UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ~~EXCHANGE~~EXCHANGEACT ~~ACT~~ OF 1934
For the quarterly period ended December 31, 2016
For the quarterly period ended March 31, 2017
o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from:		to


Commission File No. 001-14949

Secure Point Technologies, Inc.

Massachusetts		04-2837126
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

215 Depot Court SE, Leesburg, Virginia		20175
(Address of principal executive offices)		(Zip Code)

(212) 370-1300
(Registrant’s telephone number, including area code)
Implant Sciences Corporation, 500 Research Drive, Unit 3, Wilmington, Massachusetts, 01887
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or aan ~~smaller~~emerging ~~reporting~~growth company. See the definitions of “large accelerated filer,” “accelerated filer,” ~~and~~ smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

☐ Large Accelerated Filer ☐ Accelerated Filer ☐ Non-accelerated Filer (do not check if a smaller reporting company) ☒ Smaller reporting company ☐ Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒ No ☐

AsAPPLICABLE ofONLY ~~December~~TO ~~31,~~ISSUERS ~~2016,~~INVOLVED ~~there~~IN ~~were~~BANKRUPTCY ~~79,875,620~~PROCEEDINGS ~~shares~~DURING ofTHE ~~the~~PRECEDING ~~registrant’s~~FIVE ~~Common Stock outstanding.~~YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of May 15, 2017, there were 79,886,165 shares of the registrant’s Common Stock outstanding.

SECURE POINT TECHNOLOGIES, INC.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of December 31, 2016 (unaudited) and June 30, 2016 (audited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and June 30, 2016 (audited)	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended December 31, 2016 and 2015 (unaudited)	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended March 31, 2017 and 2016 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2016 and 2015 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2017 and 2016 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6-3533
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3634-4643
Item 4.	Controls and Procedures	4744
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	4845
Item 1A.	Risk Factors	4845-4946
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5047
Item 6.	Exhibits	~~50-51~~47

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Secure Point Technologies, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
	December 31, 2016 (Unaudited)	June 30, 2016 (Audited)
	March 31, 2017 (Unaudited)	June 30, 2016 (Audited)
ASSETS
Current assets:
Cash and cash equivalents	$ 372,~~354~~752	$ 1,338
Restricted cash and investments	~~367~~-	367
Accounts receivable-trade, net of allowances of $39,000 and $7,000, respectively	3,806	7,123
Accounts receivable-trade, net of allowances of $0 and $7,000, respectively	-	7,123
Inventories, net	~~10,633~~-	4,681
Prepaid expenses and other current assets	~~826~~464	464
Total current assets	1873,~~986~~216	13,973
Property and equipment, net	~~832~~-	874
Other non-current assets	98-	98
Total assets	$ 1973,~~916~~216	$ 14,945
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Debtor-in-possession super-priority senior secured promissory note	$ 8,000	$ -
Senior secured promissory note – BAM	$ -	20,000
Senior secured promissory note – BAM	20,000	20,000
Senior secured convertible promissory note – Montsant Partners	5,284	5,284
Second senior secured convertible promissory note – DMRJ	11,970	18,970
Third senior secured convertible promissory note - DMRJ	17,523	17,523
Senior secured promissory note – DMRJ	1,000	1,000
Line of credit - DMRJ	17,662	17,662
Current maturities of obligations under capital lease	15-	18
Warrant derivative liability	2,167	-
Accrued expenses	13,934	15,181
Accrued expenses	23,812	15,181
Accounts payable	2,499	4,655
Accounts payable	6,359	4,655
Income tax payable	2,000	-
Deferred revenue	~~779~~-	406
Total current liabilities	~~114~~71,~~571~~872	100,699
Long-term liabilities:
Long-term obligations under capital lease, net of current maturities	29-	35
Accrued Liabilities other – long term	-	-
Deferred revenue, net of current	~~451~~-	479
Total long-term liabilities	~~480~~-	514
Total liabilities	~~115~~71,~~051~~872	101,213
Commitments and contingencies (Note 17)
Stockholders' deficit:
Common stock; $0.001 par value; 250,000,000 and 200,000,000 shares authorized on December 31, 2016 and June 30, 2016, respectively; 79,886,165 and 79,875,620 shares issued and outstanding at December 31, 2016 and 79,396,165 and 79,385,620 shares issued and outstanding at June 30, 2016, respectively	80	79
Common stock; $0.001 par value; 250,000,000 and 200,000,000 shares authorized on March 31, 2017 and June 30, 2016, respectively; 79,886,165 and 79,875,620 shares issued and outstanding at March 31, 2017 and 79,396,165 and 79,385,620 shares issued and outstanding at June 30, 2016, respectively	80	79
Preferred stock; no stated value; 5,000,000 shares authorized
Series G Convertible Preferred Stock, no stated value; 650,000 shares authorized, no shares issued and outstanding	-	-
Series H Convertible Preferred Stock; no stated value; 22,500 shares authorized, 7,000 shares issued and outstanding at December 31, 2016 and no shares issued and outstanding at June 30, 2016	7,000	-
Series H Convertible Preferred Stock; no stated value; 22,500 shares authorized, 7,000 shares issued and outstanding at March 31, 2017 and no shares issued and outstanding at June 30, 2016	7,000	-
Series I Convertible Preferred Stock; no stated value; 21,000 shares authorized, no shares issued and outstanding	-	-
Series J Convertible Preferred Stock; no stated value; 6,500 shares authorized, no shares issued and outstanding	-	-
Additional paid-in capital	~~123~~125,~~957~~883	114,255
Accumulated deficit	(~~226~~131,~~075~~538)	(200,084)
Deferred compensation	(248)	(467)
Other comprehensive income	-	22
Treasury stock, 10,545 common shares, at cost	(73)	(73)
Total stockholders' deficit	~~(95~~1,~~135)~~344	(86,268)
Total liabilities and stockholders' deficit	$ 1973,~~916~~216	$ 14,945

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Secure Point Technologies, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands except share and per share amounts)
(Unaudited)
	For the Three Months Ended December 31,		For the Six Months Ended December 31,
	For the Three Months Ended March 31,		For the Nine Months Ended March 31,
	2016	2015	2016	2015
	2017	2016	2017	2016
Revenues
Product
Government	$ ~~3,501~~12	$ 3,~~262~~932	$ 5,~~187~~199	$ 37,~~262~~194
Commercial	~~4,867~~184	6,~~899~~816	11,~~072~~256	2027,~~723~~539
Subtotal Product Revenues	~~8,386~~196	10,~~161~~748	16,~~259~~455	2334,~~985~~733
Services
Government	~~149~~5	1340	~~178~~183	~~455~~465
Commercial	~~108~~5	~~118~~135	~~250~~255	~~245~~410
Subtotal Services Revenues	~~257~~10	~~131~~175	~~428~~438	~~700~~875
Total Revenues	~~8,625~~206	10,~~292~~923	16,~~687~~893	2435,~~685~~608
Cost of revenues	~~5,720~~166	67,~~439~~691	11,~~310~~476	1422,~~575~~266
Gross margin	~~2,905~~40	3,~~853~~232	5,~~377~~417	1013,~~110~~342
Operating expenses:
Research and development	~~876~~36	~~901~~1,040	1,~~857~~892	13,~~984~~024
Selling, general and administrative	75,~~510~~534	3,~~718~~811	1116,~~275~~809	711,~~256~~067
Total operating expenses	8,386	4,619	13,132	9,240
Gain on sale of assets	(104,791)	-	(104,791)	-
(Loss) income from operations	(5,481)	(766)	(7,755)	870
Total operating expenses	(99,221)	4,851	(86,090)	14,091
Income (Loss) from operations	99,261	(1,619)	91,507	(749)
Other income (expense), net:
Interest expense	(32,~~426~~823)	(2,~~547~~477)	(3134,~~375~~199)	(57,~~094~~571)
Derivative mark-to-market – warrant	~~10,497~~362	-	13,~~536~~899	-
Total other income (expense), net	7(2,~~071~~461)	(2,~~547~~477)	(1720,~~839~~300)	(57,~~094~~571)
Net income (loss)	196,~~590~~800	(34,~~313~~096)	~~(25~~71,~~594)~~207	(48,~~224~~320)
Preferred dividends	(262)	-	(397)	-
Provision for income taxes	(2,000)	-	(2,000)	-
Income (loss) from operations	1,328	(3,313)	(25,991)	(4,224)
Net income (loss)	94,800	(4,096)	69,207	(8,320)
Preferred dividends	(263)	-	(660)	-
Net income (loss) applicable to common shareholders	$ 94,537	$ (4,096)	$ 68,547	$ (8,320)
Other comprehensive loss net of tax:
Foreign currency translation adjustments	23-	(9)	23-	(19)
Other comprehensive loss net of tax:	23-	(9)	23-	(19)
Comprehensive income (loss)	$ 194,~~613~~537	$ (34,~~322~~105)	$ ~~(25~~68,~~571)~~547	$ (48,~~243~~339)
Net income (loss) per share, basic and diluted	$ 01.0219	$ (0.0405)	$ (0.~~32)~~87	$ (0.0511)
Net income (loss) per share, applicable to common shareholders, basic and diluted	$ 01.0218	$ (0.0405)	$ (0.~~33)~~87	$ (0.0511)
Weighted average shares used in computing net income (loss) per common share, basic and diluted	79,~~875~~886,~~620~~165	78,~~528~~878,~~620~~953	79,~~767~~814,~~287~~516	77,~~367~~871,~~787~~509

The accompanying notes are an integral part of these condensed consolidated financial statements.

On January 5, 2017 the Company sold substantially all its assets and some liabilities to L-3 Communications Corporation, as described in further detail in this document.

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Secure Point Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited – In thousands)
	For the Six Months Ended December 31,
	For the Nine Months Ended March 31,
	2016	2015
	2017	2016
Cash flows from operating activities:
Net loss	$ (25,594)	$ (4,224)
Net income (loss)	$ 69,207	$ (8,320)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization	7779	~~104~~153
Bad debt expense (benefit)	34	(76)
Stock-based compensation expense	~~470~~592	~~668~~982
Warrants issued to non-employees	15	4358
Common stock issued to consultants	429	~~331~~579
Non-cash interest expense	1524,~~703~~920	-
Senior secured convertible promissory note – beneficial conversion feature	9,217	-
Executive severance expense	16	-
Change in fair value of warrant derivative liability	(13,~~536~~899)	-
Loss on disposal of equipment	2	-
(Gain) loss on sale of assets and liabilities	(104,791)	3
Change in assets and liabilities:
Accounts receivable	3,~~283~~363	(5,~~237~~590)
Inventories	(56,~~952~~187)	(~~1,479~~737)
Prepaid expenses and other current assets	(~~362~~560)	~~455~~-
Accounts payable	1,704	1,942
Restricted cash	(367)	356
Accrued expenses	8,249	7,885
Operating cash and equivalents	(3,712)	-
Deferred revenue	345	(1,854)
Security deposits	(98)
Net cash used in operating activities	(5,916)	(1,373)
Accounts payable	1,371	2,122
Accrued expenses	7,088	9,880
Deferred revenue	563	(2,087)
Net cash used in operating activities	(21,937)	(2,607)
Cash flows from investing activities:
Purchases of property and equipment	(37)	(65)
Proceeds from sale of assets and liabilities	113,447	-
Net cash used in investing activities	(37)	(65)
Purchase of property and equipment	(21)	(117)
Net cash provided by (used in) investing activities	113,426	(117)
Cash flows from financing activities:
Proceeds from common stock issued in connection with exercise of stock options and common stock purchase warrants	-	3437
Net borrowing under debtor-in-possession super-priority senior secured promissory note	8,000	-
Principal repayments of long-term debt and capital lease obligations	(20,053)	(36)
Principal repayments of long-term debt and capital lease obligations	(9)	(24)
Net borrowings on line of credit	-	1,000
Net borrowings on line of credit	-	200
Net cash (used in) provided by financing activities	(20,053)	1,001
Net cash provided by financing activities	7,991	210
Effect of exchange rate changes on cash and cash equivalents	(22)	18
Effect of exchange rate changes on cash and cash equivalents	(22)	19
Net change in cash and cash equivalents	71,414	(1,705)
Net change in cash and cash equivalents	2,016	(1,209)
Cash and cash equivalents at beginning of period	1,338	1,985
Cash and cash equivalents at end of period	$ 372,~~354~~752	$ ~~776~~280
Supplemental Disclosure of Cash Flow Information:
Interest paid	$ ~~511~~5,086	$ 5813
Non-cash Financing Activity:
Conversions of senior secured convertible promissory note to Series H Convertible Preferred Stock	$ 7,000	$ -
Senior secured convertible promissory note issued to DMRJ Group, LLC - beneficial conversion feature	$ 9,217	$ -
Warrant issued to DMRJ Group, LLC	$ 15,703	$ -
Conversions of senior secured convertible note interest to common shares	$ -	$ 245
Reclassification of warrant derivative liability to equity	1,805	-
Common stock issued to consultants	$ 429	$ 331
Conversions of senior secured convertible note interest to common shares	-	245
Common stock issued to consultants	429	579
Accrued interest converted to debt	-	13,574
Prepaid interest added to debt	-	1,019

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Description of Business, Liquidity and Going Concern

Secure Point Technologies, Inc. (the “Company”) formerly known as Implant Sciences Corporation, up until the time of the sale of its business to L-3 Communications Corporation in January 2017 (as described below) provided systems and sensors for the homeland security market and related industries. We developed and acquired technologies using ion mobility spectrometry to develop a product line for use in trace explosives and narcotics detection. Prior to the sale of the Company’s business to L-3 Communications Corporation in January 2017, the Company marketed and sold its existing trace explosives and narcotics detector products while continuing to make significant investments in developing the next generation of these products. At the present time, Wewe are a shell company with no operations. We are actively considering various acquisition targets and other business opportunities. We hope to acquire one or more operating businesses or consummate a business opportunity within the next twelve months. However, we cannot guarantee that we will successfully consummate an acquisition or other business opportunity within such timeframe, or at all.

Sale of Explosives Detector Assets and Bankruptcy Filing

On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement (as amended, the “Asset Purchase Agreement”) with L-3 Communications Corporation (“L-3”) to sell our explosives trace detection assets, constituting our entire business, to L-3 for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment (the “Transaction”). The Asset Purchase Agreement served as the “stalking horse bid” in a sale process that was conducted under Section 363 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) and an order of the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) establishing certain procedures and protections (the “Sales Procedures Order”). In connection with the Asset Purchase Agreement, on October 10, 2016, the Company and its subsidiaries IMX Acquisition Corp., C Acquisition Corp. and Accurel Systems International Corp. (together with the Company, the “Debtors”) filed voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. After commencement of the Chapter 11 proceedings, we continued to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. On the Petition Date, we filed several “first day” motions with the Bankruptcy Court, including a motion to have the Chapter 11 cases jointly administered. At a hearing held on October 11, 2016, the Bankruptcy Court entered orders approving the various first day motions.

On December 16, 2016, after completion of the auction process in accordance with the requirements of the Bankruptcy Code and the Sales Procedures Order, the Bankruptcy Court entered an order authorizing and approving the Transaction with L-3 under Section 363 of the Bankruptcy Code.

On January 5, 2017, the closing of the Transaction occurred and L-3 acquired substantially all the assets of the Debtors in exchange for $117.5 million in cash plus the assumption of certain liabilities. In connection with the closing of the Transaction, on January 5, 2017, each of Drs. William J. McGann and Darryl Jones, Messrs. Roger Deschenes and Todd Silvestri and Ms. Brenda L. Baron resigned from their positions as executive officers and employees of the Company, and Dr. William J. McGann resigned from his position as a member of the Company’s board of directors. Also in connection with the closing of the Transaction, on January 5, 2017, the Company filed Articles of Amendment to the Company’s Articles of Organization in the State of Massachusetts to change the Company’s name to Secure Point Technologies, Inc.

On the closing date of the Transaction, Mr. Robert Liscouski, our President, assumed the senior executive role for the Company and continues to serve as a Director of the Company along with the other two remaining board members, Mr. Michael Turmelle (Chairman) and Mr. James Simon, Jr. Effective January 9, 2017, the Company entered into a service agreement with Mr. Christopher Roberts, pursuant to which Mr. Roberts agreed to assist in the preparation of the Company’s financial statements and provide related services. In connection therewith, on January 9, 2017, the board of directors of the Company appointed Mr. Roberts as the chief financial officer of the Company.

Effective February 1, 2017, the Company changed its address to 215 Depot Ct. SE, Leesburg, VA 20175.

In connection with the commencement of the Chapter 11 cases, we filed a motion seeking the approval of the Bankruptcy Court for a super-priority senior secured loan of $5.7 million (the “Original DIP Loan”) between the Debtors and DIP SPV I, L.P., as the debtor-in-possession lender ( the “Original DIP Lender”) pursuant to a Senior Secured Super-Priority Debtor-in-Possession Loan and Security Agreement entered into by the Debtors and the Original DIP Lender on October 10, 2016 (as amended on November 3, 2016, the “Original DIP Agreement”). The Original DIP Loan would bear interest at 12% and included a one-time closing fee of $199,500 on the closing date of the Original DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which was at a rate of 24%), paid to the Original DIP Lender as of the termination date of the Original DIP Loan. The Original

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DIP Loan was payable in full upon the consummation of the sale under the Asset Purchase Agreement with L-3 or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the Original DIP Loan.

The use of proceeds from the Original DIP Loan were limited to working capital and other general corporate purposes consistent with the budget that the Company presented to the Original DIP Lender, including payment of costs and expenses related to the administration of the bankruptcy proceedings and payment of other expenses as approved by the Bankruptcy Court.

On November 7, 2016, as a result of an auction process run in accordance with the requirements of the Bankruptcy Code, the Debtors terminated the Original DIP Agreement and entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “New DIP Agreement”) with Tannor Partners Credit Fund, LP, (the “New DIP Lender”), which New DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of November 7, 2016 for the initial loan amount of $5,700,000. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender lent up to a total of $8.0 million to the Debtors, with the initial installment of $5,700,000 paid upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2,300,000 paid upon the Bankruptcy Court entering the final order for the New DIP Agreement, which final order was entered by the Bankruptcy Court on November 30, 2016. The New DIP Agreement was substantially identical to the Original DIP Agreement, except for the amounts of the closing fee and the exit fee, which was $35,000 and $425,000 (minus any interest other than default interest), respectively. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016. In connection with the termination of the Original DIP Agreement, the Company paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lender’s advisors.

On or about December 8, 2016, New DIP Lender asserted that we were not in compliance with Section 7.1(a) of the New DIP Agreement, wherein the net cash receipts for the cumulative period commencing on November 7, 2016 and ending on November 30, 2016 were required be equal to or exceed 85% of the budgeted cash receipts amount (the “DIP Budget”), which event constituted an event of default under the New DIP Agreement. Effective as of December 1, 2016 the interest rate under the New DIP Agreement increased 12.0% to 24.0%. Subject to the terms of a Stipulation and Order entered in the Bankruptcy Case, we agreed with the New DIP Lender to waive such asserted default in exchange for an agreement by us to pay an additional $96,000 of interest, which interest was not credited against the exit fee.

The total amount borrowed under the New DIP Agreement together with accrued interest was paid in full effective January 5, 2017 in connection with the closing of the Transaction with L-3.

We believe that the proceeds from the Transaction with L-3 and the assumption by L-3 of certain liabilities, after taking into account the payment of the New DIP Loan, related expenses and exit fee, will be sufficient to pay all secured and unsecured creditor claims, financial advisor and legal expenses associated with the Transaction, payments due under our Change of Control Plan which were not assumed by L-3, and, legal fees and other expenses associated with the bankruptcy filing. $2.5 million of the cash proceeds from the Transaction are being held in an escrow account to secure the Debtors’ obligations for the purchase price adjustments under the Asset Purchase Agreement for the Debtors’ net working capital, which adjustments are expected to be completed in the first half of calendar 2017. The Company’s Board of Directors is exploring opportunities to provide optionality to our shareholders with the remaining proceeds after the closing of the Transaction with L-3. We intend to provide alternatives as part of the plan to emerge from voluntary Chapter 11 bankruptcy that would recognize the value of a publicly listed shell. These alternatives may include the merger of an operating entity into the shell or a liquidation of the company, which determination is subject to approval by our shareholders. A Chapter 11 plan of reorganization ~~was~~and ~~required~~an toaccompanying bedisclosure statement were filed with the Bankruptcy Court on ~~February~~May 71, 2017~~, but on January 26, 2017 we filed a motion with the Bankruptcy Court requesting a 60 day extension of the date by which the Debtors have an exclusive right to file a plan of reorganization~~.

Termination of Zapata Industries SAS Letter of Intent

On July 18, 2016, the Company and Zapata Industries SAS (“Zapata”) entered into a Letter of Intent (the “LOI”) regarding a potential business combination between us and Zapata. On November 21, 2016, the LOI ~~was~~with ~~terminated. On~~Zapata ~~December~~was 2terminated, ~~2016~~and Zapata subsequently filed a claim with the Bankruptcy Court seeking a breakup fee and other expenses related to the ~~cancellation~~termination. On May 9, 2017, Zapata filed a complaint in the Supreme Court of the ~~acquisition. The~~State of New York, New York County, against Robert Liscouski, the President of the Company ~~disputes~~and ~~any~~a ~~payment~~member ~~obligations~~of itthe ~~may~~Board ~~have~~of toDirectors, ~~Zapata~~asserting ina ~~connection~~claim for tortious interference with the LOI orand seeking to recover from Mr. Liscouski the ~~termination~~very ~~thereof~~same breakup fee and other expenses it is seeking from the Company in the Bankruptcy Court.

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company has an obligation to indemnify Mr. Liscouski and disputes any payment obligations it may have to Zapata in connection with the LOI or the termination thereof. Mr. Liscouski also disputes and intends to vigorously defend against the claim asserted against him by Zapata.

Liquidity, Going Concern and Management’s Plans

On December 10, 2008, we entered into a note and warrant purchase agreement with DMRJ Group LLC (“DMRJ”) pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock. We have entered into a series of amendments, waivers and modifications with DMRJ. On July 20, 2016, we amended our credit agreements with DMRJ pursuant to which, amongst other matters, we extended the maturity date of all of our indebtedness to DMRJ to October 31, 2016.

On May 4, 2015, we entered into an assignment agreement with DMRJ and Montsant Partners, LLC (“Montsant”), wherein DMRJ assigned its rights, title and interest in the senior secured promissory note dated December 10, 2008 and appointed DMRJ as its collateral agent under the promissory note agreement. On July 20, 2016, we amended our credit agreement with Montsant, extending the maturity date of our indebtedness to October 31, 2016.

DMRJ and Montsant are funds managed by Platinum Partners Value Arbitrage Fund LP.

On March 19, 2014, we entered into a note purchase agreement with a group of institutional investors and BAM Administrative Services LLC (“BAM”), an administrative agent for the investors, pursuant to which we issued senior secured promissory notes in the aggregate principal amount of $20,000,000. We used all of the proceeds from the sale of the notes to repay (i) $17,624,000 of our outstanding indebtedness to DMRJ under revolving promissory note (ii) $1,809,000 of interest outstanding under that facility and (iii) $567,000 of interest outstanding under our senior secured convertible promissory note (see Note 12 to the condensed consolidated financial statements). We have entered into several amendments, waivers and modifications with BAM. The notes bore interest at 16% per annum. Due to the filing of the voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court, we were deemed to be in default under our note purchase agreement with BAM and our interest rate was increased to 18.5% effective as of October 10, 2016.

