(

) Preferred Stock and Warrants

Series E Senior Convertible Voting Perpetual Preferred Stock

March 26, 2018,

the Company entered into a Securities Purchase Agreement for the sale of

43,800

shares of a newly designated series of

6.0%

Series E Senior Convertible Voting Perpetual Preferred Stock (“Series E Shares”) to approximately

private investors. The sale was completed and the Series E Shares were issued on

March 28, 2018.

The purchase price for each Series E Share was

$25.00.

Gross proceeds received by the Company were approximately

$1.095

million (the “Placement”). Net proceeds to the Company after fees and expenses of the Placement were approximately

$1.0

million. Placement agent fees incurred in connection with the transaction were

of gross proceeds or approximately

$57,000

in cash, plus warrants to purchase

of the number of common shares into which the Series E shares can be converted (

223,000

shares) at an exercise price of

$0.25

per share.

Each Series E Share is initially convertible (at the option of the holder) at a conversion price of

$0.25

per share of common stock, representing

100

shares of the Company’s common stock per each Series E Share. The conversion ratio is subject to adjustments for stock splits, stock dividends, recapitalizations and similar transactions. As of

March 31, 2018,

if all

43,800

issued Series E Shares were immediately converted, holders of such shares would acquire

4,380,000

shares of common stock of the Company, or

31%

of the pro forma number of shares of common stock that would be outstanding if the conversion had occurred on this date,

27%

of the pro forma number of shares of common stock that would be outstanding upon the conversion of the Company’s outstanding shares of Series B, Series C and Series D Convertible Preferred Stock (collectively, the “Previously Issued Preferred Shares”) and

22%

of the pro forma number of shares of common stock that would be outstanding if all shares of preferred stock were converted and all warrants exercised as of this date. The Company is entitled to redeem Series E Shares at a price equal to

300%

of the Series E Share purchase price, or

$75.00

per share, subject to potential adjustment, but the right to redeem is subject to satisfaction of certain conditions related to the market price and trading volume of the Company’s common stock.

Each Series E Share has a liquidation preference of

150%

of the purchase price or

$37.50,

subject to adjustment. In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, a merger, or a sale of the Company’s MSI business line or Simulation and Electronics Warfare business line or their related assets, before any payment or distribution to holders of junior shares (including common stock and Previously Issued Preferred Stock), holders of Series E Shares will be entitled to receive an amount of cash per share of Series E Shares up to the liquidation preference plus all accumulated accrued and unpaid dividends thereon. Upon a sale of the Company’s MSI business line or Simulation and Electronics Warfare business line or their related assets, holders of Series E Shares shall be entitled to receive a pro rata portion of the net sale proceeds after reasonable transaction expenses and amount payable to the Company’s secured creditors for releases of their liens on such assets, up to the liquidation preference plus accrued and unpaid dividends. If the payment per Series E Shares is less than the Series E Shares’ liquidation preference, the liquidation preference and the Series E Share redemption price will be reduced by the amount of the payment received.

Holders of Series E Shares are entitled to receive, when, as and if declared by the Company’s Board of Directors, cumulative preferential dividends, payable semiannual in cash at a rate per annum equal to

6.0%

of the initial purchase price of

$25.00

per share or in-kind (at the Company’s election) through the issuance of shares of the Company’s common stock, based on the

day volume weighted average price of the common stock.

Holders of Series E Shares generally vote together with the common stock on an as-converted basis on each matter submitted to the vote or approval of the holders of common stock, and vote as a separate class with respect to certain actions that adversely affect the rights of the holders of Series E Shares and on other matters as required by law. In addition, the approval of the Holders of the Series E shares is generally required prior to the Company’s issuance of any securities having rights senior to or in parity with the Series E Shares with respect to dividends or liquidation preferences. The Series E Shares’ right to approve parity securities will terminate at such time that (

) fewer than

22,300

Series E Shares, which is

50%

of the number of Series E Shares

first

issued, remain outstanding or (

) the volume weighted average closing price of the Company’s common stock for any

trading days within any

trading day period is

$0.75

or more, the average daily trading volume over such

trading day period is

100,000

shares or more and there is either an effective registration statement covering resale of the shares of common stock that holders of Series E Shares would be entitled to receive upon conversion and any shares received as pay-in-kind dividends, or such share could be freely sold pursuant to Rule

144

under the Securities Act of

1933,

as amended.

