Annual report pursuant to Section 13 and 15(d)

Warrant Liabilities

Warrant Liabilities

12 Months Ended

Sep. 29, 2019

Note 12 — Warrant Liabilities

On August 26, 2016, Optex Systems Holdings, Inc. issued 4,323,135 warrants to new shareholders and the underwriter, in connection with a public share offering. The warrants entitle the holder to purchase one share of our common stock at an exercise price equal to $1.50 per share at any time on or after August 26, 2016 (the “Initial Exercise Date”) and on or prior to the close of business on August 26, 2021 (the “Termination Date”). The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the common stock included in the public share offering. Management also determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as a liability pursuant to ASC 480 “Distinguishing Liabilities from Equity”. The Company has no plans to consummate a fundamental transaction and does not believe a fundamental transaction is likely to occur during the remaining term of the outstanding warrants. In accordance with the accounting guidance, the outstanding warrants are recognized as a warrant liability on the balance sheet and are measured at their inception date fair value and subsequently re-measured at each reporting period with changes being recorded as a component of other income in the consolidated statement of operations.

The fair value of the warrant liabilities presented below were measured using either a BSM valuation model. Significant inputs into the respective model at the inception and reporting period measurement dates are as follows:

Valuation Assumptions	Issuance date⁽¹⁾ August 26, 2016⁽⁴⁾			Period ended October 1, 2017⁽⁴⁾			Period ended September 30, 2018			Period ended September 29, 2019
Exercise Price⁽¹⁾	$	1.50		$	1.50		$	1.50		$	1.50
Warrant Expiration Date ⁽¹⁾		8/26/2021			8/26/2021			8/26/2021			8/26/2021
Stock Price ⁽²⁾	$	0.95		$	0.98		$	1.71		$	1.56
Interest Rate (annual) ⁽³⁾		1.23	%		1.62	%		2.88	%		1.63	%
Volatility (annual) ⁽⁴⁾		246.44	%		179.36	%		64.05	%		53.66	%
Time to Maturity (Years)		5.0			3.9			2.9			1.9
Calculated fair value per share	$	0.93		$	0.87		$	0.82		$	0.49

(1) Based on the terms provided in the warrant agreement to purchase common stock of Optex Systems Holdings, Inc. dated August 26, 2016.

(2) Based on the trading value of common stock of Optex Systems Holdings, Inc. as of each presented period ending date.

(3) Interest rate for U.S. Treasury Bonds, as of each presented period ending date, as published by the U.S. Federal Reserve.

(4) Based on the historical daily volatility of Optex Systems Holdings, Inc. as of each presented period ending date.

The warrants outstanding and fair values at each of the respective valuation dates are summarized below:

Warrant Liability	Warrants Outstanding			Fair Value per Share		Fair Value (000’s)
Fair Value as of period ended 10/01/2017		4,323,135		$	0.87	$	3,607
Reclassification to additional paid in capital for correction to underwriter warrants outstanding⁽¹⁾							41
Reclassification to additional paid in capital upon exercise of warrants⁽²⁾		(62,350	)				(53	)
Gain on Change in Fair Value of Warrant Liability							(95	)
Fair Value as of period ended 9/30/2018		4,260,785		$	0.82	$	3,500
Reclassification to additional paid in capital upon exercise of warrants⁽³⁾		(47,504	)				(48	)
Warrant buyback and cancellation⁽⁴⁾		(88,081	)				(72	)
Gain on Change in Fair Value of Warrant Liability							(1,344	)
Fair Value as of period ended 9/29/2019		4,125,200		$	0.49	$	2,036

	(1)	Correction to Additional Paid in Capital and Warrant Liability for 197,935 outstanding warrants issued to underwriters on August 26, 2016. Total warrants were incorrectly reflected as 4,125,200 and should have been 4,323,135.

	(2)	Warrants exercised on September 17, 2018 for gross proceeds of $93.5 thousand. The fair market value of the warrants as of the exercise date was $53 thousand and was reclassed to additional paid in capital.

	(3)	Exercise of warrants for gross proceeds of $72 thousand and a warrant liability fair market value of $48 thousand as of the exercise date.

	(4)	Buyback of 88,081 warrants at $0.85 per warrant for a total consideration of ($75) thousand and a warrant liability fair market value of $72 thousand.

The warrant liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various assumptions about of future activities and the Company’s stock prices and historical volatility as inputs.