The maturity of our indebtedness to BAM was automatically extended to October 30, 2016 as a result of the extension of the maturity date of our indebtedness to DMRJ and Montsant.

The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings.

The full amount of the BAM Promissory Note and all accrued interest, along with the New DIP Loans and all accrued interest were paid in full on January 5, 2017 upon the closing of the Transaction with L-3.

We are incurring and expect to continue to incur increased legal and financial adviser costs associated with the bankruptcy proceedings following the closing of the Transaction with L-3. These ongoing costs ~~raise~~are ~~doubt~~addressed asin to our ~~ability~~filed reorganization plan to successfully emerge from Chapter 11 and provide a recovery to equity holders.

Our common stock was delisted by the NYSE Amex LLC in June 2009 as result of our failure to comply with certain continued listing requirements. Our common stock has been quoted on the OTC Bulletin Board since May 2009 and is also quoted on the OTC Markets Group’s OTCQB tier under the symbol “IMSC”. We believe that trading ‘over the counter’ has limited our stock’s liquidity and has impaired our ability to raise capital. We have submitted paperwork for a symbol change based on the corporate name change. We anticipate that FINRA will issue a new ticker symbol in the near future.

For the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, we reported a net ~~loss~~income of $2569,~~594~~207,000 and ~~used~~a net use of $521,~~916~~937,000 in cash ~~from~~in operations, due to the sale of our business assets to L-3 Communications. As of ~~December~~March 31, ~~2016~~2017, the Company had an accumulated deficit of approximately $~~226~~131,~~075~~538,000 and a working capital ~~deficit~~ of $951,~~585~~344,000.

As of ~~December~~March 31, ~~2016~~2017, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of ~~December~~March 31, ~~2016~~2017, our obligation to DMRJ for accrued interest under these instruments approximated $911,~~129~~393,000 and is included in current liabilities in the condensed consolidated financial statements.

As of ~~December~~March 31, ~~2016~~2017, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of ~~December~~March 31, ~~2016~~2017, our obligation to Montsant for accrued interest under this instrument approximated was $~~405~~603,000. On April 10, 2017, the Equity Committee filed a motion with the Bankruptcy Court seeking approval of a

As of December 31, 2016, our obligations under the senior secured promissory notes for which BAM is the agent were $20,000,000. Further, as of December 31, 2016, our obligation under such notes for accrued interest amounted to approximately $4,113,000 and is included in current liabilities in the condensed consolidated financial

- 8 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~statements. The~~settlement ~~total~~agreement ~~amounts~~with ~~borrowed~~DMRJ, ~~under~~Montsant and Platinum that, among other things, provides for the ~~BAM~~reduction ~~senior~~and ~~secured~~allowance ~~promissory~~of ~~notes~~the ~~together~~company’s ~~with~~obligations ~~accrued~~to ~~interest~~DMRJ ~~were~~and ~~paid~~Montsant in ~~full~~the ~~effective~~aggregate ~~January~~amount 5of $55,000,000, ~~2017~~the ~~upon~~release of any recovery on account of the ~~closing~~preferred shares held by Platinum and a mutual release of claims and causes of action. At a hearing held before the ~~Transaction~~Bankruptcy ~~with~~Court ~~L-3~~on April 27, 2017, the Bankruptcy Court approved the settlement pending the submission of an order.

AsThe oftotal ~~February~~amounts ~~13,~~borrowed ~~2017, our obligations to DMRJ~~ under ~~each~~the ofBAM ~~the~~senior ~~three~~secured promissory notes ~~and a revolving line~~ of ~~credit approximated~~ $1120,~~970,~~000, ~~$17,523,~~000, ~~$1,000,000~~together ~~and~~with ~~$17,662,000, respectively. Further, as of February 13, 2017, our obligation to DMRJ for~~ accrued interest ~~under~~of ~~these instruments approximated~~ $104,~~012~~113,000. ~~Please~~were ~~refer~~paid toin ~~Note~~full 14effective toJanuary ~~the~~5, ~~condensed~~2017 ~~consolidated~~upon ~~financial~~the ~~statements~~closing ~~for a discussion~~ of the ~~August~~Transaction ~~2016~~with ~~conversions of principal indebtedness by DMRJ~~L-3.

As of ~~February~~May 1315, 2017, our obligations to ~~Montsant~~DMRJ under aeach of the three promissory ~~note~~notes and a revolving line of credit approximated $511,~~284~~970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of ~~February~~May 1315, 2017, our obligation to ~~Montsant~~DMRJ for accrued interest under ~~this~~these ~~instrument~~instruments approximated $~~502~~11,838,000. Please refer to Note 14 to the condensed consolidated financial statements for a discussion of the August 2016 conversions of principal indebtedness by DMRJ.

As of May 15, 2017, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of May 15, 2017, our obligation to Montsant for accrued interest under this instrument approximated $702,000.

On December 11, 2015, we entered into an Accounts Receivable Purchase Agreement (the “ RCA Purchase Agreement”) with Republic Capital Access, LLC (“RCA”), pursuant to which we may sell eligible accounts receivables relating to U.S. government prime contracts or subcontracts (as defined in the RCA Purchase Agreement, “Eligible Receivables”) to RCA. The total amount of Eligible Receivables that we may sell to RCA is subject to a maximum limit of $2,000,000 of outstanding receivables at any given time. On April 11, 2016, we amended the RCA Purchase Agreement (the “Amended RCA Purchase Agreement”). As amended, the total amount of Eligible Receivables that we may sell to RCA is subject to a maximum limit of $3,500,000 of outstanding receivables at any given time.

Pursuant to the terms of the RCA Purchase Agreement, we will receive from RCA, within two business days of the submission of the applicable invoice, an initial payment equal to 90% of the face value of an Eligible Receivable purchased by RCA. Following payment of such Eligible Receivable to RCA by the relevant customer, RCA shall pay the Company the residual 10% of such receivable, less transaction fees payable to RCA by the Company pursuant to the RCA Purchase Agreement.

We have paid, the following fees, as applicable, to RCA pursuant to the RCA Purchase Agreement: (i) an initial enrollment fee equal to $5,000.00; (ii) a discount factor equal to 0.35%, for U.S. government contracts (or 0.53% for U.S. government subcontracts), of the amounts of purchased receivables; (iii) a program access fee equal to 0.017% of the daily ending account balance for each day that receivables are outstanding; (iv) a commitment fee equal to 1% of Maximum Amount minus the amount of purchased receivables; and (v) expenses relating to the negotiation of the RCA Purchase Agreement, which amount is not expected to exceed $1,000. As of ~~December~~March 31, ~~2016~~2017, RCA has purchased $16,913,000 of our receivables pursuant to the RCA Purchase Agreement.

The RCA Purchase Agreement terminated on October 10, 2016, as a consequence of our filing of voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. As of that date, we were no longer able to sell eligible accounts receivable to RCA and we have collected all amounts owed under the RCA Purchase Agreement from RCA. As of ~~December~~March 31, ~~2016~~2017 the outstanding amount borrowed under the RCA Purchase Agreement was $0.

$2.5 million of the cash proceeds from the Transaction with L-3 ~~are~~were ~~being~~ held in an escrow account to secure the Debtors’ obligations for the purchase price adjustments under the Asset Purchase Agreement for the Debtors’ net working capital, which adjustments ~~are~~were ~~expected~~completed toin beMay, ~~completed~~2017 inand $2.393 million of the ~~first~~escrow ~~half~~funds were transferred from the escrow account to the Company. No further proceeds are due from L-3 as a result of ~~calendar~~the ~~2017~~Transaction.

The payment of our secured obligations with DMRJ and Montsant will be stayed until such time that the Official Committee of Equity Holders has concluded their activities to assert certain estate claims and causes of action and challenge the validity, enforceability, and perfection of certain prepetition secured claims. ~~Subject~~The toBankruptcy ~~the~~Court ~~terms~~granted ofstanding ato ~~settlement~~the ~~that~~Equity ~~will~~Committee beto ~~filed~~pursue ~~with~~some ~~the~~of ~~Bankruptcy~~their ~~Court,~~claims and ~~which~~causes isof ~~subject~~action toagainst ~~Bankruptcy~~DMRJ ~~Court~~and ~~approval~~Montsant, ~~interest~~but onstayed ~~our~~the ~~debt~~Equity ~~obligations~~Committee ~~with~~from ~~DMRJ~~pursuing ~~and~~claims ~~Montsant~~until ~~will~~a ~~not~~mediation ~~accrue~~could ~~until~~be ~~such~~held ~~time~~with ~~that~~ the ~~obligations~~secured ~~are~~creditors. ~~paid~~A bymediation ~~us,~~was orheld ~~until~~on ~~August~~April 104-5, 2017~~. Further,~~ ~~upon~~between the ~~occurrence~~Equity ofCommittee, anthe ~~event~~Company ofand ~~default under certain provisions of our credit agreements with~~ DMRJ, ~~Montsant~~ and ~~BAM~~Montsant, wewhich ~~could~~resulted bein ~~required~~a toproposed ~~pay~~Settlement ~~default~~Plan, ~~rate~~which ~~interest~~was ~~equal~~filed towith the ~~lesser~~Bankruptcy ~~of 2~~Court.5% ~~per~~Subject ~~month~~to ~~and~~ the ~~maximum~~terms ~~applicable legal rate per annum on the outstanding principal balance. The failure to cure an event~~ of ~~default or negotiate further extensions of our obligations to our secured lenders would have~~ a ~~material~~settlement ~~adverse~~that ~~impact~~has onbeen ~~our~~filed ~~liquidity~~with ~~and~~the ~~financial~~Bankruptcy ~~condition~~Court, and ~~could~~which ~~raise~~is ~~doubt~~subject as to ~~our ability to successfully emerge from Chapter 11 and provide a recovery to equity holders.~~

On August 24, 2016, a Cayman Islands court appointed an insolvency specialist, RHSW Caribbean, to liquidate the assets of Platinum Partners Value Arbitrage Fund LP (“Platinum”). On October 18, 2016, RHSW Caribbean filed a Chapter 15 bankruptcy petition with the United States Bankruptcy Court for the District of Southern New

- 9 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~York~~Bankruptcy Court approval, ~~which~~interest ~~seeks~~on our debt obligations with DMRJ and Montsant continues to ~~protect~~accrue ~~Platinum's~~until Usuch time that the settlement is approved and all obligations are paid by us.S. ~~assets~~Further, ~~from~~upon ~~its~~the ~~creditors~~occurrence ~~while~~of an ~~insolvency~~event ~~proceeding~~of isdefault ~~underway~~under incertain provisions of our credit agreements with DMRJ, Montsant and BAM, we could be required to pay default rate interest equal to the ~~Cayman~~lesser ~~Islands~~of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance. The failure to cure an event of default or negotiate further extensions of our obligations to our secured lenders would have a material adverse impact on our liquidity and financial condition and could raise doubt as to our ability to successfully emerge from Chapter 11 and provide a recovery to equity holders.

We have suffered recurring losses from operations. Our condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

There can be no assurances that our forecasted results will be achieved or that we will be able to raise additional capital necessary to operate our business. These conditions raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Interim Financial Statements and Basis of Presentation

Principles of Consolidation

The accompanying condensed consolidated financial statements include our operations in Massachusetts, California and Shanghai, China, and those of our wholly-owned subsidiaries. On March 25, 2015, our Board of Directors approved restructuring actions to better align costs with current and future geographic revenue sources and to improve efficiencies. Our San Diego, CA advanced technology office was relocated to our Wilmington, MA facility and our Shanghai office was closed. All intercompany transactions and accounts have been eliminated in consolidation.

Accounting Principles

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments), which we consider necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for the periods presented. The results of operations and cash flows for the three months ended may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year. The balance sheet at June 30, 2016 has been derived from our audited consolidated financial statements at that date, but does not include all of the information and notes required by U.S. GAAP for complete financial statements.

The information contained in this Form 10-Q should be read in conjunction with our audited financial statements, included in our Form 10-K, as of and for the year ended June 30, 2016.

Use of Accounting Estimates

The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Some of the more significant estimates include allowance for doubtful accounts, allowance for sales returns, inventory valuation, warranty reserves, and long-lived assets. Management's estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends and management's assessments of the probable future outcome of these matters. Consequently, actual results could differ from such estimates.

Significant accounting policies are described in Note 2 to the condensed consolidated financial statements included in Item 7 of our Form 10-K for the fiscal year ended June 30, 2016.

Foreign Currency Translation

The assets and liabilities of our Shanghai representative office were translated into U.S. dollars at current exchange rates as of the balance sheet date, expenses were translated at average monthly exchange rates. Net unrealized translation gains or losses associated with the Shanghai office were recorded directly to other comprehensive income. Realized gains and losses from foreign currency transactions were not material for any of the periods presented. We had short-term inter-company receivables from our Shanghai office which were adjusted each period for changes in foreign currency exchange rates with a corresponding entry recorded as a component of the consolidated statement of operations and comprehensive loss.

- 10 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Foreign Currency Translation

The assets and liabilities of our Shanghai representative office were translated into U.S. dollars at current exchange rates as of the balance sheet date; expenses were translated at average monthly exchange rates. Net unrealized translation gains or losses associated with the Shanghai office were recorded directly to other comprehensive income. Realized gains and losses from foreign currency transactions were not material for any of the periods presented. We had short-term inter-company receivables from our Shanghai office which were adjusted each period for changes in foreign currency exchange rates with a corresponding entry recorded as a component of the consolidated statement of operations and comprehensive loss.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current period presentation. On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement to sell our explosives trace detection assets, constituting substantially all of our assets, to L-3 Communications Corporation for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment. We concluded that it was appropriate to classify the assets used in our explosives detection business as held for sale, as all of the criteria established under ASC 205 were met. ~~Corresponding~~ ~~reclassifications have also been made to the balance sheet at June 30, 2016.~~ These changes in classification had no effect on the previously reported condensed consolidated statement of operations for any period and did not materially affect previously reported cash flows in the condensed consolidated statement of cash flows.

Discontinued Operations and Assets Classified as Held for Sale

Accounting Standards Codification (Topic 205) Presentation of Financial Statements – Reporting Discontinued Operations (“ASC 205”), establishes the criteria for a component of an entity classification as held for sale and reporting an entities financial statements as a discontinued operation. Under ASC 205, a component or group of components, or a business should be classified as held for sale in period in which all of the criteria are met.

Management, having the authority to approve the action, commits to a plan to sell the entity to be sold.

The entity to be sold is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such entities to be sold.

An active program to locate a buyer or buyers and other actions required to complete the plan to sell the entity to be sold have been initiated.

The sale of the entity to be sold is probable (the future event or events are likely to occur), and transfer of the entity to be sold is expected to qualify for recognition as a completed sale, within one year, unless events or circumstances beyond an entity’s control extend the period required to complete the sale as discussed below.

The entity to be sold is being actively marketed for sale at a price that is reasonable in relation to its current fair value.

Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

The Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). Under ASU 2014-08, a disposal of a component of an entity, a component or group of components shall be reported in discontinued operation if the ~~if the~~ disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results, as determined when the component or group of components; meets the criteria to be classified as held for sale; is disposed of by sale; or, is disposed of other than by sale.

The sale of our explosive detection assets ~~will~~to ~~have~~L-3 Communications Corporation on January 5, 2017 had a significant effect on our operations and financial results, ~~given~~as ~~that~~substantially ~~we are disposing of essentially~~ all of the assets used in our sole business and product line were sold pursuant to the Transaction.

- 11 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following ~~balance~~schedule ~~sheet~~shows ~~provides~~ the major classes and final values of our explosives detection business’ ~~held~~assets ~~for~~and liabilities sold to L-3 Communications Corporation on January 5, 2017, and our estimate of the resulting gain from the Transaction. The Company has determined that the sale of assets and liabilities ~~and~~to isL-3 ~~reconciled~~Communications toCorporation ~~our~~was ~~condensed~~not ~~consolidated~~a ~~balance~~strategic ~~sheet~~shift asand oftherefore ~~December~~there ~~31,~~was ~~2016~~no ~~and~~need ~~June~~to ~~30,~~present ~~2016~~discontinued operations.

Secure Point Technologies, Inc.
	Amounts in ($000)
Condensed Consolidated Balance Sheet
Cash received from L-3 at Closing (net of adjustments)	$ 113,447
As of December 31, 2016
Assets acquired by L-3
(in thousands)
Cash and cash equivalents	3,712
	Held for Sale	Continuing	Total
Restricted cash and investments	367
ASSETS
Accounts receivable-trade, net	3,760
Current assets:
Inventories, net	10,868
Cash and cash equivalents	$ 3,354	$ -	$ 3,354
Prepaid expenses and other current assets	561
Restricted cash and investments	367	-	367
Property and equipment, net	833
Accounts receivable-trade, net	3,806	-	3,806
Other non-current assets	98
Inventories, net	10,633	-	10,633
Total assets sold	$ 20,198
Prepaid expenses and other current assets	677	149	826
Liabilities assumed by L-3
Total current assets	18,837	149	18,986
Accounts payable	4,910
Property and equipment, net	832	-	832
Accrued compensation	2,058
Other non-current assets	98	-	98
Warranty reserve	2,694
Total assets	$ 19,767	$ 149	$ 19,916
Accrued rent	174
LIABILITIES AND STOCKHOLDERS' DEFICIT
Other accrued liabilities	216
Current liabilities:
Deferred revenue (current and long term)	1,448
Debtor-in-possession super-priority senior secured promissory note	$ -	$ 8,000	$ 8,000
Current and long-term obligations under capital leases	44
Senior secured promissory note – BAM	-	20,000	20,000
Total liabilities assumed	11,542
Senior secured convertible promissory note – Montsant Partners	-	5,284	5,284
Gain on sale of assets and liabilities	$ 104,791
Senior secured promissory note – DMRJ	-	1,000	1,000
Second senior secured convertible promissory note – DMRJ	-	11,970	11,970
Third senior secured convertible promissory note - DMRJ	-	17,523	17,523
Line of credit - DMRJ	-	17,662	17,662
Current maturities of obligations under capital lease	15	-	15
Warrant derivative liability	-	2,167	2,167
Accrued expenses	5,169	18,643	23,812
Accounts payable	4,589	1,770	6,359
Deferred revenue	779	-	779
Total current liabilities	10,552	104,019	114,571
Long-term liabilities:
Long-term obligations under capital lease, net of current maturities	29	-	29
Deferred revenue, net of current	451	-	451
Total long-term liabilities	480	-	480
Total liabilities	11,032	104,019	115,051
Commitments and contingencies
Stockholders' deficit:
Common stock;	-	80	80
Preferred stock; no stated value; 5,000,000 shares authorized
Series G Convertible Preferred Stock	-	-	-
Series H Convertible Preferred Stock	-	7,000	7,000
Series I Convertible Preferred Stock	-	-	-
Series J Convertible Preferred Stock	-	-	-
Additional paid-in capital	-	123,957	123,957
Accumulated deficit	-	(226,075)	(226,075)
Deferred compensation	-	(24)	(24)
Other comprehensive income	-	-	-
Treasury stock, at cost	-	(73)	(73)
Total stockholders' deficit	-	(95,135)	(95,135)
Total liabilities and stockholders' deficit	$ 11,032	$ 8,884	$ 19,916

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Secure Point Technologies, Inc.
Condensed Consolidated Balance Sheet
As of June 30, 2016
(in thousands)

	Held for Sale	Continuing	Total
ASSETS
Current assets:
Cash and cash equivalents	$ 1,338	$ -	$ 1,338
Restricted cash and investments	367	-	367
Accounts receivable-trade, net	7,123	-	7,123
Inventories, net	4,681	-	4,681
Prepaid expenses and other current assets	229	235	464
Total current assets	13,738	235	13,973
Property and equipment, net	874	-	874
Other non-current assets	98	-	98
Total assets	$ 14,710	$ 235	$ 14,945
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Senior secured promissory note – BAM	$ -	$ 20,000	$ 20,000
Senior secured convertible promissory note – Montsant Partners	-	5,284	5,284
Senior secured promissory note – DMRJ	-	1,000	1,000
Second senior secured convertible promissory note – DMRJ	-	18,970	18,970
Third senior secured convertible promissory note - DMRJ	-	17,523	17,523
Line of credit – DMRJ	-	17,662	17,662
Current maturities of obligations under capital lease	18	-	18
Accrued expenses	5,729	9,452	15,181
Accounts payable	3,143	1,512	4,655
Deferred revenue	406	-	406
Total current liabilities	9,296	91,403	100,699
Long-term liabilities:
Long-term obligations under capital lease, net of current maturities	35	-	35
Deferred revenue, net of current	479	-	479
Total long-term liabilities	514	-	514
Total liabilities	9,810	91,403	101,213
Commitments and contingencies
Stockholders' deficit:
Common stock;	-	79	79
Preferred stock; no stated value; 5,000,000 shares authorized
Series G Convertible Preferred Stock	-	-	-
Series H Convertible Preferred Stock	-	-	-
Series I Convertible Preferred Stock	-	-	-
Series J Convertible Preferred Stock	-	-	-
Additional paid-in capital	-	114,255	114,255
Accumulated deficit	-	(200,084)	(200,084)
Deferred compensation	-	(467)	(467)
Other comprehensive income	-	22	22
Treasury stock, at cost	-	(73)	(73)
Total stockholders' deficit	-	(86,268)	(86,268)
Total liabilities and stockholders' deficit	$ 9,810	$ 5,135	$ 14,945

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Warrant Derivative Liability

Accounting Standards Codification (“ASC”) 815-40-15 “Derivatives and Hedging”, requires freestanding contracts that are settled in common stock, including common stock warrants to be designated as an equity instrument, asset or liability. On July 20, 2016, we issued a warrant to purchase 50,657,894 shares of our common stock to DMRJ LLC, which warrant has since expired since the Zapata acquisition was not consummated. Under the provisions of ASC 815-40-15, a contract designated as an asset or a liability must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. The warrant derivative liability should initially and subsequently be measured at fair value with changes in fair value recorded in earnings in each reporting period.

The fair value is estimated using a binomial option pricing model, which includes variables such as the expected volatility of our share price, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense / income recognized for changes in the valuation of the warrant liability.

Beneficial Note Conversion Feature - DMRJ

Accounting Standards Codification (“ASC”) 470-20 “Debt,” addresses the accounting for financial instruments which have a beneficial conversion feature. In accordance with ASC 470-20, a conversion feature is beneficial, or “in the money,” when the conversion rate of the convertible security is below the market price of the underlying common stock. A beneficial conversion feature, calculated as of the commitment date, is the difference between the convertible instruments conversion price and the fair value of the company’s common stock on that date multiplied by the number of common shares the debt converts into.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”. The FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new rule also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein, which is effective for our fiscal year beginning July 1, 2018, the first day of our 2019 fiscal year. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update 2014-12, Compensation-Stock Compensation (“ASU 2014-12”). The FASB issued ASU 2014-12 to provide specific guidance on share-based payment awards that provide for achievement of a specific performance target that could be achieved after the requisite service period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. Earlier adoption is permitted. ASU 2014-12 may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this guidance should be recognized in the financial statements as an adjustment to the opening retained earnings balance at that date. The adoption of ASU 2014-12 did not have a material impact on our consolidated financial statements.

