Quarterly report pursuant to Section 13 or 15(d)

Accounting Policies (Policies)

Accounting Policies (Policies)

9 Months Ended

Jul. 02, 2017

Use of 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 revenue and expenses during the reporting period. Actual results could differ from the estimates.

Inventory

Inventory: Inventory is recorded at the lower of cost or market value, and adjusted, as necessary, for decreases in valuation and obsolescence. Adjustments to the valuation and obsolescence reserves are made after analyzing market conditions, current and projected sales activity, inventory costs and inventory balances to determine appropriate reserve levels. Cost is determined using the first-in first-out method. Under arrangements by which progress payments are received against certain contracts, the customer retains a security interest in the undelivered inventory identified with these contracts. Payments received for such undelivered inventory are classified as unliquidated progress payments and deducted from the gross inventory balance. As of July 2, 2017 there was $5 thousand and as of October 2, 2016 there was $0 in unliquidated progress payments. As of July 2, 2017 and October 2, 2016, inventory included:

	(Thousands)
	July 2, 2017			October 2, 2016
Raw Material	$	4,761		$	4,655
Work in Process		3,611			2,830
Finished Goods		657			380
Gross Inventory	$	9,029		$	7,865
Less: Inventory Reserves		(1,651	)		(1,651	)
Less: Unliquidated Progress Payments		(5	)		—
Net Inventory	$	7,373		$	6,214

Net inventory increased by $1.2 million during the nine months ending July 2, 2017 in support of contracts deliverable over the next six months.

Customer Advance Deposits

Customer Advance Deposits: Customer advance deposits represent amounts collected from customers in advance of shipment or revenue recognition, which relate to undelivered product or other cash in advance payment terms. As of July 2, 2017, Optex Systems, Inc. had a balance of $0.7 million in short term customer advance deposits for materials purchased in support of deliveries to occur within the next twelve months.

Earnings per Share

Earnings per 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 potentially dilutive securities that Optex Systems Holdings has outstanding are convertible preferred stock, unvested restricted stock units, 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 Holdings uses the Treasury Stock Method to compute the dilutive effect of any dilutive shares. Convertible preferred stock, unvested restricted stock units, stock options and warrants that are anti-dilutive are excluded from the calculation of diluted earnings per common share.

For the three and nine months ended July 2, 2017, 318 shares of Series C preferred stock, 182,000 unvested restricted stock units, 56,260 stock options and 4,125,200 warrants were excluded from the earnings per share calculation as anti-dilutive. For the three months ended June 26, 2016, 546 shares of Series A preferred stock, 969 shares of Series B preferred stock, 52,850 stock options and zero warrants were included in the dilutive earnings per share calculation, but were excluded from the nine months ending June 26, 2016 as they were anti-dilutive.