The Company and each Series E investor entered into an Investor Rights Agreement. Under this agreement, the Company agreed to, among other things, use best efforts to file certain registration statements for the resale of common stock of the Company that the investor

may

acquire upon conversion of the Series E Shares and

may

potentially receive as payment-in-kind dividends during the

two

years following the date of the agreement. The Company also agreed that it would

not

issue additional debt without the approval by holders of at least

66.6%

of the Series E Shares, other than trade debt incurred in the normal course and commercial bank working capital debt, whether revolving or term debt. Concurrent with the execution of the Securities Purchase Agreement for the Series E Shares, the Company and PFG entered into a modification agreement providing for the restructuring of certain terms associated with approximately

$1.7

million in indebtedness owed to PFG (see Note

– Term Loans, Revolving Line of Credit and Warrants).

In connection with the sale of Series E Shares, the Company agreed to reduce the exercise price of certain warrants issued in connection with the Company’s private placement in

January 2016 (

see Note

– Private Placement Offering), in which the Company sold (in part)

2,787,872

warrants (a

“2016

Warrant”). Each

2016

Warrant entitled the holder to purchase

0.75

shares of the Company’s common stock at the price of

$1.15

per whole share. The Company agreed to reduce the exercise price of

2016

Warrants that are held by the

2016

Investors purchasing Series E Shares from

$1.15

$0.25

per share as follows: A

2016

Investor purchasing an amount equal to or exceeding the lesser of

$200,000

50%

of the amount it invested in the

2016

Private Placement will have the exercise price of all of its

2016

Warrants reduced to

$0.25,

and

2016

Investors purchasing less than the lesser of

$200,000

50%

of the amount it invested in the

January 2016

Private Placement will have the exercise price of a ratable percentage of the

2016

Warrants reduced to

$0.25.

In connection with its sale of the Series E Shares, the Company reduced the exercise price of

1,759,268

of the outstanding

2016

Warrants to

$0.25.

The fair value attributable to re-pricing the

2016

Warrants, provided to the participating

2016

Investors, of approximately

$203,000,

was deducted from the Series E gross proceeds to arrive at the initial discounted carrying value of the Series E Shares. The initial discounted carrying value resulted in recognition of a beneficial conversion feature of approximately

$557,000,

further reducing the initial carrying value of the Series E Shares. The discount to the aggregate stated value of the Series E Shares, resulting from recognition of the beneficial conversion feature, was immediately accreted as a reduction of common stock and an increase in the carrying value of the Series E Shares. The accretion is presented as a deemed dividend in the consolidated statements of operations.

In addition, warrants to purchase

292,727

shares of common stock held by the placement agent, as a result of a prior transaction, were amended to reduce the exercise price from

$1.15

per share to

$0.25

per share. The fair value attributable to re-pricing the placement agent warrants of approximately

$53,000

was recognized as additional Series E issuance costs and recognized net in the carrying value of Series E Shares.

For the

three

months ending

June 30, 2018,

the Company issued an additional

8,800

shares of Series E Senior Convertible Voting Perpetual Preferred Stock at a purchase price of

$25.00

per share for total gross proceeds of

$220,000.

The table below presents information as of

June 30, 2018

and

March 31, 2018:

Preferred Stock
	Shares		Shares		Shares		Liquidation Preference
	Designated		Issued		Outstanding		(in thousands)
Series B		10,000.00		9,997.00		9,997.00	$	2,309
Series C		3,500.00		3,424.65		3,424.65		500
Series D		6,000.00		5,111.86		5,111.86		731
Series E		60,000.00		43,800.00		43,800.00		1,643
Total at March 31, 2018		79,500.00		62,333.51		62,333.51	$	5,183
Series E				9,600.00		9,600.00		360
Total at June 30, 2018		79,500.00		71,933.51		71,933.51	$	5,413