- 14 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

going concern and to provide related footnote disclosures. This new rule requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles currently in U.S. auditing standards. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plan, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued. This guidance is effective for annual periods ending after December 15, 2016, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. The adoption of ASU 2014-15 did not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330) (“ASU 2015-11”). ASU 2015-11 was issued to more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards. The core principle of this updated guidance is that an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in ASU 2015-11 apply to inventory that is measured using the first-in, first-out or average cost methods. ASU 2015-11 amends some of the guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory, but the clarifications are not intended to result in any changes in practice other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost or net realizable value for inventory. There are no other substantive changes to the guidance on the measurement of inventory. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which is effective for our fiscal year beginning July 1, 2017, the first day of our 2018 fiscal year. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.

In August 2015, the FASB issued Accounting Standards Update 2015-15, Interest – Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 states that Staff at the Securities and Exchange Commission would not object to an entity deferring or presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there were outstanding borrowings under the arrangement.

Fair Value Measurement

Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” establishes a three-level fair value hierarchy to classify the inputs used in measuring fair value, which are as follows:

Level 1 inputs to the valuation methodology are based on quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 inputs to the valuation methodology are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 inputs to the valuation methodology are based on unobservable inputs that reflect the company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Our financial instruments at ~~December~~March 31, ~~2016~~2017 and June 30, 2016 include cash equivalents, restricted cash, accounts receivable accounts payable, derivative instruments, borrowings under our senior secured convertible promissory note, senior secured promissory note, ~~debtor-in-possession financing,~~ and a revolving line of credit. The carrying amounts of cash and cash equivalents, restricted cash, receivable and accounts payable are representative of their respective fair values because of the short-term maturities or expected settlement dates of these instruments. The fair value of debt, included in Note 12 to the condensed consolidated financial statements, is based on the fair value of similar instruments. These instruments are short-term in nature and there is no known trading market for our debt.

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table provides the non-recurring fair value measurements of assets and liabilities as of ~~December~~March 31, ~~2016~~2017:

		Fair Value Measurements as of December 31, 2016
		Fair Value Measurements as of March 31, 2017
(In thousands)	Carrying Value at ~~December~~March 31, ~~2016~~2017	Quoted Prices in Active Markets for Identical Asset Level 1	Significant Other Observable Inputs Level 2	Significant Unobservable Inputs Level 3
Certificate of deposit	$ 312	$ 312	$ -	$ -
Senior secured convertible promissory note – Montsant	$ 5,284	$ -	$ -	$ 5,284
Debtor-in-possession super-priority senior secured promissory note	8,000	-	-	8,000
Senior secured promissory note – BAM	20,000	-	-	20,000
Senior secured convertible promissory note – Montsant	5,284	-	-	5,284
Senior secured promissory note – DMRJ	1,000	-	-	1,000
Second senior secured convertible promissory note – DMRJ	11,970	-	-	11,970
Third senior secured convertible promissory note – DMRJ	17,523	-	-	17,523
Line of credit – DMRJ	17,662	-	-	17,662

The following table provides the non-recurring fair value measurements of assets and liabilities as of June 30, 2016:


		Fair Value Measurements as of June 30, 2016
(In thousands)	Carrying Value at June 30, 2016	Quoted Prices in Active Markets for Identical Asset Level 1	Significant Other Observable Inputs Level 2	Significant Unobservable Inputs Level 3
Certificate of deposit	$ 312	$ 312	$ -	$ -
Senior secured promissory note – BAM	20,000	-	-	20,000
Senior secured convertible promissory note – Montsant	5,284	-	-	5,284
Senior secured promissory note – DMRJ	1,000	-	-	1,000
Second senior secured convertible promissory note – DMRJ	18,970	-	-	18,970
Third senior secured convertible promissory note – DMRJ	17,523	-	-	17,523
Line of credit - DMRJ	17,662	-	-	17,662

The following table summarizes the changes in the fair value of our Level 3 financial liabilities that are measured at fair value for each reporting period:

(In thousands)	Warrant Derivative Liability For the Three Months Ended ~~December~~March 31,		Warrant Derivative Liability For the ~~Six~~Nine Months Ended ~~December~~March 31,
	2016	2015	2016	2015
	2017	2016	2017	2016
Balance at beginning of period	$ 122,~~664~~167	$ -	$ -	$ -
Fair value on date of issuance	-	-	15,~~703~~704	-
Net change in fair value of financial instrument	(~~10,497~~362)	-	(13,~~536~~899)	-
Balance at end of period	$ 2,167	$ -	$ 2,167	$ -
Reclassification of balance to equity	(1,805)	-	(1,805)	-
Balance at end of period	$ -	$ -	$ -	$ -

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Cash and Investments

As of ~~December~~March 31, ~~2016~~2017 and June 30, 2016, we had restricted cash and investments, with maturities of less than one year, of $~~367,000~~0 and $367,000, respectively. Restricted cash and investments consisted of the following:

(In thousands)	~~December~~March 31, ~~2016~~2017	June 30, 2016
Current assets
Certificates of deposit	$ ~~312~~-	$ 312
Cash maintained to secure corporate credit card	55-	55
Total	$ ~~367~~-	$ 367

The restricted investments of $312,000 held in certificates of deposit collateralize our performance under an irrevocable letter of credit issued in April 2010, expiring April 15, 2017, aggregating to $297,000, in connection with our contract with the India Ministry of Defence, plus the bank required collateralization deposit of $15,000. The letter of credit provides warranty performance security equal to 5% of the contract amount under the terms of the contract with the India Ministry of Defence. ~~We have amended the letter of credit, extending the expiration date to April 15, 2017.~~

In May 2015, we entered into a corporate credit card agreement with our primary bank, pursuant to which the bank reserves $55,000 of our available cash held in our operating account maintained with the bank to collateralize 105% of the credit limit that is available under the credit card agreement. The restricted cash and restricted investments were assumed by L-3 as part of the Transaction, along with the underlying letter of credit and credit card agreements.

Stock Based Compensation

For the three months ended ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, our consolidated statements of operations and comprehensive loss include $~~180~~121,000 and $~~326~~314,000, respectively, of compensation costs and no income tax benefit related to our stock-based compensation arrangements for employee and non-employee director awards. For the ~~six~~nine ~~month~~months ended ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, our condensed consolidated statements of operations and comprehensive loss include $~~470~~592,000 and $~~668~~982,000, respectively, of compensation costs and no income tax benefit related to our stock-based compensation arrangements for employee and non-employee director awards, as follows:

	For the Three Months Ended December 31,		For the Six Months Ended December 31,
	For the Three Months Ended March 31,		For the Nine Months Ended March 31,
(In thousands)	~~2016~~2017	~~2015~~2016	~~2016~~2017	~~2015~~2016
Cost of revenues	$ 12-	$ 3114	$ 37	$ 6175
Research and development	25-	4633	47	~~130~~163
Selling, general and administrative	~~143~~121	~~249~~267	~~386~~508	~~477~~744
Total	$ ~~180~~121	$ ~~326~~314	$ ~~470~~592	$ ~~668~~982

As of ~~December~~March 31, ~~2016~~2017, the total amount of unrecognized stock-based compensation expense was approximately $~~614~~492,000, which ~~will~~would be recognized over a weighted average period of 10.4778 years. As of March 31, 2017, there were options outstanding to purchase 3,774,470 shares of our common stock at exercise prices ranging from $0.54 to $1.10. However, as a result of the L-3 Transaction, all Company employees holding stock options transferred to L-3, and any unexercised stock options held by those employees expired on April 5, 2017.

As of December 31, 2016, there were options outstanding to purchase 20,241,500 shares of our common stock at exercise prices ranging from $0.08 to $1.50.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

(In thousands)	~~December~~March 31, ~~2016~~2017	June 30, 2016
Inventory deposit	$ ~~486~~-	$ 109
Insurance	~~129~~431	128
Bank fees	4-	12
Other prepaid expenses	~~207~~33	215
Total	$ ~~826~~464	$ 464

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventories, net

We value our inventories at lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead. The components of inventories, net of reserves, consist of the following:

(In thousands)	~~December~~March 31, ~~2016~~2017	June 30, 2016
Raw materials	$ ~~7,479~~-	$ 3,067
Work in progress	~~1,406~~-	976
Finished goods	~~1,748~~-	638
Total	$ ~~10,633~~-	$ 4,681

As of ~~December~~March 31, ~~2016~~2017 and June 30, 2016, our reserves for excess and slow-moving inventories were $~~106,000~~0 and $171,000, respectively.

Property and Equipment, net

Property and equipment consist of the following:

(In thousands)	~~December~~March 31, ~~2016~~2017	June 30, 2016
Machinery and equipment	$ ~~538~~-	$ 529
Computers and software	~~502~~-	507
Furniture and fixtures	98-	96
Leasehold improvements	~~191~~-	178
Equipment under capital lease	94-	94
Construction in progress	~~342~~-	342
	1,765	1,746
	-	1,746
Less: accumulated depreciation and amortization	~~933~~-	872
Total	$ ~~832~~-	$ 874

For the three months ended ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, depreciation expense was approximately $341,~~000~~700 and $5049,000, respectively.

For the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, depreciation expense was approximately $7778,~~000~~700 and $~~104~~153,000, respectively.

Accrued Expenses

Accrued expenses consist of the following:

(In thousands)	~~December~~March 31, ~~2016~~2017	June 30, 2016
Current liabilities
Accrued interest	$ 1311,~~646~~997	$ 7,703
Accrued compensation and benefits	~~2,131~~344	3,347
Accrued warranty costs	~~2,692~~-	2,282
Accrued legal and accounting	~~3,898~~510	533
Accrued taxes	788	106
Accrued dividends	~~397~~660	-
Other accrued liabilities	~~970~~415	1,210
Total	$ 2313,~~812~~934	$ 15,181

On January 16, 2015, Glenn D. Bolduc, resigned his positions as Chief Executive Officer and President of the Company), as well as his seat on the Company’s Board of Directors and his position as Chairman of the Board. In connection with and prior to Mr. Bolduc’s resignations, Mr. Bolduc entered into a Separation Agreement and Release (the “Separation Agreement”) with the Company. The Separation Agreement provides that Mr. Bolduc’s resignation will be deemed an involuntary termination without cause pursuant to his Amended and Restated Employment Agreement dated as of June 25, 2013. In this regard, and subject to the terms contained in the Employment Agreement, Mr. Bolduc is entitled to receive: (i) annual base salary for 18 months on a regular payroll basis; (ii) a pro rata portion of any bonus earned in 2015; (iii) continuation of coverage under and contributions to

- 1817 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Employment Agreement dated as of June 25, 2013. In this regard, and subject to the terms contained in the Employment Agreement, Mr. Bolduc is entitled to receive: (i) annual base salary for 18 months on a regular payroll basis; (ii) a pro rata portion of any bonus earned in 2015; (iii) continuation of coverage under and contributions to health care, dental and life insurance benefits for a 12 month period; and (iv) transfer of any key man life insurance. In connection with Mr. Bolduc’s resignation, we recorded a non-recurring charge of $725,000 in our consolidated statements of operations and comprehensive loss for the year ended June 30, 2015. As of ~~December~~March 31, ~~2016~~2017 and June 30, 2016, $0 and $55,000, respectively, of separation benefits are included in accrued expenses in our condensed consolidated financial statements.

10.

Deferred Revenues – Current and Long-Term

Deferred revenues are recorded when we receive payments for product or services for which we have not yet completed our obligation to deliver product or have not completed services required by the contractual agreements.

As of ~~December~~March 31, ~~2016~~2017 and June 30, 2016, we had customer advance payment and extended warranty service agreements with maturities of less than one year, of $~~779,000~~0 and $406,000, respectively, and extended warranty service agreements, with maturities of more than one year, of $~~451,000~~0 and $479,000, respectively. Deferred revenues consisted of the following:

(In thousands)	~~December~~March 31, ~~2016~~2017	June 30, 2016
Current liabilities
Customer advance payments	$ ~~282~~-	$ 42
Extended warranty service agreements	~~497~~-	364
Total	$ ~~779~~-	$ 406
Long-term liabilities
Extended warranty service agreements	$ ~~451~~-	$ 479
Total	$ ~~451~~-	$ 479

11.

Earnings Per Share

Basic earnings per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method and assumed conversion of certain convertible promissory notes and convertible preferred stock. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversion of potential shares. As of ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, potentially dilutive shares are excluded from the earnings per share calculation, because their effect would be antidilutive. Shares deemed to be antidilutive include stock options, warrants, convertible debt and convertible preferred stock.

	For the Three Months Ended December 31,		For the Six Months Ended December 31,
	For the Three Months Ended March 31,		For the Nine Months Ended March 31,
(In thousands, except share and per share amounts)	~~2016~~2017	~~2015~~2016	~~2016~~2017	~~2015~~2016
Basic and diluted loss per share:
Numerator:
Net income (loss)	$ 194,~~590~~800	$ (34,~~313~~096)	$ ~~(25~~69,~~594)~~207	$ (48,~~224~~320)
Denominator:
Weighted average shares	79,~~875~~886,~~620~~165	78,~~528~~878,~~620~~953	79,~~767~~814,~~287~~516	77,~~367~~871,~~787~~509
Basic and diluted income (loss) per share	$ 0.02	$ (0.04)	$ (0.32)	$ (0.05)
Net income (loss) per share, basic and diluted	$ 1.19	$ (0.05)	$ 0.87	$ (0.11)

- 1918 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Common stock equivalents excluded from the diluted earnings per share calculation for the three and ~~six~~Nine months ended ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, were as follows:

	For the Three Months Ended December 31,		For the Six Months Ended December 31,
	For the Three Months Ended March 31,		For the Nine Months Ended March 31,
	2016	2015	2016	2015
	2017	2016	2017	2016
Common stock equivalents excluded
Stock options	85,324	~~556~~425,~~561~~097	315,368	~~686~~575,~~859~~792
Warrants	-	-	-	326,~~396~~191
Convertible debt	69,858,383	3940,~~800~~342,~~000~~568	77,777,723	39,~~800~~983,~~000~~458
Convertible preferred stock	-27,456,640	-	27,456,640	-
	69,943,707	40,356,561	105,549,731	40,519,255
	97,400,374	40,767,655	105,549,731	40,565,441

12.

Long-Term Debt and Credit Arrangements

Term Debt and Revolving Credit Facility with DMRJ Group, LLC and Term Debt with Montsant Partners, LLC

We are a party to several loan and credit agreements with DMRJ Group LLC (“DMRJ”), an accredited institutional investor. In December 2008, we entered into a note and warrant purchase agreement with DMRJ pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock. Thereafter, we entered into a series of amendments, waivers and modifications of this facility. The note, which is collateralized by all of our assets, originally bore interest at 11.0% per annum.

The note contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, provided, however, that a merger or consolidation is permitted if we are the surviving entity; against the sale, assignment, transfer or lease of our assets, other than in the ordinary course of business and excluding inventory and certain asset sales expressly permitted by the note purchase agreement; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we have authorized or reserved for the purpose of issuance, 150% of the aggregate number of shares of our common stock issuable upon exercise of the warrant; that we maintain a minimum cash balance of at least $500,000; that the aggregate dollar amount of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00.

On March 19 2015, we amended each of our credit instruments with DMRJ, pursuant to which the maturity of all of our indebtedness to DMRJ was extended from March 31, 2015 to March 31, 2016 and DMRJ waived our compliance with certain financial covenants contained in each of our promissory notes and all related credit agreements through the new maturity date.

On May 4, 2015, we entered into an assignment agreement with DMRJ and Montsant Partners LLC (“Montsant”), wherein DMRJ assigned its rights, title and interest in the senior secured promissory note dated December 10, 2008 and appointed DMRJ as its collateral agent under the promissory note agreement.

DMRJ and Montsant Partners, LLC are funds managed by Platinum Partners Value Arbitrage Fund LP.

The note purchase agreement with Montsant contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, against the sale, assignment, transfer or lease of our assets, other than in the ordinary course of business; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we maintain a minimum cash balance of at least $500,000; that the weighted average age of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00. Montsant waived our compliance with certain financial covenants in our promissory notes through the maturity date, consistent with the financial covenants which have been waived in each of our promissory notes and all related credit agreements with DMRJ.

- 2019 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On March 31, 2016, we further amended each of our credit instruments with DMRJ and Montsant, which were entered into on April 6, 2016 and effective March 31, 2016, pursuant to which:

the maturity of all of our indebtedness to DMRJ under (i) a senior secured promissory note dated July 1, 2009 and (ii) a credit agreement dated September 4, 2009, was extended from March 31, 2016 to June 30, 2016;

the maturity of all of our indebtedness to (i) Montsant under an amended and restated senior secured convertible promissory note dated March 12, 2009 (the “March 2009 Note”), (ii) DMRJ under a senior secured convertible promissory note dated September 5, 2012 (the “September 2012 Note”) and (iii) to DMRJ under a senior secured convertible promissory note dated February 28, 2013 (the “February 2013 Note” and together with the March 2009 Note, the July 2009 Note, the September 2012 Note, the “Notes”), was extended from March 31, 2016 to December 30, 2016;

the provisions regarding the prepayment of the March 2009 Note were deleted;

the “blocker” provisions of the March 2009 Note limiting the number of shares of our common stock, par value $0.001 per share (“Common Stock”) to be issued upon the conversion of the March 2009 Note, when aggregated with the all other shares of Common Stock beneficially owned by the holder of the March 2009 Note at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time were deleted;

the conversion provisions of the March 2009 Note were fixed to remove the limitations on the conversion to only upon prepayment of the note or during the 30-day period ending March 31, 2014;

we agreed to make the amendments to our Series H Convertible Preferred Stock (the “Series H Preferred Stock”), Series I Convertible Preferred Stock (the “Series I Preferred Stock”) and Series J Convertible Preferred Stock (the “Series J Preferred Stock” and together with the Series H Preferred Stock and the Series I Preferred Stock, the “Amended Preferred Stock Series”;

we agreed to prepay the interest due on each of the March 2009 Note, the September 2012 Note and the February 2013 Notes from the date of the amendment through June 30, 2016 by increasing the outstanding aggregate principal amount under each such Note;

all outstanding amounts due to DMRJ and Montsant shall be immediately due and payable if (a) we receive an offer from another person or entity with respect to a Major Transaction, (b) DMRJ notifies us that such offer is satisfactory to DMRJ (in its sole discretion), and (c) either (i) our Board of Directors does not approve such transaction within ten (10) days of our receipt of such notice from DMRJ, (ii) if such transaction is subject to stockholder approval, we do not file a preliminary proxy statement with the SEC within fifteen (15) days of the receipt of such notice from DMRJ or (iii) if such transaction is subject to stockholder approval, our stockholders do not approve such transaction within ninety (90) days of the receipt of such notice from DMRJ, that we shall be obligated to immediately forward to DMRJ any offer that we receive with respect to any Major Transaction;

we shall provide not less than thirty (30) business days’ written notice to DMRJ and Montsant, as applicable, of the our intent to repay all or any portion of the principal, interest and other amounts outstanding under our indebtedness and following receipt of any such notice, DMRJ and Montsant shall have the option to convert all or any portion of their Notes in accordance with the applicable conversion terms of the applicable Note;

each Note, plus all accrued and unpaid interest thereon at the time of any conversion, may be converted at the option of DMRJ or Montsant, as applicable, at any time and from time to time into such number of shares of the applicable preferred stock of the Company, upon one (1) business days’ notice to us, and upon Montsant’s conversion of the March 2009 Note, the shares of preferred stock shall be issued to Montsant or any designee(s) of Montsant;

we agreed that if there is any breach of the Comfort Letter , the interest rate under each term note and advances under the Credit Agreement will be increased by an additional fourteen percent (14%) per annum (pro-rated for partial years), not to exceed the maximum amount of such interest permitted by applicable New York law;

agreed that we will not, and will not permit any Subsidiary to, enter into, create, incur, assume, suffer, become or be liable for in any manner, or permit to exist, any indebtedness, or guarantee, assume,

- 2120 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

endorse or otherwise become responsible for (directly or indirectly), any indebtedness, performance or obligations of any other person, and failure by us to comply with this clause shall be an immediate event of default;

we shall be obligated to provide DMRJ and Montsant with written notice of the anticipated record date with respect to any Major Transaction at least five (5) business days prior to such record date, and failure by us to comply with this clause shall be an immediate event of default;

we agreed not to amend the terms of any Amended Preferred Stock Series without the prior written consent of the DMRJ and Montsant, and any breach is an immediate event of default; and

we agreed not to issue any shares of any Amended Preferred Stock Series other than upon the conversion of the March 2009 Note, the September 2012 Note and the February 2013 Note or with the prior written consent of the Investor, and any breach of this provision is an immediate event of default.

The prepayment by us of all interest to be accrued from the March 31, 2016 through June 30, 2016, amounted to $119,400 on account of the March 2009 Note, $450,000 on account of the September 2012 Note and $450,000 on account of the February 2013 Note. Such prepayments were effected by increasing the outstanding aggregate principal amount under each of the March 2009 Note, the September 2012 Note and the February 2013 Note, respectively. Further, the accrued interest amount due under each of the March 2009 Note, the September 2012 Note and the February 2013 Note, as of March 31, 2016, of $1,980,000, $6,520,000 and $5,073,000, respectively, were added to the outstanding principal amount under each of the notes, as of March 31, 2016. Consequently, the new outstanding principal balance under (i) the March 2009 Note was $5,284,000, (ii) the September 2012 Note was $18,970,000 and (iii) the February 2013 Note was $17,523,000, as of March 31, 2016.

However, despite the best efforts of the Company, DMRJ and the Assignee, certain post-closing effectiveness conditions to the April 6, 2016 amendment with respect to the delivery of an opinion of counsel and payment of the fees and expenses of DMRJ and the Assignee were not satisfied, and the April 6, 2016 amendment was, therefore, never deemed effective, resulting in our being in default of our obligations to DMRJ and the Montsant since March 31, 2016.

On July 20, 2016, we further amended each of our credit instruments with DMRJ and Montsant, effective as of June 30, 2016, pursuant to which:

the maturity of all of our indebtedness to DMRJ under (i) the amended and restated senior secured convertible promissory note, dated March 12, 2009 (as amended, the “March 2009 Note”), (ii) the senior secured promissory note dated July 1, 2009 (as amended, the “July 2009 Note”), (iii) the credit agreement dated September 4, 2009 (as amended, the “September 2009 Credit Agreement”), (iv) the senior secured convertible promissory note, dated September 5, 2012 (as amended, the “September 2012 Note”), and (v) the senior secured convertible promissory note, dated February 28, 2013 (as amended, the “February 2013 Note”) were each extended to October 31, 2016;

the “blocker” provisions of the March 2009 Note held by the Assignee, limiting the number of shares of Common Stock, to be issued upon the conversion of such notes, when aggregated with the all other shares of Common Stock beneficially owned by the holders of such notes at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, were confirmed as never having been deleted by the April 6, 2016 Amendment and an identical “blocker” provision was added to the September 2012 Note held by DMRJ;

the conversion and anti-dilution provisions of the February 2013 Note held by DMRJ were deleted in their entirety, and the conversion provisions of the September 2012 Note were limited to an aggregate total of $7,000,000 in obligations thereunder;

the conversion price for the September 2012 Note was reduced from $1.09 to $0.19 per share for up to $7,000,000 of the obligations thereunder, DMRJ agreed to convert $7,000,000 of the principal under the September 2012 Note prior to the consummation of the Zapata acquisition, and the remaining conversion rights under the September 2012 Note and the February 2013 Note were waived;

we agreed to amend our Series H Convertible Preferred Stock (the “Series H Preferred Stock”), Series I Convertible Preferred Stock (the “Series I Preferred Stock”) and Series J Convertible Preferred Stock (the “Series J Preferred Stock” and together with the Series H Preferred Stock and the Series I Preferred Stock, the “Amended Preferred Stock Series”) to correct and amend and reinsert the 4.99%

- 2221 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

“blocker” provisions in lieu and in replacement of the similar provision that was added in the Articles of Amendment to the Restated Articles of Organization that was filed on July 18, 2016;

we agreed to issue to DMRJ a warrant to purchase 50,657,894 shares of our common stock (see Note 16 to the condensed consolidated financial statements), which warrant has expired since the Zapata acquisition was not consummated; and

DMRJ and Montsant waived any defaults from the failure of the effectiveness of the March 31, 2016 amendment.

