months ended June 29, 2014.  The Applied Optics Center, which Optex Systems Holdings acquired on November 3, 2014, contributed 39.8%, or $3 million toward the current fiscal year revenue, which offset an otherwise (35.3)%, or ($2.6) million decrease in the Optex Systems Holdings base revenue excluding the acquisition. The increased general and administrative costs associated with the Applied Optics Center product line through June 28, 2015 was $0.6 million. U.S. military spending has been significantly reduced as a result of the Congressional sequestration cuts to defense spending, which began in fiscal year 2013. As a result of lower U.S. government 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. Backlog has increased by $2.0 million over prior year backlog, of which, $2.8 million of the increased backlog is directly attributable to the Applied Optic Center product line. Given the reduced backlog and revenue of traditional Optex Systems, Inc.’s products from prior year levels, the Company does not anticipate being able to fully offset the reduced government spending with alternative business in the current fiscal year.

The Company has historically funded its operations through operations, convertible notes, 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 June 28, 2015, the Company had approximately $0.9 million in cash and an outstanding payable balance of $0.6 million against our working line of credit.  The line of credit allows for borrowing up to a maximum of $1 million, which fluctuates based on our open accounts receivable balance. The Company expects to continue to incur net losses into the first half of fiscal year 2016.  Successful transition to attaining profitable operations is dependent upon achieving a level of revenue adequate to support the Company’s cost structure.  Management intends to manage operations commensurate with its level of working capital during the next twelve months; however, uneven revenue levels 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.

Optex Systems Holdings is an ISO 9001:2008 certified company.