Note 17 — Restatements

The Company has restated its consolidated financial statements for the year ended October 2, 2016 to correct the manner in which the Company recorded 4,125,200 warrants that were issued in conjunction with common stock and Series C preferred shares pursuant to a public offering. On August 26, 2016, 2,291,900 Class A units consisting of common stock and warrants and 400 Class B units consisting of shares of Series C convertible stock and warrants were issued pursuant to a public offering. The offering is comprised of Class A Units, priced at a public offering price of $1.20 per unit, with each unit consisting of one share of common stock and one five-year warrant to purchase one share of common stock with an exercise price of $1.50 per share (each, a "warrant"), and Class B Units, priced at a public offering price of $5,000 per unit, with each unit comprised of one share of preferred stock with a conversion price of $1.20 which is convertible into 4,167 shares of common stock and warrants to purchase 4,167 shares of common stock. The net proceeds from the offering were $4,245 thousand (Gross proceeds of $4,750 thousand less underwriter expenses of $505 thousand). Deferred public offering costs incurred by Optex in connection with the offering was $252 thousand. On August 26, 2016 Optex Systems Holdings, Inc. issued 3,958,700 warrants to investors and 166,500 warrants to the underwriter.

Optex Systems Holdings, Inc. originally treated the warrants as equity instruments and as such the warrants and public offering costs associated with the transaction were netted to additional paid in capital. The warrants are determined to be free standing financial instruments that are legally detachable and separately exercisable from the common stock and are also deemed to be indexed to the company’s own stock. During the subsequent review period for the quarter ending January 1, 2017, it was determined that these warrants contained a fundamental transaction clause which provided that the warrants are puttable for cash at the option of the holder based on a triggering of the clause. The warrant clause meets the requirement for a contingently redeemable security; however, as they are redeemable at the option of the holder rather than the issuer and control of the redemption is outside the control of the Company, the warrants require classification as a liability pursuant to ASC 480 “Distinguishing Liabilities from Equity”. In accordance with ASC 480, the issued warrants should have been recorded at the fair market value on origination and recorded as a liability with an offsetting entry to additional paid in capital. The guidance also requires the fair market value be subsequently re-measured at each reporting period or triggering event with any changes in the valuation booked to earnings as a gain or loss.

Misstatement of the original warrant instruments as equity rather than debt, and the subsequent correction to warrant liability triggered additional accounting corrections as they related to the allocation of the proceeds received and the allocation of the public issuance costs against the warrants, common stock and Series C preferred shares. In accordance with the accounting guidance, fees associated with public offering costs for debt instruments must recognized in earnings to the extent they are allocable to the debt instrument. This correction resulted in a higher share of the fees associated with the public raise being allocated and recognized against earnings instead of netted against the proceeds and offset to additional paid in capital. In addition, after allocation of the proceeds attributable to the warrants, the remaining equity associated with our Series C preferred shares resulted in an effective accounting conversion rate well below the stated conversion price, and which was significantly below the then current market value, creating a beneficial conversion feature at inception and a corresponding recognition requirement as a preferred stock dividend/premium on the Series C preferred stock.

The corrections to the financial statement accounts as a result of the misstatement errors are summarized in the table below.

* These adjustements are reflected in both the Consolidated Balance Sheet Accumulated Deficit account balances as well as the Consolidated Statement of Operations account balances

In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated, the Company considered the guidance in ASC Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1, Assessing Materiality, and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The Company concluded that these errors were in the aggregate material to the prior reporting period, and therefore, restatement of the previously filed financial statements for the year ending October 2, 2016 was necessary. There were no other annual or interim periods effected by this correction.

The account balances labeled “As Reported” in the following tables represent the previously reported audited balances in the Company’s Annual Report on Form 10-K for the year ended October 2, 2016 as filed with Securities Exchange Commission on December 23, 2016.

* The table above reflects only the amounts for selective Balance Sheet accounts and their respective account class subtotals and grand totals which were affected by the error. Balance Sheet accounts not listed above were not affected by the errors and as such have not changed from the originally reported balances.

* The table above reflects only the amounts for selective Statement of Operations accounts and their respective account class subtotals and grand totals which were affected by the error. Statement of Operations accounts not listed above are not affected by the errors and as such have not changed from the originally reported balances.

(1) There is no impact to diluted earnings per share as the "As Reported" and "As Restated" earnings per share as are both in a net loss position and the resulting calculations are antidilutive.

* The table above reflects only the amounts for selective Statement of Cash Flows accounts and their respective account class subtotals and grand totals which were affected by the error. Statement Cash Flows accounts not listed above were not affected by the errors and as such have not changed from the originally reported balances.

(1) The increase in accounts payable and accrued expenses is a rounding adjustment to balance the financial statement accounts