As of ~~February~~May 1315, 2017, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of ~~February~~May 1315, 2017, our obligation to DMRJ for accrued interest under these instruments approximated $1011,~~012~~838,000. Please refer to Note 14 to the condensed consolidated financial statements for a discussion of the August 2016 conversions of principal indebtedness by DMRJ.

As of ~~February~~May 1315, 2017, our obligations to Montsant under a promissory note approximated $5,284,000. Further, as of ~~February~~May 1315, 2017, our obligation to Montsant for accrued interest under this instrument approximated $~~502~~702,000.

The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings. However, if the settlement proposal filed with the Bankruptcy Court is approved, DMRJ and Montsant would be paid the agreed amount within 48 hours of said approval.

Term Debt with BAM

On March 19, 2014, we entered into a note purchase agreement with a group of institutional investors and BAM Administrative Services LLC (“BAM”), an administrative agent for the investors, pursuant to which we issued senior secured promissory notes in the aggregate principal amount of $20,000,000. The notes bear interest at 15% per annum and mature on March 31, 2015. The proceeds from the sale of the notes were used to repay (i) $17,624,000 of our outstanding indebtedness to DMRJ under the amended and restated revolving promissory note dated September 29, 2011 (ii) $1,809,000 of interest outstanding under the amended and restated promissory note and (iii) $567,000 of interest outstanding under our senior secured convertible promissory note dated September 5, 2012.

On March 19, 2015, we extended our credit agreement with BAM pursuant to which, amongst other matters, the interest rate increased to 16% per annum, commencing on April 1, 2015 and we extended the maturity date of our indebtedness from March 31, 2015 to March 31, 2016. The maturity of our indebtedness to BAM was automatically extended to October 30, 2016 as a result of the extension of the maturity date of our indebtedness to DMRJ and Montsant. Due to the filing of the voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court we were deemed to be in default under our note purchase agreement with BAM and our interest rate was increased to 18.5% effective as of October 10, 2016.

The notes purchase agreement contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, against the sale, assignment, transfer or lease of our assets, other than in the inventory ordinary course of business ; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we maintain a minimum cash balance of at least $500,000; that the weighted average age of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00. BAM waived our compliance with certain financial covenants in our promissory notes through the maturity date, consistent with the financial covenants which have been waived in each of our promissory notes and all related credit agreements with DMRJ.

- 2322 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Further, upon the occurrence of an event of default under certain provisions of our agreements with BAM, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance outstanding.

On April 6, 2016, we extended our credit agreement with BAM, effective March 31, 2016 pursuant to which;

the maturity of our indebtedness to the investors extended from March 30, 2016 to June 29, 2016; provided that in the event we extend the maturity date on all obligations owed to DMRJ, to a date past June 30, 2016, the maturity date of the Secured Term Notes shall automatically extend to such business day as is immediately prior to such extended maturity date of the DMRJ obligations;

all outstanding amounts due to the under the notes shall be immediately due and payable if (a) we receive an offer from another person or entity with respect to a Major Transaction (as defined below under the heading “Amendments to Preferred Stock”), (b) BAM, on behalf of the investors, notifies us that such offer is satisfactory to the investors (in their sole discretion), and (c) either (i) our Board of Directors does not approve such transaction within ten (10) days of receipt of such notice from BAM, (ii) if such transaction is subject to stockholder approval, we do not file a preliminary proxy statement with the SEC within fifteen (15) days of receipt of such notice from BAM or (iii) if such transaction is subject to stockholder approval, our stockholders do not approve such transaction within ninety (90) days of receipt of such notice from BAM; provided, that we shall be obligated to immediately forward to BAM, on behalf of the investors, any offer that we receive with respect to any Major Transaction;

we shall provide not less than thirty (30) business days’ written notice to BAM, of our intent to repay all or any portion of the principal, interest and other amounts outstanding under our obligations to the investors;

agreed that we will not, and will not permit any subsidiary to, enter into, create, incur, assume, suffer, become or be liable for in any manner, or permit to exist, any indebtedness, or guarantee, assume, endorse or otherwise become responsible for (directly or indirectly), any indebtedness, performance or obligations of any other person, and failure by us to comply with this clause shall be an immediate event of default;

AsThe oftotal ~~December~~amount ~~31,~~borrowed ~~2016, our obligations~~ under the BAM senior secured promissory notes ~~for~~of ~~which BAM is the agent were~~ $20,000,000. ~~Further,~~together aswith ~~of December 31, 2016, our obligation under such notes for~~ accrued interest ~~amounted~~of to approximately $4,113,000 ~~and~~were ispaid ~~included~~ in ~~current~~full ~~liabilities~~effective inJanuary 5, 2017 upon the ~~consolidated~~closing ~~financial~~of ~~statements~~the Transaction with L-3.

The total amount borrowed under the BAM senior secured promissory notes together with accrued interest were paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.

Debtor-in-Possession Financing

In connection with the Chapter 11 filings, we filed a motion seeking the approval of the Bankruptcy Court for a super-priority senior secured loan of $5.7 million (the “Original DIP Loan”) between the Debtors and DIP SPV I, L.P., as the debtor-in-possession lender ( the “Original DIP Lender”) pursuant to a Senior Secured Super-priority debtor-in-possession Loan and Security Agreement entered into by the Debtors and the Original DIP Lender on October 10, 2016. The Original DIP Loan would bear interest at 12% and shall pay a one-time closing fee of $199,500 on the closing date of the Original DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which is at a rate of 24%), paid to the Original DIP Lender as of the termination date of the Original DIP Loan. The Original DIP Loan is payable in full upon the consummation of the sale under the Asset Purchase Agreement with L-3 or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the Original DIP Loan.

The use of proceeds from the Original DIP Loan would be limited to working capital and other general corporate purposes consistent with the budget that the Company presented to the Original DIP Lender, including payment of costs and expenses related to the administration of the bankruptcy proceedings and payment of other expenses as approved by the Bankruptcy Court.

-On 24November 7, 2016, we terminated the Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of October 10, 2016 (as amended on November 3, 2016, the “Original DIP Agreement”), with the original lender, DIP SPV I, L.P. (the “Original DIP Lender”). In connection with such

- 23 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On November 7, 2016, we terminated the Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of October 10, 2016 (as amended on November 3, 2016, the “Original DIP Agreement”), with the original lender, DIP SPV I, L.P. (the “Original DIP Lender”). In connection with such termination, we paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lender’s advisors.

On November 7, 2016 (the “Effective Date”), we entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “New DIP Agreement”) with Tannor Partners Credit Fund, LP, the New DIP Lender, which DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of the Effective Date for the initial loan amount of $5.7 million. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender agreed to lend up to a total of $8.0 million to us, with the initial installment of $5.7 million payable upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2.3 million payable upon the Bankruptcy Court entering the final order for the New DIP Agreement. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016. AsOn ofor about December 318, 2016, New DIP Lender asserted that we were not in compliance with Section 7.1(a) of the ~~total~~New DIP Agreement, wherein the net cash receipts for the cumulative period commencing on November 7, 2016 and ending on November 30, 2016 were required be equal to or exceed 85% of the budgeted cash receipts amount ~~borrowed~~(the “DIP Budget”), which event constituted an event of default under the New DIP Agreement. ~~was~~Effective $8as of December 1,~~000,000,~~ ~~plus~~2016 ~~accrued~~the interest ofrate $under the New DIP Agreement increased 12.0% to 24.0%. ~~Interest~~Subject ~~for~~to the ~~month~~terms ~~ended~~of ~~December~~a 31Stipulation and Order entered in the Bankruptcy Case, ~~2016~~we ~~was~~agreed ~~paid~~with onthe ~~December~~New 30DIP Lender to waive such asserted default in exchange for an agreement by us to pay an additional $96,000 ~~2016~~of interest, which interest was not credited against the exit fee.

OnThe ortotal ~~about~~amount ~~December~~borrowed 8,under ~~2016, New DIP Lender asserted that we were not in compliance with Section 7.1(a) of~~ the New DIP Agreement, ~~wherein~~together ~~the~~with ~~net~~accrued ~~cash~~interest ~~receipts~~was ~~for~~paid ~~the~~in ~~cumulative~~full ~~period~~effective ~~commencing~~January ~~on November 7~~5, ~~2016~~2017 ~~and~~upon ~~ending on November 30, 2016 were required be equal to or exceed 85% of~~ the ~~budgeted~~closing ~~cash receipts amount (the “DIP Budget”), which event constituted an event~~ of ~~default under~~ the ~~New~~Transaction ~~DIP~~with ~~Agreement~~L-3. ~~Effective~~ asAs of ~~December~~March 131, ~~2016~~2017 ~~the~~there ~~interest~~was ~~rate~~no remaining amount borrowed under the New DIP Agreement ~~increased 12~~.0% to 24.0%. Subject to the terms of a Stipulation and Order entered in the Bankruptcy Case, we agreed with the New DIP Lender to waive such asserted default in exchange for an agreement by us to pay an additional $96,000 of interest, which interest was not credited against the exit fee.

The total amount borrowed under the New DIP Agreement together with accrued interest was paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.

13.

Convertible Preferred Stock

Series H Convertible Preferred Stock

In connection with the September 7, 2012 amendment to our credit instruments with DMRJ we issued to DMRJ a second senior secured convertible promissory note in the principal amount of $12,000,000 (the “September 2012 Note”). The September 2012 convertible promissory note is convertible in whole or in part, at DMRJ’s option, into shares of Series H Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series H Preferred Stock, the “Series H Original Issue Price”). The number of shares of our Preferred Stock, par value $0.10 per share (the “Preferred Stock”), designated as Series H Preferred Stock was 15,000.

The holders of the Series H Preferred Stock will be entitled to receive, prior to the payment of any dividends with respect to our Common Stock and/or Series G Convertible Preferred Stock, cumulative dividends on each share of Series H Preferred Stock at a rate equal to 15% of the Series H Original Issue Price per annum, (i) when, as and if declared by our Board of Directors, (ii) upon a liquidation, dissolution or winding up of the Company (a “Liquidation Event”), or (iii) upon the repurchase or conversion of the Series H Preferred Stock. All dividends accruing on the Series H Preferred Stock are payable by the issuance of additional shares of Series H Preferred Stock.

Each share of Series H Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by (i) dividing the Series H Original Issue Price by the Series H Conversion Price (as defined below) in effect at the time of conversion and (ii) multiply the result by 1,000. The “Series H Conversion Price” will initially be equal to $1,090, and is subject to adjustment in the event that (a) we issue additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series H Original Issue Price or the Series H Conversion Price, the New Note will be convertible indirectly, at DMRJ’s option, into shares of Common Stock at an effective conversion price of $1.09 per share, which represents a discount of approximately 20% from the daily volume weighted average price of the Common Stock over the 20 trading days preceding the date of the amendment.

-Upon 25a -Liquidation Event, the holders of shares of Series H Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders, before any payment is made to the holders of Common Stock and/or Series G Preferred Stock in respect of such stock, an amount per share equal to the Series H Original Issue Price, plus any accrued but unpaid dividends thereon, whether or not declared. At the option of holders of a majority of the outstanding Series H Preferred Stock, (i) a consolidation or merger of us with

- 24 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Upon a Liquidation Event, the holders of shares of Series H Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders, before any payment is made to the holders of Common Stock and/or Series G Preferred Stock in respect of such stock, an amount per share equal to the Series H Original Issue Price, plus any accrued but unpaid dividends thereon, whether or not declared. At the option of holders of a majority of the outstanding Series H Preferred Stock, (i) a consolidation or merger of us with or into another entity or person, or any other corporate reorganization, in which our stockholders immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities’ voting power immediately following such consolidation, merger or reorganization, or (ii) a sale or transfer of all or substantially all of our assets for cash, securities or other property, will be deemed to be a Liquidation Event.

The holders of the Series H Preferred Stock will have no voting rights except as required by applicable law. However, without the consent of the holders of a majority of the outstanding Series H Preferred Stock, we may not (i) amend, alter or repeal any provision of its Articles of Organization or By-laws in a manner that adversely affects the powers, preferences or rights of the Series H Preferred Stock; (ii) authorize or issue any equity securities (or any equity or debt securities convertible into equity securities) ranking prior and superior to the Series H Preferred Stock with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up; or (iii) consummate any capital reorganization or reclassification of any of its equity securities (or debt securities convertible into equity securities) into equity securities ranking prior and superior to the Series H Preferred Stock with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up.

On July 18, 2016, the Company adopted and filed Articles of Amendment to the Restated Articles of Organization of the Company (the “July 18 Preferred Stock Articles of Amendment”), pursuant to which the initial conversion price of the Series H Preferred Stock was reduced from $1,090 per share to $190 per share; and the “blocker” provisions of the Amended Series H Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, which the Company purported to delete in the Articles of Amendment filed in connection with the Fourteenth Amendment, were reinserted. In connection with such amendment, on July 20, 2016, DMRJ agreed to waive its rights under the September 2012 Note so that only $7,000,000 of the principal under the September 2012 Note would be convertible into shares of Series H Preferred Stock and the remaining balance would not be convertible.

Between August 11, 2016 and August 23, 2016, DMRJ converted $7,000,000 of principal into 7,000 Series H Preferred Stock shares, of which DMRJ assigned 4,401.54 shares of Series H Preferred Stock to Platinum Partners Value Arbitrage Fund LP and distributed 1,467.18 shares to ED&F Man Capital Markets Limited and 1,131.28 shares to Prime Capital (Bermuda) Limited.

As of ~~December~~March 31, ~~2016~~2017, 7,000 shares of Series H Convertible Preferred Stock were issued and outstanding.

Series I Convertible Preferred Stock and Series J Convertible Preferred Stock

In connection with the February 28, 2013 amendment to our credit instruments with DMRJ we issued to DMRJ a third senior secured convertible promissory note in the principal amount of $12,000,000 (the “February 2013 Note”). The February 2013 Note is convertible in whole or in part, at DMRJ’s option, into shares of Series I Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series I Preferred Stock, the “Series I Original Issue Price”). The number of shares of our Preferred Stock, par value $0.10 per share (the “Preferred Stock”), designated as Series I Preferred Stock was 15,000.

As amended, the March 2009 Note is convertible in whole or in part, at DMRJ’s option, into shares of Series J Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series J Preferred Stock, the “Series J Original Issue Price”). The number of shares of our Preferred Stock, par value $0.10 per share (the “Preferred Stock”), designated as Series J Preferred Stock was 6,000.

Each share of Series I Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by (i) dividing the Series I Original Issue Price by the Series I Conversion Price (as defined below) in effect at the time of conversion and (ii) multiplying the result by 1,000. The “Series I Conversion Price” will initially be equal to $1,180.00, and is subject to adjustment in the event that (a) we issue additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series I Original Issue Price or the Series I Conversion Price, the February 2013 Note will be convertible indirectly, at DMRJ’s option, into shares of Common Stock at an effective conversion price of $1.18 per share, which represents premium of approximately 3% over the closing price of the Common Stock on the trading day preceding the date of the February 28, 2013 amendments.

- 2625 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series I Original Issue Price or the Series I Conversion Price, the February 2013 Note will be convertible indirectly, at DMRJ’s option, into shares of Common Stock at an effective conversion price of $1.18 per share, which represents premium of approximately 3% over the closing price of the Common Stock on the trading day preceding the date of the February 28, 2013 amendments.

The holders of the Series I Preferred Stock will be entitled to receive, prior to the payment of any dividends with respect to our Common Stock and/or Series G Preferred Stock, cumulative dividends on each share of Series I Preferred Stock at a rate equal to 15% of the Series I Original Issue Price per annum, (i) when, as and if declared by our Board of Directors, (ii) upon a “Liquidation Event”, or (iii) upon the conversion of the Series I Preferred Stock All dividends accruing on the Series I Preferred Stock are payable by the issuance of additional shares of Series I Preferred Stock.

The holders of Series J Preferred Stock will be entitled to participate on an “as converted” basis in all dividends or distributions declared or paid on our Common Stock.

Upon a Liquidation Event, the holders of shares of Series I Preferred Stock and Series J Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders, pari passu with distributions made with respect to the Series H Preferred Stock but before any payment is made to the holders of Common Stock and /or Series G Preferred Stock in respect of such stock, (i) an amount per share of Series I Preferred Stock equal to the Series I Original Issue Price, plus any accrued but unpaid dividends thereon, whether or not declared, and (ii) an amount per share of Series J Preferred Stock equal to the Series J Original Issue Price, plus any dividends declared but unpaid thereon. At the option of holders of a majority of the outstanding Series I Preferred Stock, (i) a consolidation or merger of the company with or into another entity or person, or any other corporate reorganization, in which the stockholders of the company immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities’ voting power immediately following such consolidation, merger or reorganization, or (ii) a sale or transfer of all or substantially all of our assets for cash, securities or other property, will be deemed to be a Liquidation Event.

Upon any such Liquidation Event, and after all payments described in the preceding paragraph are made in full in respect of the Series H Preferred Stock, the Series I Preferred Stock and the Series J Preferred Stock, the holders of the Series G Preferred Stock will be entitled to be paid out of the assets of the company available for distribution to its stockholders an amount equal to $8.00 per share of Series G Preferred Stock, plus any declared but unpaid dividends, prior to the payment of any amounts to the holders of our Common Stock by reason of their ownership of such stock.

Each share of Series J Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by dividing the Series J Original Issue Price by the Series J Conversion Price (as defined below) in effect at the time of conversion. The “Series J Conversion Price” will initially be equal to $0.08, and is subject to adjustment in the event that (a) the Company issues additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series J Original Issue Price or the Series J Conversion Price, the March 2009 Note will be convertible indirectly, at DMRJ’s option, into shares of Common Stock at an effective conversion price of $.08 per share. Prior to the execution of the amendment, the March 2009 Note was convertible directly into shares of Common Stock at a conversion price of $0.08 per share. Accordingly, we do not believe this change to be material.

The holders of the Series I Preferred Stock and the Series J Preferred Stock will have no voting rights except as required by applicable law. However, without the consent of the holders of a majority of the outstanding Series I Preferred Stock or Series J Preferred Stock, as the case may be, with each such series voting as a separate class, we may not (i) amend, alter or repeal any provision of our Articles of Organization or By-laws in a manner that adversely affects the powers, preferences or rights of the Series I Preferred Stock or Series J Preferred Stock, as the case may be; (ii) authorize or issue any equity securities (or any equity or debt securities convertible into equity securities) ranking prior and superior to the Series I Preferred Stock or Series J Preferred Stock, as the case may be, with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up; or (iii) consummate any capital reorganization or reclassification of any of its equity securities (or debt securities convertible into equity securities) into equity securities ranking prior and superior to the Series I Preferred Stock or Series J Preferred Stock, as the case may be, with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up.

-In 27connection -with the March 31, 2016 amendment to our credit agreements with DMRJ and Montsant, we agreed to amend certain terms of each of the Amended Preferred Stock Series as follows, which amendments were set forth in Articles of Amendment adopted on April 6, 2016:

the number of shares of our Preferred Stock, par value $0.10 per share (the “Preferred Stock”), designated as Series H Preferred Stock was increased from 15,000 shares to 22,500 shares, Series I

- 26 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

InPreferred ~~connection~~Stock ~~with~~was ~~the~~increased ~~March~~from 3115,000 ~~2016 amendment~~shares to ~~our~~21,000 ~~credit~~shares ~~agreements with DMRJ~~ and ~~Montsant,~~Series weJ ~~agreed to amend certain terms of each of the Amended~~ Preferred Stock ~~Series~~was asincreased ~~follows~~from 6,000 ~~which~~shares ~~amendments~~to ~~were set forth in Articles of Amendment adopted on April~~ 6,500 ~~2016:~~shares;

the number of shares of our Preferred Stock, par value $0.10 per share (the “Preferred Stock”), designated as Series H Preferred Stock was increased from 15,000 shares to 22,500 shares, Series I Preferred Stock was increased from 15,000 shares to 21,000 shares and Series J Preferred Stock was increased from 6,000 shares to 6,500 shares;

the Series J Preferred Stock was amended so that its holders are entitled to receive preferred dividends equal to fifteen percent (15%) of the original issue price (subject to certain adjustments) of such shares of Preferred Stock, which is paid by the issuance of additional shares of Series J Preferred Stock;

the Series J Preferred Stock was amended so that it has the same dividend rights as the Series H Preferred Stock and the Series I Preferred Stock wherein we cannot declare, pay or set aside any dividends on any shares of Common Stock unless the holders of the Series J Preferred Stock then outstanding shall simultaneously receive a dividend on each outstanding share of Series J Preferred Stock in an amount at least equal to that dividend per share of Series J Preferred Stock as would equal the product of (i) the dividend payable on each share of Common Stock and (ii) the number of shares of Common Stock issuable upon conversion of a share of Series J Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend;

we agreed that if there is any breach of the Comfort Letter, the preferred dividend rate under each Amended Preferred Stock Series will be increased by an additional fourteen percent (14%) per annum (pro-rated for partial years), not to exceed the maximum amount (if any) permitted by law;

each Amended Preferred Stock Series was amended so that in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company (a “Liquidation Event”), instead of receiving just the original issue price (subject to certain adjustments) of such shares of Preferred Stock, the holders of such Preferred Stock receive the greater of the original issue price (subject to certain adjustments) of such shares of Preferred Stock and the amount that they would have received if all such shares of such Amended Preferred Stock Series were converted into Common Stock in accordance with the terms of such Amended Preferred Stock Series immediately prior to such Liquidation Event;

the Series J Preferred Stock was amended so that its holders have the same rights as the holders of Series H Preferred Stock and Series I Preferred Stock to, at the option of the holders of a majority of the outstanding applicable Amended Preferred Stock Series, have a Liquidation Event also include (i) a consolidation or merger of the Company with or into another entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities voting power immediately following such consolidation, merger or reorganization (solely in respect of their equity interests), or (ii) a sale or transfer of all or substantially all of the Company’s assets for cash, securities or other property;

each Amended Preferred Stock Series was amended to give their respective holders voting rights on any Major Transaction that is approved by our board of directors and presented to the our stockholders for their action or consideration at any meeting of our stockholders (or, if applicable, by written consent of stockholders in lieu of meeting) (a “Major Transaction Stockholder Vote”), entitling them to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of the applicable Amended Preferred Stock Series held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter (irrespective of whether any such conversion would result in economic gain or loss to the holder) and shall be entitled to notice of any such meeting of stockholders in accordance with our by-laws, which holders of the applicable Amended Preferred Stock Series, except as provided by law or as otherwise provided therein, vote on any Major Transaction Stockholder Vote together with the holders of Common Stock as a single class;

Amended Preferred Stock Series, except as provided by law or as otherwise provided therein, vote on any Major Transaction Stockholder Vote together with the holders of Common Stock as a single class;

the “blocker” provisions of each Amended Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time were deleted; and,

~~- 28 -~~·

- 27 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~Amended~~effected ~~Preferred~~solely ~~Stock~~for ~~Series~~the atpurpose ~~that~~of ~~time~~changing the our jurisdiction of incorporation or (y) a consolidation, merger or other business combination in which holders of the Company’s voting power immediately prior to ~~4.99~~the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities); (ii) the sale or transfer of more than fifty percent (50%) of our assets (based on the ~~then~~fair ~~issued~~market ~~and~~value ~~outstanding~~as ~~shares~~determined in good faith by the Board of Directors) other than inventory in the ordinary course of business in one or a related series of transactions; or (iii) the closing of a purchase, tender or exchange offer made to the holders of more than fifty percent (50%) of the outstanding shares of Common Stock in which more than fifty percent (50%) of the outstanding atshares ~~such~~of ~~time~~Common Stock were ~~deleted;~~tendered and, accepted.

we shall be obligated to provide each holder of an Amended Preferred Stock Series with written notice of the anticipated record date with respect to any Major Transaction at least five (5) business days prior to such record date, where “Major Transaction” means (i) the consolidation, merger or other business combination by us with or into another entity or person (other than (x) pursuant to a migratory merger effected solely for the purpose of changing the our jurisdiction of incorporation or (y) a consolidation, merger or other business combination in which holders of the Company’s voting power immediately prior to the transaction continue after the transaction to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities); (ii) the sale or transfer of more than fifty percent (50%) of our assets (based on the fair market value as determined in good faith by the Board of Directors) other than inventory in the ordinary course of business in one or a related series of transactions; or (iii) the closing of a purchase, tender or exchange offer made to the holders of more than fifty percent (50%) of the outstanding shares of Common Stock in which more than fifty percent (50%) of the outstanding shares of Common Stock were tendered and accepted.

Further, we adopted on July 20, 2016, and filed on July 21, 2016, Articles of Amendment to the Restated Articles of Organization of the Company (the “July 21 Preferred Stock Articles of Amendment”), pursuant to which each of the Amended Preferred Stock Series was corrected and amended to reinsert the “blocker” provisions of each Amended Preferred Stock Series limiting the number of shares of the Common Stock to be issued upon the conversion of the applicable Amended Preferred Stock Series, when aggregated with the all other shares of Common Stock beneficially owned by the holder of such Amended Preferred Stock Series at that time, to 4.99% of the then issued and outstanding shares of the Common Stock outstanding at such time, in lieu and in replacement of the similar provisions in the July 18 Preferred Stock Articles of Amendment. In connection with such amendment, on July 20, 2016, DMRJ agreed to waive its rights under the February 2013 Note so that it would no longer be convertible into shares of Series I Preferred Stock.

As of ~~December~~March 31, ~~2016~~2017, there were no shares of Series I Preferred Stock or Series J Preferred Stock outstanding.

14.

Derivative Liabilities

Beneficial Note Conversion Feature - DMRJ

Accounting Standards Codification (“ASC”) 470-20 “Debt,” addresses the accounting for financial instruments which have a beneficial conversion feature. On July 20, 2016, we extended the maturity date of our obligations with DMRJ LLC. As amended, the conversion and anti-dilution provisions of the February 2013 Note held by DMRJ were deleted in their entirety, and the conversion provisions of the September 2012 Note were limited to an aggregate total of $7,000,000 in obligations thereunder. The conversion price for the September 2012 Note was reduced from $1.09 to $0.19 per share for up to $7,000,000 of the obligations thereunder. The market price of our common stock on the date of the note extension was $0.44 per share; therefore a beneficial conversion feature existed.

In accordance with ASC 470-20, a conversion feature is beneficial, or “in the money,” when the conversion rate of the convertible security is below the market price of the underlying common stock. A beneficial conversion feature, calculated as of the commitment date, is the difference between the convertible instruments conversion price and the fair value of the company’s common stock on that date multiplied by the number of common shares the debt converts into. For the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 we recorded a non-cash interest charge of $9,217,000 in our condensed consolidated statements of operations.

Between August 11, 2016 and August 23, 2016, DMRJ converted $7,000,000 of principal into 7,000 Series H Convertible Preferred Stock shares, of which DMRJ assigned 4,401.54 shares of Series H Convertible Preferred Stock to Platinum Partners Value Arbitrage Fund LP and assigned 1,467.18 shares to ED&F Man Capital Markets Limited and 1,131.28 shares to Prime Capital (Bermuda) Limited.

Warrant Derivative Liability

Accounting Standards Codification (“ASC”) 815-40-15 “Derivatives and Hedging”, requires freestanding contracts that are settled in common stock, including common stock warrants to be designated as an equity instrument, asset or liability. Under the provisions of ASC 815-40-15, a contract designated as an asset or a liability must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. On July 20, 2016, we issued a warrant to purchase 50,657,894 shares of our common stock to DMRJ LLC at an exercise price of no lower than $0.19 per share with a five-year term, first exercisable on October 31, 2016. The specific exercise price shall be the higher of: (i) $0.19 per share; and (ii) in the event that we sell our existing business (which would not include any assets acquired by us) on or prior to October 31, 2016, the price in such sale. This warrant expired on January 31, 2017 by its terms because the Zapata acquisition was not consummated, and the balance of the warrant derivative value at that date was written off to equity.

- 2928 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. On July 20, 2016, we issued a warrant to purchase 50,657,894 shares of our common stock to DMRJ LLC at an exercise price of no lower than $0.19 per share with a five-year term, first exercisable on October 31, 2016. The specific exercise price shall be the higher of: (i) $0.19 per share; and (ii) in the event that we sell our existing business (which would not include any assets acquired by us) on or prior to October 31, 2016, the price in such sale. This warrant has since expired since the Zapata acquisition was not consummated.

The warrant derivative liability was valued using a binomial option pricing model, with the following assumptions on the following dates:

	Warrant Derivative Liability – Fair Value Calculation
	July 20, 2016	~~September~~December 3031, 2016	~~December~~January 31, ~~2016~~2017
Shares eligible to be purchased	50,657,894	50,657,894	50,657,894
Exercise price	$ 0.19	$ 0.19	$ 0.19
Stock price on date of measurement	$ 0.44	$ 0.3709	$ 0.0908
Expected volatility	61.9%	6481.81%	81.1%
Expected dividend yield	0.0%	0.0%	0.0%
Risk free interest rate	1.17%	1.1343%	1.43%
Expected life (in years)	5.00	4.8155	4.5547
Fair value	$ 15,~~703~~704,000	$ 122,~~664~~167,000	$ 21,~~167~~805,000

The warrant derivative liability was initially and is subsequently measured at fair value with changes in fair value recorded in earnings in each reporting period.

As of the date of grant, we recorded a warrant derivative liability of $15,703,000 and will accrete the fair value of the warrant derivative liability to non-cash interest expense in our condensed consolidated statements of operations over the least of the warrant vesting period or duration of the new note conversion feature. For the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, we ~~accreted~~accrued $15,703,000 to non-cash interest expense in our condensed consolidated statement of operations, given the new note conversion amount was converted to shares of our Series H Convertible Preferred Stock in August 2016 (see Note 13 to our condensed consolidated financial statements). For the three and ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, we recorded a non-cash benefits of $10362,~~497,~~000 and $13,~~536~~899,000, respectively, in our consolidated statements of operations and comprehensive loss to recognize the change in the fair value of the warrant as of that date. The fair value is estimated using a binomial option pricing model, which includes variables such as the expected volatility of our share price, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense / income recognized for changes in the valuation of the warrants liability.

15.

Stockholders’ Deficit

Common Shares Authorized

On July 1, 2015, at an Annual Meeting of Stockholders, our stockholders approved an amendment to the Company’s Restated Articles of Organization to increase the number of authorized shares of common stock by 50,000,000 shares to 250,000,000 shares. Articles of Amendment to our Restated Articles of Organization with the Commonwealth of Massachusetts were filed on July 20, 2016 to affect that increase. As a result of the stockholder approval, we are authorized to issue 250,000,000 shares of our common stock.

Common Stock Options and Stock Purchase Warrants

In connection with various financing agreements and services provided by consultants, we have issued warrants to purchase shares of our common stock. The fair value of warrants issued is determined using a binomial or Black-Scholes option pricing model.

Common Stock Options

In December 2004, we adopted the 2004 Stock Option Plan (the “2004 Plan”). The 2004 Plan provides for the grant of incentive stock options and non-qualified stock options to employees and affiliates. The exercise price of the options equa1 100% of the fair market value on the date of the grant or 110% of the fair market value for beneficial owners of more than 10% of our stock. Options expire between five and ten years from the date of the option grant and have various vesting periods. Options may be exercised by delivering to the company cash in an amount equal to such aggregate exercise price of the options exercised, or with the consent of the Committee, shares of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable consideration including a cashless exercise/resale procedure, or any combination of the foregoing. A total of 500,000 shares were originally reserved for issuance under the 2004 Plan. In December 2005, our stockholders approved an increase in the 2004 Plan from 500,000 shares to 1,000,000 shares. In December 2007, our stockholders approved an increase in the 2004 Plan from 1,000,000 shares to 2,000,000 shares. In March 2012, our stockholders approved an increase in the 2004 Plan from 2,000,000 shares to 4,000,000. The 2004 Plan expired in May 2014, as such no further options grants may be issued under this plan. In September 2012, our Board of Directors adopted an amendment to our 2004

- 3029 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable consideration including a cashless exercise/resale procedure, or any combination of the foregoing. A total of 500,000 shares were originally reserved for issuance under the 2004 Plan. In December 2005, our stockholders approved an increase in the 2004 Plan from 500,000 shares to 1,000,000 shares. In December 2007, our stockholders approved an increase in the 2004 Plan from 1,000,000 shares to 2,000,000 shares. In March 2012, our stockholders approved an increase in the 2004 Plan from 2,000,000 shares to 4,000,000. The 2004 Plan expired in May 2014, as such no further options grants may be issued under this plan. In September 2012, our Board of Directors adopted an amendment to our 2004 Stock Option increasing the total number of shares of our common stock issuable thereunder from 4,000,000 shares to 20,000,000 shares. On July 1, 2015, at the 2015 Annual Meeting of Stockholders, the September 2012 amendment was approved by our stockholders.

On July 2, 2014, our Board of Directors adopted the 2014 Stock Option Plan (the “2014 Plan”). The 2014 Plan provides for the grant of incentive stock options and non-qualified stock options to employees and affiliates. The exercise price of the options equa1 100% of the fair market value on the date of the grant or 110% of the fair market value for beneficial owners of more than 10% of our stock. Options expire between five and ten years from the date of the option grant and have various vesting periods. Options may be exercised by delivering to the company cash in an amount equal to such aggregate exercise price of the options exercised, or with the consent of the Committee, shares of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable consideration including a cashless exercise/resale procedure, or any combination of the foregoing. A total of 15,000,000 shares were originally reserved for issuance under the 2014 Plan. The 2014 Plan was approved by our stockholders on July 1, 2015 at the 2015 Annual Meeting of Stockholders.

As of ~~December~~March 31, ~~2016~~2017, there were options outstanding to purchase 203,~~241~~774,~~500~~470 shares of our common stock at exercise prices ranging from $0.0854 to $1.5010.

We issued no shares and 207,000 shares of common stock during the three months ended ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, respectively, as a result of the exercise of options by employees and consultants. We issued no shares and 8390,000 shares of common stock during the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, respectively, as a result of the exercise of options by employees and consultants.

Stock Purchase Warrants and Stock Issuances

In May 2015 we entered into two advisory and consulting services agreements, which provided for the issuance of an aggregate of 2,200,000 shares of our common stock as payment. In June 2015, we issued 550,000 shares of common and the advisory and services agreements provide for the issuance of the remaining 1,650,000 shares in equal monthly installments of 110,000 shares commencing in September 2015. During the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, we issued 440,000 shares of common stock having a value of $183,000 to these two advisors for services rendered under the advisory and consulting services agreement and issued 50,000 shares of our common stock to a third advisor having a value of $20,000.

As of ~~December~~March 31, ~~2016~~2017, there were warrants outstanding to purchase 523,~~832~~625,~~894~~000, shares of our common stock at exercise prices ranging from $0.1979 to $1.22 expiring at various dates between May 1, 2017 and October 20, 2021.

16.

Income Taxes

We are required to file federal and state income tax returns in the United States. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by us. In consultation with our tax advisors, we base our tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal and state taxing authorities in the jurisdictions in which we file tax returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions taken by us (“uncertain tax positions”) and, therefore, may require us to pay additional taxes. As required under applicable accounting rules, we accrue an amount for our estimate of additional income tax liability, including interest and penalties, which we could incur as a result of the ultimate or effective resolution of the uncertain tax positions. We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.

-We 31account -for uncertain income tax positions by accruing for the estimated additional amount of taxes for the uncertain tax positions when the uncertain tax position does not meet the more likely than not standard for

- 30 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~amounts~~sustaining ofthe ~~existing~~position. ~~assets~~We review and ~~liabilities~~update ~~and~~our ~~their~~accrual ~~respective~~as ~~tax~~more ~~bases.~~definitive ~~Deferred~~information ~~tax~~becomes ~~assets~~available ~~and~~from ~~liabilities~~taxing ~~are~~authorities, ~~measured~~upon ~~using~~completion ~~enacted~~of tax ~~rates~~audits, ~~expected~~upon toexpiration ~~apply~~of tostatutes ~~taxable~~of ~~income~~limitation, inor ~~the~~upon ~~years~~occurrence inof ~~which~~other ~~those~~events. ~~temporary~~This ~~differences~~requires significant judgment, the use of estimates, and ~~carry-forwards~~the ~~are~~interpretation ~~expected~~and toapplication beof ~~recovered~~complex ortax ~~settled~~laws. ~~The~~Significant ~~effect~~judgment onis ~~deferred~~required ~~tax~~in ~~assets~~assessing the timing and ~~liabilities~~amounts of adeductible ~~change~~and intaxable items and the probability of sustaining uncertain tax ~~rates~~positions. isThe ~~recognized~~benefits inof ~~income~~uncertain tax positions are recorded in ~~the~~our ~~period~~consolidated ~~that~~financial ~~includes~~statements only after determining a more-likely-than-not probability that the ~~enactment~~uncertain ~~date~~tax positions will withstand challenge, if any, from tax authorities. A ~~valuation~~When ~~allowance~~facts isand ~~established~~circumstances ~~when~~change, ~~necessary~~we toreassess ~~reduce~~these ~~deferred~~probabilities ~~tax~~and ~~assets~~record toany ~~amounts~~changes ~~expected~~in tothe beconsolidated ~~realized~~financial statements as appropriate.

We account for uncertain income tax positions by accruing for the estimated additional amount of taxes for the uncertain tax positions when the uncertain tax position does not meet the more likely than not standard for sustaining the position. We review and update our accrual as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate.

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of the assets and liabilities using the enacted tax rate in effect in the years in which the differences are expected to reverse. A valuation allowance has been recorded against the deferred tax asset as it is more likely than not, based upon our analysis of all available evidence, that the tax benefit of the deferred tax asset will not be realized.

A valuation allowance has been established for our tax assets as their use is dependent on the generation of sufficient future taxable income, which cannot be predicted at this time. Included in the valuation allowance is approximately $800,000 related to certain operating loss carryforwards resulting from the exercise of employee stock options, the tax benefit of which, when recognized, will be accounted for as a credit to additional paid-in capital rather than a reduction in income tax.

As of ~~December~~March 31, ~~2016~~2017, the Company has the following unused net operating loss and tax credit carryforwards available to offset future federal and state taxable income, both of which expire at various times as noted below:


(In thousands)	Net Operating Losses	Investment AMT & Research Credits	Expiration Dates
Federal	$ 115,701	$ 1,615	2022 to 2036
State	$ 81,872	$ 1,099	2017 to 2036

We have recorded a full valuation allowance against our net deferred tax assets of $52,892,000 as of ~~December~~March 31, ~~2016~~2017, due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable.

Potential 382 Limitation

Our net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service. Our ability to utilize our net operating loss (“NOL”) and alternative minimum tax (“AMT”) and research and development credit (“R&D”) carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of NOL, AMT and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined in Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.

The sale of our explosives trace detection assets, constituting our entire business, to L-3 for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment (the “Transaction”) ~~will~~may result in the recognition of a taxable gain of approximately $100 million. WeIf we have ~~engaged~~experienced aan ~~consulting~~ownership ~~firm~~change, toutilization ~~perform~~of athe ~~study~~NOL, toAMT ~~assess~~and ~~whether~~R&D ~~one~~credit orcarryforwards ~~more~~would ~~ownership~~be ~~changes~~subject ~~have~~to ~~occurred~~an ~~since~~annual welimitation, ~~became~~which ais ~~loss~~determined ~~corporation~~by asfirst ~~defined~~multiplying inthe ~~Section~~value ~~382~~of our common stock at the time of the ~~Code,~~ownership ~~but~~change weby ~~believe~~the ~~that~~applicable itlong-term, istax-exempt ~~likely~~rate, ~~that~~and anthen ~~ownership~~could ~~change~~be ~~has~~subject ~~occurred~~to additional adjustments, as required. If weAny ~~have~~such ~~experienced~~limitation anmay ~~ownership~~result ~~change,~~in ~~utilization~~the expiration of a portion of the NOL, AMT ~~and~~or R&D credit carryforwards ~~would~~before beutilization. Until such time as it is determined (if ever) that we are subject to anany ~~annual~~of ~~limitation~~the foregoing limitations, ~~which~~no isamounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC 740. We have not engaged any tax advisers to analyze whether it can be determined bythat ~~first~~we ~~multiplying~~are ~~the~~subject ~~value~~to any such limitations. Any carryforwards that expire prior to utilization as a result of ~~our~~such ~~common~~limitations ~~stock~~will atbe removed from deferred tax assets with a corresponding adjustment to the ~~time~~valuation allowance. Due to the existence of the valuation allowance, it is not expected that any potential limitation will have a material impact on our operating results.

- 3231 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a portion of the NOL, AMT or R&D credit carryforwards before utilization. Until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit under ASC 740. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any potential limitation will have a material impact on our operating results.

From time to time we may be assessed interest or penalties by major tax jurisdictions, namely the states of Massachusetts and California. As of June 30, 2016, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. No interest and penalties have been recognized by the Company to date.

Tax years 2013 through 2016 are subject to examination by the federal and state taxing authorities. There are no income tax examinations currently in process.

For the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 ~~and~~we ~~2015~~provided for $2,000,000 for income taxes in our consolidated statement of operations as we anticipate that while most of the gain from the sale of assets to L-3 will be covered by the existing net loss carryforwards, there may still be an income tax liability under the Alternative Minimum Tax (AMT) rules. We provided for no taxes for the nine months ended March 31, 2016 in our consolidated statement of operations as at that time we ~~have~~had significant net loss carryforwards.

Our net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and are subject to certain limitations in the event of cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%.

17.

Commitments and Contingencies

On April 1, 2013, we entered into a lease for manufacturing, research and office space in Wilmington, Massachusetts, the lease of which expires on June 30, 2020. Under the terms of the lease, we are responsible for our proportionate share of real estate taxes and operating expenses relating to this facility. We leased research and office space in San Diego, California and leased 300 square feet of office space in Shanghai, China. On March 25, 2015, our Board of Directors approved restructuring actions to better align costs with current and future geographic revenue sources and to improve efficiencies. We have exited from our leases in San Diego, CA and Shanghai, China in November 2015. Total rent expense, including assessments for maintenance and real estate taxes for the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 and ~~2015~~2016, was $~~367~~368,000 and $~~363~~573,000, respectively. On January 5, 2017, in connection with the closing of the Transaction with L-3, L-3 assumed our obligations under the Wilmington, Massachusetts lease.

License Agreements

We are obligated under one license agreement, assumed in connection with the acquisition of Ion Metrics, whereby we were granted rights to use certain intellectual property for safety, security and narcotic applications. The license agreement expired on September 30, 2016 and as of ~~December~~March 31, ~~2016~~2017 we have no obligation under this license agreement for future minimum guaranteed payments.

18.

Financial Information By Segment

Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker or decision making group, in determining how to allocate resources and in accessing performance. Our chief operating decision making group is composed of the chief executive officer and members of senior management. Based on qualitative and quantitative criteria, we have determined that we operate within one reportable segment, which is the Security Products Segment.

19.

Legal

On March 23, 2015, Bernard Miller (“Mr. Miller”), individually and on behalf of all others similarly situated shareholders of the company, filed a complaint against Dr. William J. McGann, Messrs. Glenn D. Bolduc, John H. Hassett, John A. Keating, Robert P. Liscouski, Howard Safir and Michael C. Turmelle and the Company in the Suffolk Superior Court of the Commonwealth of Massachusetts, seeking derivative action as a result of director breaches of fiduciary duty and unjust enrichment. Amongst other things, the plaintiff requested that the court compel the Company to hold an annual stockholders’ meeting; subject the September 2012 Amendment to the 2004 Plan to a vote at the next annual stockholders’ meeting; rescind the stock option awards granted under the September 2012 Amendment to 2004 Plan in the event that the amendment is not approved by a majority of our stockholders’; impose a trust, in favor of the Company, for any benefits improperly received; and award costs and expenses, including reasonable attorney fees.

-On 33July -1, 2015 we held our 2015 Annual Meeting of Stockholders. Stockholders approved an amendment to the Company’s 2004 Stock Option Plan to increase the aggregate number of shares of the Company’s common stock, par value $0.001 per share available for issuance under the Plan by 16,000,000 shares to 20,000,000 shares and approved the Company’s Amended and Restated 2014 Stock Option Plan.

- 32 -

SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On July 1, 2015 we held our 2015 Annual Meeting of Stockholders. Stockholders approved an amendment to the Company’s 2004 Stock Option Plan to increase the aggregate number of shares of the Company’s common stock, par value $0.001 per share available for issuance under the Plan by 16,000,000 shares to 20,000,000 shares and approved the Company’s Amended and Restated 2014 Stock Option Plan.

On May 22, 2015, a motion to dismiss the Complaint with prejudice was served on the plaintiff and subsequently filed with the Court. On July 21, 2015, the Court endorsed an Order of Stipulation the parties entered into. The Stipulation provides, among other things, that the Complaint is dismissed with prejudice and the Motion to Dismiss is moot. On December 17, 2015, the Court ruled that the Plaintiff’s counsel was entitled to a fee of $70,000 together with costs of approximately $6,000. During the fiscal year ended June 30, 2016, we recorded a charge of $76,000 in our condensed consolidated statement of operations and comprehensive loss.

On October 10, 2016, in connection with entering into the Asset Purchase Agreement with L-3, the Company and its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court.

On November 21, 2016, the LOI with Zapata was terminated, and Zapata subsequently filed a claim with the Bankruptcy Court seeking a breakup fee and other expenses related to the ~~cancellation~~termination. On May 9, 2017, Zapata filed a complaint in the Supreme Court of the ~~acquisition~~State of New York, New York County, against Robert Liscouski, the President of the Company and a member of the Board of Directors, asserting a claim for tortious interference of the LOI and seeking to recover from Mr. Liscouski the very same breakup fee and other expenses it is seeking from the Company in the Bankruptcy Court. Mr. Liscouski disputes and intends to vigorously defend against the claim asserted against him by Zapata. The Company has an obligation to indemnify Mr. Liscouski and disputes any payment obligations it may have to Zapata in connection with the LOI or the termination thereof.

We are not currently a party to any other legal proceedings, other than routine litigation incidental to our business that which we believe will not have a material effect on our business, assets or results of operations. From time to time, we are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities and in connection with the Chapter 11 cases. Each of these matters may be subject to various uncertainties.

20.

Subsequent Events

~~Sale~~Chapter of11 ~~Explosives~~Reorganization ~~Detector~~Plan ~~Assets, Bankruptcy Filing~~ and ~~Court~~Disclosure ~~Order Authorizing Sale~~Statement

On ~~October~~May 108, ~~2016~~2017, wethe ~~and~~Company ~~our~~filed ~~subsidiaries~~the ~~entered~~Debtors’ ~~into~~Joint anPlan ~~asset~~of ~~purchase~~Reorganization ~~agreement~~Pursuant ~~(as~~to ~~amended,~~Chapter 11 of the ~~“Asset~~Bankruptcy ~~Purchase~~Code ~~Agreement~~[Docket No. 707] (the “Plan”), ~~with~~and ~~L-3~~the ~~Communications~~related ~~Corporation~~disclosure statement [Docket No. 707] (the “~~L-3~~Disclosure Statement”). toThe ~~sell~~Plan ~~our~~provides ~~explosives~~for ~~trace~~the ~~detection~~substantive ~~assets,~~consolidation ~~constituting~~of ~~our~~the ~~entire~~bankruptcy ~~business,~~cases toand ~~L-3~~ for: ~~$117.5~~(i) ~~million~~the unimpairment and/or payment, in ~~cash~~full, ~~plus~~of all allowed claims, and preferred interests; and (ii) the ~~assumption~~option offor ~~specified~~holders ~~liabilities,~~of ~~subject~~Class to6 ~~adjustment~~Interests (as defined in the ~~“Transaction”~~Plan) in Secure Point Technologies, Inc. ~~The~~ ~~Asset~~(f/k/a ~~Purchase~~Implant ~~Agreement~~Sciences ~~constituted~~Corporation) that vote to accept the Plan to elect to either (x) receive a ~~“stalking~~Class ~~horse~~6 ~~bid”~~Cash Distribution (as defined in athe ~~sale~~Plan) ~~process~~or ~~that~~(y) ~~was~~retain ~~conducted~~their ~~under~~shares ~~Section~~in ~~363~~Reorganized ofSecure Point Technologies for the ~~U.S.~~purpose ~~Bankruptcy~~of ~~Code~~pursuing a Potential Business Venture (~~the~~as ~~“Bankruptcy~~defined ~~Code”~~in the Plan). In ~~connection~~Please ~~with~~see the ~~Asset~~Disclosure ~~Purchase~~Statement ~~Agreement,~~for ona ~~October~~further 10description of the Potential Business Venture. A hearing to consider entry of an order, ~~2016~~among other things, finding that the ~~Company~~Disclosure ~~and~~Statement ~~its~~contains ~~subsidiaries~~“adequate ~~IMX~~information” ~~Acquisition~~within ~~Corp.~~the meaning of section 1125 of the Bankruptcy Code, Capproving ~~Acquisition~~the ~~Corp.~~Disclosure Statement, and ~~Accurel~~establishing ~~Systems~~procedures ~~International~~for ~~Corp.~~the ~~(together~~solicitation ~~with~~and tabulation of votes to accept or reject the ~~Company,~~Plan (the “~~Debtors~~Disclosure Statement Hearing”) ~~filed~~will ~~voluntary~~be ~~relief~~held ~~petitions~~before ~~under~~the ~~Chapter~~Honorable 11Brendan ofL. ~~the~~Shannon, Chief United States Bankruptcy ~~Code~~Judge, ~~with~~in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), 824 N. ~~After~~ ~~the~~Market ~~filings~~Street, we6th ~~continued~~Floor, toCourtroom ~~operate~~1, ~~our~~Wilmington, ~~businesses~~Delaware as19801 ~~debtors-in-possession~~on ~~under~~June ~~the~~14, ~~jurisdiction~~2017, ofat 11:00 a.m. (prevailing Eastern Time). The Disclosure Statement may be amended at or prior to the ~~Bankruptcy~~Disclosure ~~Court~~Statement Hearing, and inthe ~~accordance~~Disclosure ~~with~~Statement ~~the~~Hearing ~~applicable~~may ~~provisions~~be ofadjourned from time to time by the Bankruptcy ~~Code. On~~Court or the ~~petition~~Debtor ~~date,~~without wefurther ~~filed~~notice ~~several~~other ~~motions~~than by such adjournment being announced in open court or by a notice of adjournment filed with the Bankruptcy Court, ~~including~~and aserved ~~motion~~on tosuch ~~have~~parties as the ~~Chapter~~Bankruptcy 11Court ~~cases~~may ~~jointly administered~~order.

~~On December 16, 2016, after the completion of the auction process in accordance with the requirements of the Bankruptcy Code, the Bankruptcy Court issued an order authorizing the Transaction with L~~-3 ~~under~~33 ~~Section 363 of the Bankruptcy Code.~~-

On January 5, 2017, the closing of the Transaction occurred and L-3 acquired substantially all the assets of the Debtors. In connection with the closing of the Transaction, on January 5, 2017, each of Drs. William J. McGann and Darryl Jones, Messrs. Roger Deschenes and Todd Silvestri and Ms. Brenda L. Baron resigned from their positions as executive officers and employees of the Company, and Dr. William J. McGann resigned from his position as a member of the Company’s board of directors. Also in connection with the closing of the Transaction, on January 5, 2017, the Company filed Articles of Amendment to the Company’s Articles of Organization in the State of Massachusetts to change the Company’s name to Secure Point Technologies, Inc.

On the closing date of the Transaction, Robert Liscouski took over as President and the senior executive of the company and remains serving as a Director of the Company along with the other two remaining board members, Michael Turmelle (Chairman) and James Simon. Effective January 9, 2017, the Company entered into a service agreement with Christopher Roberts, pursuant to which Mr. Roberts agreed to assist in the preparation of the Company’s financial statements and provide related services. In connection therewith, on January 9, 2017, the board of directors of the Company appointed Mr. Roberts as the chief financial officer of the Company.

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SECURE POINT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Debtor-in-Possession Financing

In connection with the Chapter 11 filings, we filed a motion seeking the approval of the Bankruptcy Court for a super-priority senior secured loan of $5.7 million (the “Original DIP Loan”) between the Debtors and DIP SPV I, L.P., as the debtor-in–possession lender ( the “Original DIP Lender”) pursuant to a Senior Secured Super-Priority Debtor-in-Possession Loan and Security Agreement entered into by the Debtors and the Original DIP Lender on October 10, 2016 (as amended on November 3, 2016, the “Original DIP Agreement”). The Original DIP Loan would bear interest at 12% and included a one-time closing fee of $199,500 on the closing date of the Original DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which is at a rate of 24%), paid to the Original DIP Lender as of the termination date of the Original DIP Loan. The Original DIP Loan was payable in full upon the consummation of the sale under the Asset Purchase Agreement with L-3 or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the Original DIP Loan.

On November 7, 2016, as a result of an auction process run in accordance with the requirements of the Bankruptcy Code, the Debtors terminated the Original DIP Agreement and entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “New DIP Agreement”) with Tannor Partners Credit Fund, LP (the “New DIP Lender”), which New DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of November 7, 2016 for the initial loan amount of $5,700,000. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender lent up to a total of $8.0 million to the Borrowers, with the initial installment of $5,700,000 paid upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2.3 million paid upon the Bankruptcy Court entering the final order for the New DIP Agreement. The New DIP Agreement was substantially identical to the Original DIP Agreement, except for the amounts of the closing fee and the exit fee, which was $35,000 and $425,000 (minus any interest other than default interest), respectively. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016. In connection with the termination of the Original DIP Agreement, the Company paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lender’s advisors.

The total amounts borrowed under the New DIP Agreement together with accrued interest were paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.

Christopher Roberts Service Agreement and Appointment as Chief Financial Officer

Effective January 9, 2017, the Company entered into a service agreement with Christopher Roberts, pursuant to which Mr. Roberts agreed to assist in the preparation of the Company’s financial statements and provide related services. In connection therewith, on January 9, 2017, the board of directors of the Company appointed Mr. Roberts as the chief financial officer of the Company.

Change of Address

Effective February 1, 2017, the Company changed its address to 215 Depot Ct. SE, Leesburg, VA 20175.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying condensed consolidated financial statements and provides additional information on Secure Point Technologies, Inc.’s (“Secure Point” or the “Company’) business, current developments, financial condition, cash flows and results of operations.

When we say “we,” “us,” “our,” “Company,” or “Secure Point,” we mean Secure Point Technologies, Inc. and its subsidiaries.

Please see our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 for a complete description of our business.

Overview

Secure Point Technologies, Inc. (formerly known as Implant Sciences Corporation), up until the time of the sale of its business to L-3 pursuant to the Transaction in January 2017, provided systems and sensors for the homeland security market and related industries. A variety of technologies are currently used worldwide in security and inspection applications. In broad terms, the technologies focus on detection in two major categories: (i) the detection of “bulk” contraband, which includes materials that would be visible to the eye, such as weapons, explosives, narcotics and chemical agents; and (ii) the detection of “trace” amounts of contraband, which includes trace particles or vapors of explosives, narcotics and chemical agents. Technologies used in the detection of “bulk” materials include computed tomography, transmission and backscatter x-ray, metal detection, trace detection and x-ray, gamma-ray, passive millimeter wave, and neutron analysis. Trace detection techniques used include mass spectrometry, gas chromatography, chemical luminescence, and ion mobility spectrometry.

Prior to the closing of the Transaction, we developed proprietary technologies used in explosives and narcotics trace detection (“ETD” and “NTD”, respectively) applications and market and sold handheld ETD and desktop ETD and NTD systems that used our proprietary technologies. Our products were marketed and sold to a growing number of locations domestically and internationally. These systems are used by private companies and government agencies to screen baggage, cargo, other objects and people for the detection of trace amounts of explosives and narcotics.

A significant component of our ability to compete in the markets that we served was the attainment of regulatory approvals. We have undertaken considerable efforts in the past twelve to eighteen months in this regard and achieved the following regulatory approvals and customer orders:

Our QS-B220 desktop ETD system successfully completed and passed testing requirements for the TSA’s qualification test for aviation checkpoint and checked baggage and has been placed on the TSA’s Qualified Product List (“QPL”) on August 28, 2014. The QS-B220 is the first ETD with a non-radioactive source to be approved by the TSA for use in U.S. airports for passenger and baggage screening. We are now able to participate in TSA tenders for ETD procurements for aviation checkpoint and checked baggage screening.

On October 6, 2014, the QS-B220 successfully passed the European Civil Aviation Conference's (“ECAC”) Common Evaluation Process of Security Equipment (“CEP”) for airport checkpoint screening of passengers and baggage. The CEP was established to provide standards for security equipment performance across ECAC's 44 member nations.

On November 10, 2014, we entered into an Indefinite Delivery / Indefinite Quantity (“IDIQ”) contract with the United States Transportation Security Administration (“TSA”) for our QS-B220 desktop explosives trace detectors. The IDIQ, a necessary prerequisite for competing for TSA’s annual trace detection procurements and establishes contract terms under which the TSA could purchase up to $162 million of equipment and services. This contract was transferred to L-3 as part of the Transaction.

On November 10, 2014, we received an initial delivery order from the TSA for 1,170 QS-B220 desktop explosives trace detectors. However, the IDIQ was subject to protest by Morpho Detection Systems, delaying the implementation of the government’s order for our B220 products until the end of Q1 of 2015, and stretching out the delivery of the B220 systems under the contract.

We have taken significant strategic actions in the past eighteen months as well:

On December 3, 2015, we announced that our Board of Directors authorized management to retain financial advisors to explore strategic alternatives to maximize shareholder value.

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On April 6, 2016, we amended our credit agreements with DMRJ and Montsant, effective as of March 31, 2016, pursuant to which, amongst other matters, we extended the maturity date of our indebtedness to June 30, 2016 and December 30, 2016, respectively. Further on that date, we amended our credit agreements with BAM, effective as of March 31, 2016, pursuant to which, amongst other matters, we extended the maturity date of all of our indebtedness from March 31, 2016 to June 29, 2016.

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to June 30, 2016 and December 30, 2016, respectively. Further on that date, we amended our credit agreements with BAM, effective as of March 31, 2016, pursuant to which, amongst other matters, we extended the maturity date of all of our indebtedness from March 31, 2016 to June 29, 2016.

On July 20, 2016 we amended our credit agreements with DMRJ and Montsant, effective as of June 30, 2016, pursuant to which, amongst other matters, we extended the maturity date of our indebtedness to October 31, 2016. Further, on that date, our credit agreements with BAM were automatically extended to October 30, 2016 as a result of the extension of the maturity date of our credit agreements with DMRJ and Montsant.

On July 18, 2016, we entered into a non-binding Letter of Intent (the “LOI”) with Zapata Industries SAS (“Zapata”), pursuant to which the we intended to acquire all the issued and outstanding shares of Zapata, or all of Zapata’s business, excluding inventory (with the our having the right to purchase all or a portion of the inventory of Zapata at cost), in exchange for (i) a number of shares of our common stock, par value $0.001 per share, (the “Common Stock”) equal to 60% of the total issued and outstanding shares of Common Stock on a fully-diluted basis (treating any preferred stock on an as converted basis and any warrants on an as exercised basis), (ii) $15,000,000 in cash and (iii) warrants to purchase 50,657,984 shares of Common Stock at an exercise price of $1.50 per share with a four-year term. We terminated the Zapata LOI on November 21, 2016. On November 21, 2016, after performing due diligence on Zapata Industries, the Board of Directors voted against pursuing the acquisition due to Zapata Industries inability to comply with the elements of the LOI. . Zapata has filed a claim in the Chapter 11 Bankruptcy for a breakup fee related to the cancelation of the acquisition. The Company disputes any payment obligations it may have to Zapata in connection with the LOI or the termination thereof.

On September 13, 2016, we received a delivery order from the TSA for 1,353 QS-B220 desktop explosives trace detectors, with options to increase the delivery order quantity to 3,426 QS-B220 systems. The contract value, including options, aggregates to $71.3 million.

On October 10, 2016, we and our subsidiaries entered into an asset purchase agreement to sell our explosives trace detection assets to L-3 Communications Corporation for $117.5 million in cash, plus the assumption of specified liabilities, subject to adjustment. In connection with the Transaction, on October 10, 2016, Secure Point Technologies, Inc. and its subsidiaries IMX Acquisition Corp., C Acquisition Corp. and Accurel Systems International Corp. (together with the Company, the “Debtors”) filed voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware.

On December 16, 2016, after completion of the auction process in accordance with the requirements of the Bankruptcy Code, the Bankruptcy Court issued an order authorizing the sale of substantially all of our assets free and clear of liens, claims, encumbrances and other interests; authorized and approved our performance under the asset purchase agreement entered into with L-3; approved the assumption and assignment of certain of our contracts and unexpired leases. In conjunction with this order, on December 16, 2016, we amended the asset purchase agreement with L-3 whereby both parties agreed that the closing date would be January 5, 2017.

On January 5, 2017, the closing of the Transaction occurred and L-3 acquired substantially all the assets of the Debtors. In connection with the closing of the Transaction, on January 5, 2017, each of Dr. William J. McGann, Darryl Jones, Roger Deschenes, Todd Silvestri and Brenda L. Baron resigned from their positions as executive officers and employees of the Company, and Dr. William J. McGann resigned from his position as a member of the Company’s board of directors. Also in connection with the closing of the Transaction, on January 5, 2017, the Company filed Articles of Amendment to the Company’s Articles of Organization in the State of Massachusetts to change the Company’s name to Secure Point Technologies, Inc.

Effective January 5, 2017, Robert Liscouski, assumed the position of President of Secure Point Technologies and remains serving as a Director of the Company along with the other two remaining board members, Michael Turmelle (Chairman) and James Simon. Effective January 9, 2017, the Company entered into a service agreement with Christopher Roberts, pursuant to which Mr. Roberts agreed to assist in the preparation of the Company’s financial statements and provide related services. ~~In connection therewith, on January 9, 2017, the board of directors of the Company appointed Mr. Roberts as the chief financial officer of the Company.~~

- 3735 -

In connection therewith, on January 9, 2017, the board of directors of the Company appointed Mr. Roberts as the chief financial officer of the Company.

Effective as of February 1, 2017, the Company changed its address to 215 Depot Ct. SE, Leesburg, VA 20175.

At the present time, we are a shell company with no operations. The Board of Directors is committed to satisfying all legitimate claims in accordance with the bankruptcy process and are committed to providing optionality to the shareholders to maximize shareholder value. We are actively considering various acquisition targets and other business opportunities that will be presented to the shareholders for a vote in accordance with the legal procedures provided by the bankruptcy court. Optionality includes the potential acquisition one or more operating businesses or consummate a business opportunity within the next twelve months. However, we cannot guarantee that we will successfully consummate an acquisition or other business opportunity within such timeframe, or at all.·

On May 1, 2017 the Company submitted a Chapter 11 Plan of Reorganization and Disclosure Statement to the Bankruptcy Court.

At the present time, we are a shell company with no operations. The Board of Directors is committed to satisfying all legitimate claims in accordance with the bankruptcy process and is committed to providing optionality to the shareholders to maximize shareholder value. We are actively considering various acquisition targets and other business opportunities that will be presented to the shareholders for a vote in accordance with the legal procedures provided by the bankruptcy court. Optionality includes the potential acquisition one or more operating businesses or consummate a business opportunity within the next twelve months. However, we cannot guarantee that we will successfully consummate an acquisition or other business opportunity within such timeframe, or at all.

Critical Accounting Policies

Our significant accounting policies are summarized in Note 2 to our consolidated financial statements included in Item 7 of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2016. However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our condensed consolidated financial statements. In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our condensed consolidated financial statements.

Results of Operations

Three Months Ended ~~December~~March 31, ~~2016~~2017 vs. ~~December~~March 31, ~~2015~~2016

Revenues

	For the Three Months Ended December 31, 2016		For the Three Months Ended December 31, 2015
	For the Three Months Ended March 31, 2017		For the Three Months Ended March 31, 2016
(In thousands)	Amount	Mix	Amount	Mix	Change
Product
QS-B220	$ ~~6,272~~142	7268.79%	$ 79,~~557~~342	7385.46%	(1798.05%)
QS-H150	~~697~~-	~~8.1~~0%	~~1,725~~669	166.81%	(59100.60%)
Parts and supplies	~~1,399~~54	1626.2%	~~879~~736	86.57%	59(94.21%)
	8,368	97.0%	$ 10,161	98.7%	(17.6%)
	196	95.1%	$ 10,748	100.0%	(98.2%)
Services	~~257~~10	34.09%	~~131~~175	1.36%	9694.23%
Total	$ ~~8,625~~206	100.0%	$ 10,~~292~~923	100.0%	(1698.21%)

Revenues for the three months ended ~~December~~March 31, ~~2016~~2017 were $8206,~~625,~~000 as compared with $10,~~292~~923,000 for the comparable prior year period, a decrease of $110,~~667~~717,000, or 1698.21%. The decrease in revenue is due ~~primarily~~ to ~~a 7.5% decrease in~~ the ~~number~~sale of ~~QS-B220 desktop units sold and a 59.1% decrease in~~ the ~~number~~Company’s ofassets ~~QS-H150 handheld units sold in the three months ended December 31, 2016, due~~ to ~~decreased shipments to European airports, decreased shipments to Asia and lower non~~L-US3 ~~government~~on ~~shipments~~January ~~in the current three month period. The decrease in sales of our QS-B220 desktop systems were further impacted by a 10.2% decrease in the average unit sales prices~~5, ~~which resulted in a 17~~2017.0% decrease in QS-B220 revenues. Sales of our QS-B220 were favorably impacted in the comparable prior period due the European Civil Aviation Conference (“ECAC”) Common Evaluation Process of Security Equipment for airport checkpoint screening of passengers and baggage, which mandated the installation of ETD equipment in larger international airports by no later than September 1, 2015. Factors impacting our average unit sales prices are mainly due to the competitive market conditions in Europe and Asia, increased sales to agencies of the U.S. Government and foreign government agencies, offset partially by a decrease in early payment discounts to certain distributors to hasten collection of our accounts receivable, which discounts amounted to $97,000 in the three months ended December 31, 2015.

Sales of our QS-H150 handheld systems decreased ~~59.6~~100% in the three months ended ~~December~~March 31, ~~2016~~2017, due to a ~~59.1~~100% decrease in the number of QS-H150 handheld units sold in the three months ended ~~December~~March 31, ~~2016~~2017, compared to the prior period, due to ~~increased~~the ~~shipments~~sale toof ~~Asia~~the ~~and~~Company’s ~~Africa,~~assets ~~and~~ to aL-3 ~~lesser~~on ~~extent~~January ~~by a 1~~5,2017.1% ~~decrease in the average unit sales prices.~~

-Sales 38of parts and supplies decreased 94.1% in the three months ended March 31, 2017, due to the sale of the Company’s assets to L-3 on January 5, 2017.

~~Sales~~Service ofrevenues ~~parts~~decreased ~~and supplies increased 59~~94.23% in the three months ended ~~December~~March 31, ~~2016~~2017, due ~~primarily~~ to ~~increased~~the ~~sales~~sale of ~~consumables~~the ~~and~~Company’s ~~other~~assets ~~supplies due~~ to ~~the increased QS~~L-~~B220~~3 ~~install~~on ~~base~~January 5, ~~in the current three month period~~2017.

Service revenues increased 96.2% in the three months ended December 31, 2016, due to commencement of service revenues under our initial delivery order with the TSA. Included in the prior comparable period were service revenues related to system improvements and training related documentation required under the TSA delivery order. During the three months ended December 31, 2016, we commenced activities under a cost-plus fixed-fee contract with the U.S. Department of Homeland Security (“DHS”), effective on August 24, 2016, to develop next generation explosives trace detection screening systems.

Competitive market conditions are expected to continue to have a negative impact on our average unit sales prices for the foreseeable future.

Cost of Revenues

Cost of revenues for the three months ended ~~December~~March 31, ~~2016~~2017 was $5166,~~720,~~000 as compared with $67,~~439~~691,000 for the comparable prior year period, a decrease of $~~719~~7,525,000 or 1197.28%. The decrease in cost of revenues recorded in the three months ended ~~December~~March 31, ~~2016~~2017 is ~~primarily~~ due to ~~decreased~~the ~~unit~~sale ~~sales~~ of ~~our~~the ~~QS-B220~~Company’s ~~desktop~~assets ~~units,~~to ~~and~~L-3 ~~our~~on ~~QS-H150~~January ~~handheld~~5, ~~units~~2017.

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Gross Margin

Gross margin for the three months ended ~~December~~March 31, ~~2016~~2017 was $240,~~905,~~000 or 3319.74% of revenues as compared with $3,~~853~~232,000 or 3729.46% of revenues for the comparable prior year period. The decrease in gross margin as a percent of revenues is ~~primarily~~ due to ~~a 10.2% decrease in~~ the ~~average~~sale ~~unit sales price on sales~~ of ~~our QS-B220 in~~ the ~~current~~business ~~three~~assets ~~month period, due~~ to ~~competitive~~L-3 market conditions in Europe and Asia, increased sales to agencies of the U.S. Government and foreign government agencies at lower average unit sales prices, a 1.1% decrease in the average unit sales price on ~~sales~~January ~~of our QS-H150 units~~5, ~~decreased manufacturing overhead absorption due to decreased QS-B220 unit volume and QS-H150 unit volume, and lower margins under a cost-plus fixed-fee contract with the U~~2017.~~S. Department of Homeland Security.~~

Research and Development Expense

Research and development expense for the three months ended ~~December~~March 31, ~~2016~~2017 was $~~876~~36,000 as compared with $~~901~~1,040,000 for the comparable prior year period, a decrease of $251,004,000 or 296.85%. The decrease in research and development expense is ~~primarily~~ due to the ~~reclassification~~sale of ~~$139,000 of research and development expense incurred under a cost-plus fixed-fee contract with~~ the ~~DHS~~business assets to ~~cost of revenues, a $62,000 decrease in stock~~L-~~based~~3 ~~compensation~~on ~~and~~January ~~a $35~~5,~~000~~ ~~decrease in travel costs, partially offset by a $107,000 increase in payroll and related fringe benefits expenses and a $26,000 increase in the cost of regulatory filing expenses~~2017.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended ~~December~~March 31, ~~2016~~2017 were $75,~~510~~536,000 as compared with $3,~~718~~811,000 for the comparable prior year period, an increase of $31,~~792~~725,000, or ~~102~~45.03%. The increase in selling, general and administrative expenses is due primarily to aan ~~$4,401,000~~ increase in legal fees, ~~and~~professional ~~expenses~~fees ~~attributable to the negotiation~~ and ~~execution~~expenses ~~of the asset purchase agreement with L-3, and legal fees~~ incurred with respect to the voluntary relief petitions filed under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware,. The aCompany ~~$73,000~~also ~~increase~~recorded inincome ~~travel~~of ~~expenses incurred to support QS-B220 system installations with the TSA, a~~ $59104,791,000 ~~increase in bank fees due to increased credit card processing fees~~ on ~~increased~~the ~~consumable~~sale ~~product~~of ~~revenues,~~assets ~~offset~~and ~~partially~~liabilities ~~by a $178,000 decreased in variable selling expenses, due~~ to ~~decreased revenues, a $106,000 decrease in stock~~L-~~based~~3 ~~compensation~~Communications onCorporation ~~employee~~during ~~stock~~the ~~options,~~three ~~and~~months aended ~~$337,000~~March ~~decrease in payroll and benefit costs~~31, ~~due to the provision of $485,000 for incentive compensation recorded in the comparable prior period~~2017.

Other Expense and Other Income

For the three months ended ~~December~~March 31, ~~2016~~2017, other ~~income~~expense was $72,~~071~~461,000 as compared with other expense of $2,~~547~~477,000 for the comparable prior year period, ana ~~increase~~decrease of $916,~~618,~~000. For the three months ended ~~December~~March 31, ~~2016~~2017, ~~interest~~we recorded a non-cash benefit of $362,000 to adjust the fair value of the warrant derivative liability as of the expiration date of the warrant, January 31, 2017.Interest expense on our debt obligations increased $~~879~~346,000 to $32,~~426~~823,000~~. For~~ in the three months ended ~~December~~March 31, 2017 from $2,477,000 in the prior year, due to higher borrowings under our credit facility with DMRJ, due to the March 31, 2016, weamendment ~~recorded~~to aour ~~non-cash~~credit ~~benefit~~facility with DMRJ and Montsant whereby we further amended each of ~~$10~~our credit instruments with DMRJ and Montsant,~~497~~ which were entered into on April 6,~~000~~ 2016 and effective March 31, 2016, pursuant to ~~adjust~~which we agreed to prepay the ~~fair~~interest ~~value~~due on each of the ~~warrant~~March ~~derivative~~2009 ~~liability~~Note, asthe ofSeptember ~~that~~2012 Note and the February 2013 Notes from the date of the amendment through June 30, 2016 by increasing the outstanding aggregate principal amount under each such Note, which increased the aggregate principal balance owed to DMRJ by $14,593,000.

Interest expense on our debt obligations increased $879,000 to $3,426,000 in the three months ended December 31, 2016 from $2,547,000 in the prior year, due to higher borrowings under our credit facility with DMRJ, due to the

- 39 -

March 31, 2016, amendment to our credit facility with DMRJ and Montsant whereby we further amended each of our credit instruments with DMRJ and Montsant, which were entered into on April 6, 2016 and effective March 31, 2016, pursuant to which we agreed to prepay the interest due on each of the March 2009 Note, the September 2012 Note and the February 2013 Notes from the date of the amendment through June 30, 2016 by increasing the outstanding aggregate principal amount under each such Note, which increased the aggregate principal balance owed to DMRJ by $14,593,000 and, borrowings under the debtor-in-possession financing, which was inclusive of $83,000 of default interest.

Net Income (Loss)

Our net income for the three months ended ~~December~~March 31, ~~2016~~2017 was $194,~~590~~800,000 as compared with a net loss of $34,~~313~~096,000 for the comparable prior year period, an increase of $498,~~903~~896,000. The increase in net income is primarily due to the ~~non-cash~~gain ~~benefit~~ of $10104,~~497~~791,000 recorded toon ~~adjust~~ the ~~fair~~sale ~~value~~ of ~~the~~assets ~~warrant~~to ~~derivative liability, offset partially by decreased revenues and gross margin, increase in SG&A expense recorded in the current period, and an increase in interest expense~~L-3.

~~Six~~Nine Months Ended ~~December~~March 31, ~~2016~~2017 vs. ~~December~~March 31, ~~2015~~2016

Revenues

	For the Six Months Ended December 31, 2016		For the Six Months Ended December 31, 2015
	For the Nine Months Ended March 31, 2017		For the Nine Months Ended March 31, 2016
(In thousands)	Amount	Mix	Amount	Mix	Change
QS-B220	$ 12,~~049~~191	72.2%	$ 2029,~~048~~391	8182.25%	(3958.95%)
QS-H150	1,687	10.10%	23,~~412~~081	9.8.7%	(3045.02%)
Parts and supplies	2,~~523~~577	15.13%	12,~~525~~261	6.23%	6514.40%
	16,259	97.4%	23,985	97.2%	(32.2%)
	16,455	97.4%	34,733	97.5%	(52.6%)
Services	~~428~~438	2.6%	~~700~~875	2.85%	(3849.9%)
Total	$ 16,~~687~~893	100.0%	$ 2435,~~685~~608	100.0%	(3252.46%)

Revenues for the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 were $16,~~687~~893,000 as compared with $2435,~~685~~608,000 for the comparable prior year period, a decrease of $718,~~998~~715,000 or 3252.46%. The decrease in revenue is due primarily to ~~a 31.2% decrease in~~ the ~~number~~sale of ~~QS-B220 desktop units sold during~~ the ~~six~~Company’s ~~months~~assets ~~ended December 31, 2016, due primarily~~ to decreased shipments to Europe due the fulfillment of customer delivery requirements in the comparable prior period to comply with the European Civil Aviation Conference (“ECAC”) Common Evaluation Process of Security Equipment mandate for airport checkpoint screening of passengers and baggage, and to a lesser extent, decreased shipment to Asia, Africa, South America and nonL-US3 ~~government~~on ~~domestic~~January ~~shipments in the current six month period. The average unit sales prices for the QS-B220 decreased 12.6% in the six months ended December 31~~5, ~~2016, which when combined with the unit volume decrease, resulted in a 39~~2017.9% decrease in QS-B220 revenues. Factors impacting our average unit sales prices are mainly due to the competitive market conditions in Europe and Asia, offset partially by a decrease in early payment discounts to certain distributors to hasten collection of our accounts receivable, which discounts amounted to $307,000 in the six months ended December 31, 2015.

Sales of our QS-H150 handheld systems decreased 3042.05% in the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, due to ~~a 29.4% decrease in~~ the ~~number~~sale of ~~QS-H150 handheld units sold in~~ the ~~six~~Company’s ~~months~~assets ~~ended December 31, 2016, compared~~ to ~~the~~L-3 ~~prior~~on ~~period,~~January ~~due to decreased shipments to Asia and Africa and~~5, ~~to a lesser extent, by a 0~~2017.~~9% decrease in the average unit sales prices.~~

Sales of parts and supplies increased by $~~999~~316,000 to $2,~~523~~577,000 from $12,~~525~~261,000, or 6514.40%, in the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, due primarily to increased sales of consumables and other supplies that shipped due to the ~~increased installed base of QS-B220 desktop units.~~

Service revenues decreased 38.9% in the six months ended December 31, 2016, due to commencement of service revenues under our initial delivery order with the TSA. Included in the prior comparable period were service revenues related to system improvements and training related documentation required under the TSA delivery order. The decrease in service revenues was partially offset, during the three months ended December 31, 2016, by revenues recognized due to the commencement of activities under a cost-~~plus~~ ~~fixed-fee~~37 ~~contract with the U.S. Department of Homeland Security (“DHS”), effective on August 24, 2016, to develop next generation explosives trace detection screening systems.~~ -

~~Sales~~increased installed base of QS-B220 ~~were~~desktop ~~favorably~~units, ~~impacted~~despite in the ~~comparable~~sale ~~prior period due to the acceptance~~ of the ~~QS-B220 into the “Qualified” section of the TSA~~Company’s ~~Air~~assets ~~Cargo~~to ~~Screening~~L-3 ~~Technology~~on ~~List~~January ~~and~~5, ~~achieving~~2017. ~~European Civil Aviation Conference (“ECAC”) Common Evaluation Process of Security Equipment for airport checkpoint~~

Service revenues decreased 49.9% in the nine months ended March 31, 2017, due to the sale of the Company’s assets to L-3, 40despite the commencement of service revenues under our initial delivery order with the TSA. Included in the prior comparable period were service revenues related to system improvements and training related documentation required under the TSA delivery order. The decrease in service revenues was partially offset, during the three months ended March 31, 2017, by revenues recognized due to the commencement of activities under a cost-plus fixed-fee contract with the U.S. Department of Homeland Security (“DHS”), effective on August 24, 2016, to develop next generation explosives trace detection screening systems.

Sales of QS-B220 were favorably impacted in the comparable prior period due to the acceptance of the QS-B220 into the “Qualified” section of the TSA’s Air Cargo Screening Technology List and achieving European Civil Aviation Conference (“ECAC”) Common Evaluation Process of Security Equipment for airport checkpoint screening of passengers and baggage. Competitive market conditions are expected to continue to have a negative impact on our average unit sales prices for the foreseeable future.

Cost of Revenues

Cost of revenues for the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 were $11,~~310~~476,000 as compared with $1422,~~575~~266,000 for the comparable prior year period, a decrease of $310,~~265~~790,000 or 22 48.45 %. The decrease in cost of revenues recorded in the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 is primarily due to ~~decreased~~the ~~unit~~sale ~~sales~~ of ~~our~~the ~~QS-B220~~Company’s ~~desktop~~assets ~~units and,~~ to aL-3 ~~lesser~~on ~~extent~~January 5, ~~decreased unit sales of our QS-H150 handheld units~~2017.

Gross Margin

Gross margin for the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 was $5,~~377~~417,000 or 32.21 % of revenues as compared with $1013,~~110~~342,000 or 4137.05% of revenues for the comparable prior year period. The decrease in gross margin as a percent of revenues is primarily due to a 12.6% decrease in the average unit sales price on sales of our QS-B220 in the current ~~six~~nine month period, due to competitive market conditions in Europe and Asia, increased sales to agencies of the U.S. Government and foreign government agencies at lower average unit sales prices, decreased manufacturing overhead absorption, due to decreased QS-B220 unit volume, by a 0.9% decrease in the average unit sales price on sales of our QS-H150 units and lower margins under a cost-plus fixed-fee contract with the U.S. Department of Homeland Security.

Research and Development Expense

Research and development expense for the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 was $1,~~857~~892,000 as compared with $13,~~984~~024,000 for the comparable prior year period, a decrease of $~~127~~1,132,000 or 637.4 %. The decrease in research and development expense is primarily due to a the ~~reclassification~~sale of ~~$139,000 of research and development expense incurred under a cost-plus fixed-fee contract with~~ the ~~DHS~~company’s assets to ~~cost of revenue, an $86,000 decrease in stock~~L-~~based~~3 ~~compensation~~on ~~and~~January ~~a $61~~5,~~000~~ ~~decrease in travel expenses~~2017. ~~These decreases are partially offset by an $186,000 increase in payroll and related fringe benefit expense.~~

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 were $1116,~~275~~809,000 as compared with $711,~~256~~067,000 for the comparable prior year period, an increase of $45,~~019~~742,000 or 5551.49%. The increase in selling, general and administrative expenses is due primarily to a $46,~~841~~925,~~000~~ 856 increase in legal fees and expenses attributable to the negotiation and execution of the asset purchase agreement with L-3, and legal fees incurred with respect to the voluntary relief petitions filed under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware and plaintiff’s counsel fee and expenses, resulting from the Miller litigation,. Other factors include a $525,000 increase in consulting expenses due to the issuance of shares of our common stock to two advisors for services rendered under the advisory and consulting services agreements, a $109,000 increase in bank fees associated with increased credit card processing fees due to increased consumable revenues, a $151,000 increase in travel expense incurred to support domestic QS-B220 system installations, a $41,000 increase in bad debt expense, and a $52,000 increase in rent expense, offset in part by a $930,000 decrease in payroll and benefit costs due to the provision of $960,000 for incentive compensation and a $200,000 sign on bonus for Mr. Liscouski, our President, in the comparable prior year period a $91,000 decrease in stock-based compensation on employee stock options, and a $503,000 decrease in sales commissions due to decreased revenues.

Other Income and Expense

For the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, other expense was $1720,~~839~~300,000 as compared with other expense of $57,~~094~~571,000 for the comparable prior year period, an increase of $12,~~745~~729,000. The increase is due to increased cash and non-cash interest expense on derivatives and higher borrowings under our credit facilities with DMRJ and the debtor-in-possession credit facility, and, to a lesser extent, the 1% increase in the BAM interest rate which took effect on April 1, 2016. For the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017 interest expense increased $26,~~281~~628,000 to $31,375,000 from $5,094,000 in the prior year, due to higher borrowings under our credit facility with DMRJ, due to the March 31, 2016, amendment to our credit facility with DMRJ and Montsant whereby we further amended each of our credit instruments with DMRJ and Montsant, which were entered into on April 6, 2016 and effective March 31, 2016, pursuant to which we agreed to prepay the interest due on each of the March 2009 Note, the September 2012 Note and the February 2013 Notes from the date of the amendment through June 30, 2016 by increasing the outstanding aggregate principal amount under each such Note which increased the aggregate principal balance owed to DMRJ by $14,593,000 and, borrowings under the debtor-in-possession financing, which was inclusive of $83,000 of default interest, interest incurred under our borrowings with the debtor-in-possession credit facility and, to a lesser extent, interest incurred under our Purchase Agreement with RCA.

- 4138 -

~~We recorded non-cash interest charges of~~ $934,~~217~~199,000 from ~~and~~ $157,~~703~~571,000 in ~~our~~the ~~condensed~~prior ~~consolidated~~year, ~~statements~~due ofto ~~operations~~higher ~~for~~borrowings ~~the~~under ~~six~~our ~~months~~credit ~~ended~~facility ~~December~~with DMRJ, due to the March 31, 2016, onamendment ~~the~~to ~~note~~our ~~conversion~~credit ~~beneficial~~facility ~~conversion~~with ~~feature~~DMRJ and ~~warrant~~Montsant ~~derivative~~whereby ~~liability,~~we ~~respectively,~~further ~~both~~amended each of our credit instruments with DMRJ and Montsant, which ~~are~~were ~~related~~entered tointo ~~our~~on ~~July~~April 206, 2016 ~~amendment~~and effective March 31, 2016, pursuant to ~~our~~which ~~credit~~we ~~facility~~agreed ~~with~~to ~~DMRJ~~prepay the interest due on each of the March 2009 Note, the September 2012 Note and ~~Montsant.~~the ~~For~~February 2013 Notes from the ~~six~~date ~~months~~of ~~ended~~the ~~December~~amendment 31through June 30, 2016, weby ~~recorded~~increasing athe ~~non-cash~~outstanding ~~benefit~~aggregate ofprincipal amount under each such Note which increased the aggregate principal balance owed to DMRJ by $1314,~~536~~593,000 toand, ~~adjust~~borrowings under the ~~fair~~debtor-in-possession ~~value~~financing, which was inclusive of $83,000 of default interest, interest incurred under our borrowings with the ~~warrant~~debtor-in-possession ~~derivative~~credit ~~liability~~facility asand, ofto ~~that~~a ~~date.~~lesser extent, interest incurred under our Purchase Agreement with RCA.

~~Net~~We ~~Loss~~recorded non-cash interest charges of $9,217,000 and $15,703,000 in our condensed consolidated statements of operations for the nine months ended March 31, 2017 on the note conversion beneficial conversion feature and warrant derivative liability, respectively, both of which are related to our July 20, 2016 amendment to our credit facility with DMRJ and Montsant. For the nine months ended March 31, 2017, we recorded a non-cash benefit of $13,899,000 to adjust the fair value of the warrant derivative liability as of the expiration date.

~~Our~~Net ~~net~~Income ~~loss for the six months ended December 31, 2016 was $25,594,000 as compared with a net loss of $4,224,000 for the comparable prior year period, an increase of $21,370,000~~ or 505.9%. The increase in the net loss is primarily due to the non-cash interest charges recorded on the note conversion beneficial conversion feature and warrant derivative liability, decreased revenues and gross margin, an increase in legal expense recorded in the current period associated with the sale of our assets and the voluntary relief petitions filed under Chapter 11, and an increase in interest expense, offset partially the non-cash benefit of $13,536,000 recorded to adjust the fair value of the warrant derivative liability. Loss

Our net income for the nine months ended March 31, 2017 was $69,207,000 as compared with a net loss of $8,320,000 for the comparable prior year period, an increase of $77,511,000 or 931.9%. The increase in the net income is primarily due to the sale of assets to L-3, offset in part by the non-cash interest charges recorded on the note conversion beneficial conversion feature and warrant derivative liability, decreased revenues and gross margins compared with prior periods, an increase in legal expense recorded in the current period associated with the sale of our assets and the voluntary relief petitions filed under Chapter 11, and an increase in interest expense, offset partially the non-cash benefit of $13,899,000 recorded to adjust the fair value of the warrant derivative liability.

Liquidity and Capital Resources

As of ~~December~~March 31, ~~2016~~2017 and June 30, 2016, we had cash and cash equivalents of $372,~~354~~752,000 and $1,338,000, respectively.

In connection with the Chapter 11 filings, we filed a motion seeking the approval of the Bankruptcy Court for a super-priority senior secured loan of $5.7 million (the “Original DIP Loan”) between the Debtors and DIP SPV I, L.P., as the debtor-in-possession lender (the “Original DIP Lender”) pursuant to a Senior Secured Super-Priority Debtor-in-Possession Loan and Security Agreement entered into by the Debtors and the Original DIP Lender on October 10, 2016 (as amended on November, 3, 2016, the “Original DIP Agreement”). The Original DIP Loan would bear interest at 12% and included a one-time closing fee of $199,500 on the closing date of the Original DIP Loan and an exit fee equal to $427,500, less any interest, other that default interest (which was at a rate of 24%), paid to the Original DIP Lender as of the termination date of the Original DIP Loan. The Original DIP Loan was payable in full upon the consummation of the sale under the Purchase Agreement with L-3 or a sale to any other winning bidder in the Bankruptcy Court auction. On October 13, 2016, we borrowed $1,500,000 under the Original DIP Loan.

On November 7, 2016, as a result of an auction process run in accordance with the requirements of the Bankruptcy Code, the Debtors terminated the Original DIP Agreement and entered into a replacement Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement (the “New DIP Agreement”) with Tannor Partners Credit Fund, LP (the “New DIP Lender”), which New DIP Agreement was approved by the Bankruptcy Court on an interim basis pursuant to an order dated as of November 7, 2016 for the initial loan amount of $5,700,000. Under the New DIP Agreement, subject to the terms and conditions thereof, the New DIP Lender lent up to a total of $8.0 million to the Borrowers, with the initial installment of $5,700,000 paid upon the Bankruptcy Court entering the interim order for the New DIP Agreement and the remaining $2,300,000 paid upon the Bankruptcy Court entering the final order for the New DIP Agreement. The New DIP Agreement was substantially identical to the Original DIP Agreement, except for the amounts of the closing fee and the exit fee, which was $35,000 and $425,000 (minus any interest other than default interest), respectively. On November 8, 2016, we borrowed $5,700,000 under the New DIP Agreement and borrowed an additional $2,300,000 on November 30, 2016. In connection with the termination of the Original DIP Agreement, the Company paid $1,610,769 to the Original DIP Lender and its advisors to satisfy outstanding obligations under the Original DIP Agreement, including $74,354 for expense reimbursement for the Original DIP Lender’s advisors.

~~The~~- ~~total~~39 ~~amount borrowed under the New DIP Agreement together with accrued interest were paid in full effective January 5, 2017, upon the closing of the Transaction with L~~-3.

WeDecember ~~were~~1, ~~required~~2016 the interest rate under the New DIP Agreement increased 12.0% to ~~repay~~24.0%. ~~all~~Subject ofto ~~our~~the ~~borrowings~~terms ~~from~~of ~~DMRJ~~a Stipulation and ~~Montsant~~Order onentered ~~October~~in 31the Bankruptcy Case, ~~2016~~we ~~and~~agreed ~~from~~with athe ~~group~~New ofDIP ~~institutional~~Lender ~~investors~~to waive such asserted default in exchange for ~~which~~an ~~BAM~~agreement ~~Administrative~~by ~~Services~~us ~~LLC~~to ~~(“BAM”)~~pay ~~acts~~an asadditional ~~administrative~~$96,000 ~~agent~~of interest, which interest was not credited against the exit fee.

-The 42total amount borrowed under the New DIP Agreement together with accrued interest was paid in full effective January 5, 2017, upon the closing of the Transaction with L-3.

We were required to repay all of our borrowings from DMRJ and Montsant on October 31, 2016 and from a group of institutional investors for which BAM Administrative Services LLC (“BAM”) acts as administrative agent, on October 30, 2016. Our obligations to BAM are secured by a security interest in substantially all of our assets. DMRJ and Montsant agreed to subordinate their security interest in all of our assets to the security interest held by BAM (See Note 12 to the condensed consolidated financial statement).

The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings.

Our obligations to DMRJ are secured by security interests in substantially all of our assets. As of ~~December~~March 31, ~~2016~~2017, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of ~~December~~March 31, ~~2016~~2017, our obligation to DMRJ for accrued interest under these instruments approximated $911,~~129~~393,000 and is included in current liabilities in the consolidated financial statements.

Our obligations to a group of institutional investors for which BAM acts as administrative agent ~~are~~were secured by security interests in substantially all of our assets. AsThe oftotal ~~December~~amount ~~31,~~borrowed ~~2016, our obligations~~ under the BAM senior secured promissory notes ~~for~~of ~~which BAM is the agent were~~ $20,000,000. ~~Further,~~together aswith ~~of December 31, 2016, our obligation under such notes for~~ accrued interest ~~amounted~~of ~~to approximately~~ $4,113,000 ~~and~~were ispaid ~~included~~ in ~~current~~full ~~liabilities~~effective inJanuary 5, 2017 upon the ~~consolidated~~closing ~~financial~~of ~~statements~~the Transaction with L-3.

The total amount borrowed under the BAM senior secured promissory notes together with accrued interest were paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.

Each of these notes and the credit facility are described in Note 12 to the condensed consolidated financial statements, accompanying this Quarterly Report.

During the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, we had net cash outflows of $521,~~916~~937,000 from operating activities as compared to net cash outflows from operating activities of $12,~~373~~607,000 for the comparable prior year period. The $419,~~543~~330,000 increase in net cash outflows ~~used~~from in operating activities during the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, as compared to the prior year period, was due to the ~~following~~sale ~~changes in working capital: (i) a $3,283,000 decrease in accounts receivable, compared to a $5,237,000 increase in the prior period, due to decreased product shipments during the latter part~~ of the ~~quarter~~Company’s ~~ended~~assets ~~December~~under ~~31, 2016; (ii) a $5,952,000 increase in inventories compared to a $1,479,000 increase in~~ the ~~prior period, due primarily to increased inventory procured during the three months ended December 31, 2016 to comply with the terms of the~~ Asset Purchase Agreement with L-3; (iii) an increase in accrued expenses of $8,249,000, compared to a $7,885,000 increase in the prior period, by an increase in accrued expenses in the prior period, an increase in our accrued interest due to higher borrowings under our credit facilities with DMRJ and the ~~increase~~costs inof ~~the~~legal ~~BAM interest rate~~ and ~~increased~~professional ~~legal~~ fees, ~~offset~~associated ~~partially~~with bythe ~~decreased~~filing ~~provisions~~ for ~~incentive~~Chapter ~~compensation~~11 recorded in the six months ended December 31, 2016; (iv) a $345,000 increase in deferred revenue, compared to a $1,854,000 decrease in deferred revenue in the prior year period, due primarily to the application of ECAC customer advance deposits received in the quarter ended June 30, 2015, against accounts receivables resulting from shipments in the six months ended December 31, 2015; and, ~~(v)~~subsequent ~~a $1,704,000 increase in accounts payable, compared to a $1,942,000 increase in the prior period, due to increased inventory related payables and increased legal fees~~proceedings.

During the ~~six~~ nine months ended ~~December~~March 31, ~~2016~~2017, we had net cash ~~outflows~~generated of $37113,426,000 from investing activities as compared to net cash outflows of $65117,000 from investing activities for the prior year period. The $28113,543,000 ~~decrease~~increase in net cash ~~used~~generated in investing activities during the ~~six~~nine months ended ~~December~~March 31, ~~2016~~2017, as compared to the prior year period, was primarily due to the sale of substantially all the company’s assets, and some liabilities to L-3 on January 5, 2017.

-During 43the -nine months ended March 31, 2017 we had net cash outflows of $20,053,000 from financing activities as compared to net cash inflows of $1,001,000 for the comparable prior year period. The $21,054,000 increase in net cash used in financing activities during the nine months ended March 31, 2017, as compared to the prior year period, was primarily due to repayment of the $20,000,000 BAM Administrative Services Promissory note on January 5, 2017.

~~compared~~- to40 ~~the prior year period, was primarily due to decreased purchases of equipment in the six months ended December 31, 2016.~~-

During the six months ended December 31, 2016 we had net cash inflows of $7,991,000 from financing activities as compared to net cash inflows of $210,000 for the comparable prior year period. The $7,781,000 increase in net cash from financing activities during the six months ended December 31, 2016, as compared to the prior year period, was primarily due to $8,000,000 in borrowings under our debtor-in-possession credit facility compared to no comparable borrowings in the six months ended December 31, 2015, a $34,000 decrease in proceeds received on the exercise of stock options, and a $15,000 decrease in principal repayments of capital lease obligations.

Credit Facilities with DMRJ Group LLC, Montsant Partners LLC and BAM Administrative Services LLC

In December 2008, we entered into a note and warrant purchase agreement with DMRJ, pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock. Thereafter, we entered into a series of amendments, waivers and modifications of this facility. The notes matured on October 31, 2016, but payment has been stayed pending conclusion of bankruptcy.

On May 4, 2015, we entered into an assignment agreement with DMRJ and Montsant, wherein DMRJ assigned its rights, title and interest in the senior secured promissory note dated December 10, 2008 and appointed DMRJ as its collateral agent under the promissory note agreement. The note matured on October 31, 2016, but payment has been stayed pending conclusion of bankruptcy.

DMRJ and Montsant are funds managed by Platinum Partners Value Arbitrage Fund LP.

In March, 2014, we entered into a note purchase agreement with a group of institutional investors and BAM, an administrative agent for the investors, pursuant to which we issued senior secured promissory notes in the aggregate principal amount of $20,000,000. The notes bear interest at 16% per annum and mature on October 30, 2016. We used all of the proceeds from the sale of the notes to repay (i) $17,624,000 of our outstanding indebtedness to DMRJ under revolving promissory note (ii) $1,809,000 of interest outstanding under that facility and (iii) $567,000 of interest outstanding under our senior secured convertible promissory note. Due to the filing of the voluntary relief petitions under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), we were deemed to be in default under our note purchase agreement with BAM and our interest rate was increased to 18.5% effective as of October 10, 2016.

The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings.

See Note 12 to the condensed consolidated financial statements, accompanying this Quarterly Report. There can be no assurance that we will be successful in refinancing or extending our obligations to our secured lenders or reorganize the indebtedness under bankruptcy.

$2.5 million of the cash proceeds from the Transaction with L-3 ~~are~~were ~~being~~ held in an escrow account to secure the Debtors’ obligations for the purchase price adjustments under the Asset Purchase Agreement for the Debtors’ net working capital, which adjustments ~~are~~were ~~expected~~completed toin beMay ~~completed~~2017, inat ~~the~~which ~~first~~time ~~half~~$2.393 million of ~~calendar~~the ~~2017~~escrow funds were transferred from the escrow account to the Company. No further proceeds are due from L-3 as a result of the Transaction.

The payment of our secured obligations with DMRJ and Montsant will be stayed until such time that the Official Committee of Equity Holders has concluded their activities to assert certain estate claims and causes of action and challenge the validity, enforceability, and perfection of certain prepetition secured claims, which challenge period was extended by the bankruptcy court up to and including January 23, 2017. Interest on our debt obligations with DMRJ and Montsant will continue to accrue until such time that the obligations are paid by us. There can be no assurances that we will achieve our forecasted financial results or that we will be able to raise additional capital to operate our business. Any such failure would have a material adverse impact on our liquidity and financial condition and could force us to curtail or discontinue operations entirely. Further, upon the occurrence of an event of default under certain provisions of our credit agreements with DMRJ, Montsant and BAM, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance. The failure to cure an event of default or negotiate further extensions of our obligations to our secured lenders would have a material adverse impact on our liquidity and financial condition and could force us to curtail or discontinue operations entirely and/or could require us to convert our voluntary filing under bankruptcy laws from Chapter 11 to Chapter 7. .

-Various 44events could have an impact on the timing and structure of the company’s emergence from Chapter 11. We are incurring and expect to continue to incur increased legal and financial adviser costs associated with the bankruptcy proceedings following the closing of the Transaction with L-3. An estimate for administrative costs are accounted for in the Chapter 11 reorganization plan and disclosure statement filed with the Bankruptcy Court.

~~filed~~- a41 Chapter 15 bankruptcy petition with the United States Bankruptcy Court for the District of Southern New York, which seeks to protect Platinum's U.S. assets from its creditors while an insolvency proceeding is underway in the Cayman Islands. -

Various events could have an impact on the timing and structure of the company’s emergence from Chapter 11. We are incurring and expect to continue to incur increased legal and financial adviser costs associated with the bankruptcy proceedings following the closing of the Transaction with L-3. These ongoing costs raise doubt as to our ability to successfully emerge from Chapter 11 and provide a recovery to equity holders.

Off-Balance Sheet Arrangements

As of ~~December~~March 31, ~~2016~~2017, we ~~had~~did ~~one~~not ~~irrevocable~~have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources. The standby letter of credit outstanding in the approximate amount of $297,000. ~~The~~as ~~letter~~ of ~~credit~~December ~~provides~~31, 2016 to provide warranty performance security equal to 5% of the contract amount with the India Ministry of ~~Defence.~~Defense Wewas ~~have~~assumed ~~amended~~by ~~the~~L-3 ~~letter~~on ofJanuary ~~credit~~5, ~~extending~~2017 ~~the~~pursuant ~~expiration date~~ to ~~April~~the ~~15, 2017~~Transaction.

As of December 31, 2016, we did not have any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”. The FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new rule also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein, which is effective for our fiscal year beginning July 1, 2018, the first day of our 2019 fiscal year. We are currently evaluating the impact of this accounting guidance and do not expect any significant impact on our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update 2014-12, Compensation-Stock Compensation (“ASU 2014-12”). The FASB issued ASU 2014-12 to provide specific guidance on share-based payment awards that provide for achievement of a specific performance target that could be achieved after the requisite service period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. Earlier adoption is permitted. ASU 2014-12 may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this guidance should be recognized in the financial statements as an adjustment to the opening retained earnings balance at that date. The adoption of ASU 2014-12 did not have a material impact on our consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (“ASU 2014-15”). ASU 2014-15 provides guidance to U.S. GAAP about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This new rule requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles currently in U.S. auditing standards. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plan, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued. This guidance is effective for annual periods ending after December 15, 2016, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. The adoption of ASU 2014-15 did not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued Accounting Standards Update 2015-11, 45Inventory (Topic 330) (“ASU 2015-11”). ASU 2015-11 was issued to more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards. The core principle of this updated guidance is that an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in ASU 2015-11 apply to inventory that is measured using the first-in, first-out or average cost methods. ASU 2015-11 amends some of the guidance in Topic 330 to more clearly articulate the

alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued. This guidance is effective for annual periods ending after December 15, 2016, which is effective for our fiscal year beginning July 1, 2016, the first day of our 2017 fiscal year. The adoption of ASU 2014-15 ~~did~~42 ~~not have a material impact on our consolidated financial statements.~~-

In August 2015, the FASB issued Accounting Standards Update 2015-15, Interest – Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 states that Staff at the Securities and Exchange Commission would not object to an entity deferring or presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there were outstanding borrowings under the arrangement.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain statements that are “forward-looking” within the meaning of the federal securities laws. These forward looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events, are subject to certain risks, uncertainties and assumptions, and are not guaranties of future performance. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions.

We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Report on Form 10-Q. Important factors that could cause actual results to differ from our predictions include those discussed under this “Management’s Discussion and Analysis” and under “Risk Factors,” as well as those discussed under “Risk Factors,” “Management’s Discussion and Analysis” and “Business” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor can there be any assurance that we have identified all possible issues which we might face. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our financial position and results of operations. Our expectations regarding the potential sale of the assets of the explosives detection business and our intent to acquire another business. For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof. We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law.

We urge readers to review carefully the risk factors described in this Quarterly Report, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

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Item 4.

Controls and Procedures

The certifications of our Chief Executive Officer and Chief Financial Officer attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures, and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications.

Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~December~~March 31, ~~2016~~2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions to be made regarding required disclosure. It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As a result of material weaknesses described in our Annual Report on Form 10-K for the year ended June 30, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, we did not maintain effective internal control over financial reporting as of ~~December~~March 31, ~~2016~~2017 and further concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.

Furthermore, this Quarterly Report on Form 10-Q is being filed late due to the added responsibilities of our finance staff related to bankruptcy reporting obligations.

Remediation

We are committed to remediating the material weaknesses identified in internal controls over financial reporting and have begun the process to remediate these material weaknesses,; however the timing of completing our remediation efforts is uncertain. Our efforts have focused on instituting mitigating controls to address segregation of duties and undertake a thorough review of the finance functions position responsibilities and the hiring of additional staff; implement additional controls to address system access deficiencies; establish independent review and verification procedures for our vendor and customer master files; enhance the documentation to support review occurrences and approval procedures; and, commence regular periodic reviews of our internal controls over financial reporting with our Board of Directors and Audit Committee to address the inadequate risk oversight function and institute procedures to evaluate and report on risks to financial reporting, including the documentation and completion of a comprehensive risk assessment to identify all potential risk areas and evaluate the adequacy of our controls to mitigate these risks.

Changes in Internal Control ~~Over~~over Financial Reporting

During the three months ended ~~December~~March 31, ~~2016~~2017, we have implemented additional controls to address system access deficiencies, hired additional finance staff and have begun instituting mitigating controls to address segregation of duty issues. The additional staff will allow us to address the insufficient segregation of duties, oversight of work performed and allow us to continue to institute additional compensating or mitigating controls and will also allow us to document internal control support occurrences and approval procedures. We have instituted systems access controls and mitigating controls to system access. There are no other changes that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

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PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

On October 10, 2016, in connection with the Asset Purchase Agreement with L-3, the Company and its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court.

On November 21, 2016, the LOI with Zapata was terminated, and Zapata subsequently filed a claim with the Bankruptcy Court seeking a breakup fee and other expenses related to the ~~cancellation~~termination. On May 9, 2017, Zapata filed a complaint in the Supreme Court of the ~~acquisition~~State of New York, New York County, against Robert Liscouski, the President of the Company and a member of the Board of Directors, asserting a claim for tortious interference with the LOI and seeking to recover from Mr. Liscouski the very same breakup fee and other expenses it is seeking from the Company in the Bankruptcy Court. The Company has an obligation to indemnify Mr. Liscouski and disputes any payment obligations it may have to Zapata in connection with the LOI or the termination thereof. Mr. Liscouski also disputes and intends to vigorously defend against the claim asserted against him by Zapata.

We are not currently a party to any other legal proceedings, other than routine litigation incidental to our business that which we believe will not have a material effect on our business, assets or results of operations. From time to time, we are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Each of these matters may be subject to various uncertainties.

We may, from time to time, be involved in other actual or potential proceedings that we consider to be in the normal course of our business. We do not believe that any of these proceedings will have a material adverse effect on our business. We are not a party to any other legal proceedings, other than ordinary routine litigation incidental to our business, which we believe will not have a material effect on our business, assets or results of operations.

Item 1A.

Risk Factors

Other than as set forth below, there have not been any material changes from the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2016.

We may not be able to achieve our strategic objectives, including the acquisition of another business.

With respect to acquisitions and divestitures, we may not achieve expected returns and other benefits as a result of various factors, including integration and challenges of assimilating personnel and technology. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or executing alternative exit strategies in a timely manner, which could delay the accomplishment of our objectives. Alternatively, we may dispose of a business or assets at a price or on terms that are less than we anticipated. After reaching an agreement with a buyer or seller, the acquisition or sale of a business, such as the proposed sale of the ETD business or a potential acquisition, may be subject to regulatory and governmental approval and the satisfaction of pre-closing conditions, which may prevent us from completing the transaction. We may not have the resources to successfully conclude an acquisition. The sale of a business or assets may involve guarantees, indemnities or other financial obligations. Under these arrangements, the performance of the divested business or other conditions outside of our control could affect our future financial results.

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acquisition. The sale of a business or assets may involve guarantees, indemnities or other financial obligations. Under these arrangements, the performance of the divested business or other conditions outside of our control could affect our future financial results.

At the present time, we are a shell company with no operations. We are actively considering various acquisition targets and other business opportunities. We hope to acquire one or more operating businesses or consummate a business opportunity within the next twelve months. However, we cannot guarantee that we will successfully consummate an acquisition or other business opportunity within such timeframe, or at all.

Our secured borrowings matured on October 30, 2016 and October 31, 2016.

All of our borrowings from DMRJ and Montsant under (i) a senior secured promissory note dated July 1, 2009 with DMRJ, (ii) a credit agreement dated September 4, 2009 with DMRJ, (iii) to Montsant under an amended and restated senior secured convertible promissory note dated March 12, 2009 (the “March 2009 Note”), (iv) to DMRJ under a senior secured convertible promissory note dated September 5, 2012 (the “September 2012 Note”) and (v) to DMRJ under a senior secured convertible promissory note dated February 28, 2013 (the “February 2013 Note”) matured on October 31, 2016.

Our secured borrowings from a group of institutional investors for which BAM Administrative Services LLC (“BAM”) acts as administrative agent matured on October 30, 2016 and our secured borrowings with DMRJ and Montsant, matured on October 31, 2016. DMRJ and Montsant agreed to subordinate their security interest in all of our assets to the security interest held by BAM (See Note 12 to the condensed consolidated financial statements).

The payment of our indebtedness to DMRJ and Montsant are stayed pending the conclusion of the bankruptcy proceedings.

Our obligations to DMRJ are secured by a security interests in substantially all of our assets. As of ~~December~~March 31, ~~2016~~2017, our obligations to DMRJ under each of the three promissory notes and a revolving line of credit approximated $11,970,000, $17,523,000, $1,000,000 and $17,662,000, respectively. Further, as of ~~December~~March 31, ~~2016~~2017, our obligation to DMRJ for accrued interest under these instruments approximated $911,~~129~~393,000 and is included in current liabilities in the condensed consolidated financial statements.

Our obligations to a group of institutional investors for which BAM acts as administrative agent ~~are~~were secured by security interests in substantially all of our assets. AsThe oftotal ~~December~~amount ~~31,~~borrowed ~~2016, our obligations~~ under the BAM senior secured promissory notes ~~for~~together ~~which~~with ~~BAM~~accrued isinterest ~~the agent~~ were ~~$20,000,000.~~paid ~~Further,~~in asfull ofeffective ~~December~~January 315, ~~2016,~~2017 ~~our~~upon ~~obligation~~the ~~under~~closing ~~such~~of ~~notes for accrued interest amounted to approximately $4,113,000 and is included in current liabilities in~~ the ~~condensed~~Transaction ~~consolidated~~with ~~financial statements~~L-3.

The total amount borrowed under the BAM senior secured promissory notes together with accrued interest were paid in full effective January 5, 2017 upon the closing of the Transaction with L-3.

If we are unable to repay these amounts as required, refinance our obligations to DMRJ, Montsant and/or the other institutional investors, or negotiate extensions of these obligations, DMRJ, Montsant and/or BAM or reorganize the Company in Bankruptcy and have a reorganization Plan approved by the Bankruptcy Court, we may be forced to convert the Chapter 11 cases to Chapter 7d.

Management continually evaluates operating expenses and plans to increase sales and increase cash flow from operations. Despite our projected sales, expense and cash flow projections and the cash available from our New DIP Loan, we may not have sufficient capital to continue our operations. There can be no assurance that DMRJ will continue or is able to make advances under our revolving line of credit. Our failure to achieve our projections, to obtain sufficient additional capital on acceptable terms or successfully complete the sale of our ETD business to L-3 would have a material adverse effect on our liquidity and operations and could require us to file for protection under Chapter 7 of the U.S. bankruptcy laws. Furthermore, we are incurring increased legal costs and financial adviser costs associated with the activities of the Official Committee of Equity Holders appointed by the U.S. Trustee. These conditions raise substantial doubt as to our ability to continue as a going concern.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 6.

Exhibits

Exhibit No.		Description
2.1		Asset Purchase Agreement, dated as of October 10, 2016, by and among Implant Sciences Corporation, C Acquisition Corp., Accurel Systems International Corporation, IMX Acquisition Corp. and L-3 Communications Corporation (incorporated herein by reference to Exhibit 2.1 to Implant Sciences Corporation’s Current Report on Form 8-K dated October 10, 2016 filed October 10, 2016).
2.2		Amendment No. 1 to Asset Purchase Agreement, dated as of October 20, 2016, by and among Implant Sciences Corporation, C Acquisition Corp., Accurel Systems International Corporation, IMX Acquisition Corp. and L-3 Communications Corporation (incorporated herein by reference to Exhibit 2.1 to Implant Sciences Corporation’s Current Report on Form 8-K dated October 28, 2016 filed November 4, 2016).
2.3		Amendment No. 2 to Asset Purchase Agreement, dated as of October 28, 2016, by and among Implant Sciences Corporation, C Acquisition Corp., Accurel Systems International Corporation, IMX Acquisition Corp. and L-3 Communications Corporation (incorporated herein by reference to Exhibit 2.2 to Implant Sciences Corporation’s Current Report on Form 8-K dated October 28, 2016 filed November 4, 2016).
2.4		Amendment No. 3 to Asset Purchase Agreement, dated as of November 15, 2016, by and among Implant Sciences Corporation, C Acquisition Corp., Accurel Systems International Corporation, IMX Acquisition Corp. and L-3 Communications Corporation †
2.5		Amendment No. 4 to Asset Purchase Agreement, dated as of December 16, 2016, by and among Implant Sciences Corporation, C Acquisition Corp., Accurel Systems International Corporation, IMX Acquisition Corp. and L-3 Communications Corporation
3.1		Articles of Amendment to the Restated Articles of Organization of Implant Sciences Corporation, adopted January 5, 2017 and filed on January 5, 2017.
10.1		Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of October 10, 2016, by and among Implant Sciences Corporation, C Acquisition Corp., Accurel Systems International Corporation, IMX Acquisition Corp. and DIP SPV I, L.P. (incorporated herein by reference to Exhibit 10.1 to Implant Sciences Corporation’s Current Report on Form 8-K dated October 10, 2016 filed October 10, 2016).
10.2		First Amendment to Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of November 3, 2016, by and among Implant Sciences Corporation, C Acquisition Corp., Accurel Systems International Corporation, IMX Acquisition Corp. and DIP SPV I, L.P. (incorporated herein by reference to Exhibit 10.1 to Implant Sciences Corporation’s Current Report on Form 8-K dated October 28, 2016 filed November 4, 2016).
10.3		Senior Secured, Super-Priority Debtor-in-Possession Loan and Security Agreement, dated as of November 7, 2016, by and among Implant Sciences Corporation, C Acquisition Corp., Accurel Systems International Corporation, IMX Acquisition Corp. and Tannor Partners Credit Fund, LP (incorporated herein by reference to Exhibit 10.1 to Implant Sciences Corporation’s Current Report on Form 8-K dated November 7, 2016 filed November 14, 2016).
10.4*		Service Agreement between the Company and Christopher Roberts dated January 5, 2017 (incorporated herein by reference to Exhibit 10.1 to Secure Point Technologies, Inc. Current Report on Form 8-K dated January 6, 2017 filed January 13, 2017).
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL ~~Taxomony~~Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

	*	Indicates a management contract or compensatory plan or arrangement.
	**	In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed to be “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
	†	The exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The Registrant agrees to furnish supplementally a copy of all omitted exhibits and schedules to the Securities and Exchange Commission upon its request.


	*	In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed to be “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Secure Point Technologies, Inc.
	By:	/s/ Robert P. Liscouski
		Robert P. Liscouski Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Christopher B. Roberts
		Christopher B. Roberts Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)
Dated: February 21, 2017
Dated: May 30, 2017

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