UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)

þQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 20122013

Or

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________


DECISIONPOINT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)


Delaware000-5420037-1644635
(State of Incorporation)(Commission File Number)(IRS Employer Identification No.)


8697 Research Drive Irvine CA, 92618-4204
(Address of principal executive offices) (Zip code)

(949) 465-0065
(Registrant's telephone number, including area code)

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 requirement for the past 90 days.  Yes þ    No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   No o

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

Large accelerated filer          o
Accelerated filer                     o
Non-accelerated filer            o  (Do not check if a smaller reporting company)
Smaller reporting company    þ

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

The number of shares of common stock, par value $0.001 per share of DecisionPoint Systems, Inc. outstanding as of the close of business on November 9, 2012,October 31, 2013, were 9,125,075.12,144,096.

 
1

 
DECISIONPOINT SYSTEMS, INC.

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION
 
Page
Page
 
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3
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2
 5
3
6
 
4
7
23
24
37
40
37
40
   
 
PART II.  OTHER INFORMATION
 
38
38
41
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41
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2

 
PART I FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

DECISIONPOINT SYSTEMS, INC.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)

 September 30, December 31,  September 30,  December 31, 
 2012  2011  2013  2012 
ASSETS (unaudited)          
Current assets            
Cash $392,424  $365,814  $270  $1,103 
Accounts receivable, net  10,675,484   13,916,787   12,685   12,287 
Other receivable  -   1,476,285 
Due from related party  357,326   -   195   202 
Inventory, net  897,401   705,757   918   811 
Deferred costs  3,602,564   3,468,583   3,773   3,955 
Deferred tax assets  47   48 
Prepaid expenses and other current assets  302,071   408,413   919   302 
Total current assets  16,227,270   20,341,639   18,807   18,708 
                
Property and equipment, net  160,685   98,934   139   179 
Other assets, net  151   205 
Deferred costs, net of current portion  1,810   2,124 
Goodwill  8,485   8,571 
Intangible assets, net  6,626,416   2,214,000   4,472   6,023 
Goodwill  8,616,767   5,538,466 
Deferred costs, net of current portion  2,249,960   1,800,320 
Other assets, net  344,323   175,329 
Total assets $34,225,421  $30,168,688  $33,864  $35,810 
                
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities                
Accounts payable $8,502,486  $8,947,133  $13,036  $11,080 
Accrued expenses and other current liabilities  2,704,787   2,504,870   3,040   2,895 
Lines of credit  4,742,212   4,024,141   4,247   3,430 
Current portion of debt  1,847,675   1,000,000   1,963   1,800 
Due to related parties  80,721   871,508   160   1 
Accrued earn out consideration  1,201,727   -   331   1,186 
Warrant liability  933   - 
Unearned revenue  6,368,073   6,756,214   6,639   7,409 
Total current liabilities  25,447,681   24,103,866   30,349   27,801 
                
Long term liabilities                
Unearned revenue, net of current portion  3,012,324   2,509,190   2,472   2,883 
Debt, net of current portion and discount  3,452,031   970,160   2,099   2,922 
Accrued earn out consideration  161,754   - 
Accrued earn out consideration, net of current portion  154   159 
Deferred tax liabilities  1,290,621   18,000   1,038   1,078 
Deferred rent  62,091   - 
Interest payable  60,000   60,000 
Other long term liabilities  76   80 
Total liabilities  33,486,502   27,661,216   36,188   34,923 
                
Commitments and contingencies        
Commitments and contingencies and subsequent event  -   - 
  -   -         
STOCKHOLDERS' EQUITY                
Cumulative convertible preferred stock, $0.001 par value, 10,000,000 shares     
authorized, 1,816,289 shares issued and outstanding, including        
cumulative and imputed preferred dividends of $696,880 and $435,563, and     
with a liquidation preference of $11,109,994 and $10,652,275, respectively  6,580,949   6,319,629 
Cumulative Convertible Preferred stock, $0.001 par value, 10,000,000 shares        
authorized, 1,105,155 shares issued and outstanding, including        
cumulative and imputed preferred dividends of $586 and $361, and        
with a liquidation preference of $8,983 and $8,758 at September 30, 2013        
and December 31, 2012, respectively  7,609   7,370 
Common stock, $0.001 par value, 100,000,000 shares authorized,                
9,125,075 issued and 8,971,192 outstanding as of September 30, 2012,     
and 8,182,791 issued and 8,028,908 outstanding as of December 31, 2011  9,125   8,183 
12,297,979 issued and 12,144,096 outstanding as of September 30, 2013,        
and 9,300,439 issued and 9,146,556 outstanding as of December 31, 2012  12   9 
Additional paid-in capital  15,601,481   14,513,918   16,621   16,132 
Other comprehensive income  27,798   - 
Treasury stock, 153,883 shares of common stock  (204,664)  (204,664)  (205)  (205)
Accumulated deficit  (20,475,451)  (17,230,792)  (25,720)  (21,674)
Unearned ESOP shares  (800,319)  (898,802)  (664)  (767)
Total stockholders’ equity  738,919   2,507,472 
Accumulated other comprehensive income  23   22 
Total stockholders’ (deficit) equity  (2,324)  887 
Total liabilities and stockholders' equity $34,225,421  $30,168,688  $33,864  $35,810 
                
        
See accompanying notes to unaudited condensed consolidated financial statements
 
 
 
13

Table of Contents
 
DECISIONPOINT SYSTEMS, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2012  2011  2012  2011 
             
             
Net sales $18,567,021  $16,446,541  $54,144,051  $42,471,307 
                 
Cost of sales  14,222,782   13,007,116   42,269,043   34,042,818 
                 
Gross profit  4,344,239   3,439,425   11,875,008   8,428,489 
                 
Selling, general and administrative expense  4,951,913   3,274,994   13,622,674   10,267,641 
                 
Operating (loss) income  (607,674)  164,431   (1,747,666)  (1,839,152)
                 
Other expense:                
Interest expense  349,941   230,982   698,158   1,003,597 
Loss on debt extinguishment  -   24,098   -   2,665,157 
Other expense (income), net  (7,129)  (372,486)  (42,512)  (295,702)
Total other expense  342,812   (117,406)  655,646   3,373,052 
                 
Net (loss) income before income taxes  (950,486)  281,837   (2,403,312)  (5,212,204)
                 
Provision for income taxes  63,690   13,450   131,653   21,173 
                 
Net (loss) income  (1,014,176)  268,387   (2,534,965)  (5,233,377)
                 
Cumulative preferred stock dividends  (248,750)  (213,898)  (709,699)  (268,098)
                 
Net (loss) income attributable to common shareholders $(1,262,926) $54,489  $(3,244,664) $(5,501,475)
                 
Net (loss) income per share -                
Basic $(0.15) $0.01  $(0.42) $(1.00)
Diluted $(0.15) $0.01  $(0.42) $(1.00)
                 
Weighted average shares outstanding -                
Basic  8,182,103   7,320,328   7,697,635   5,493,530 
Diluted  8,182,103   7,417,555   7,697,635   5,493,530 
                 
Comprehensive loss $(1,240,576) $-  $(3,216,866) $- 
                 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2013  2012  2013  2012 
             
             
Net sales $17,575  $18,567  $46,067  $54,144 
                 
Cost of sales  14,113   14,445   36,216   42,559 
                 
Gross profit  3,462   4,122   9,851   11,585 
                 
Selling, general and administrative expense  4,485   4,741   13,981   13,370 
Adjustment to earn-out obligations  (820)  -   (820)  - 
                 
Operating loss  (203)  (619)  (3,310)  (1,785)
                 
Other expense:                
Interest expense  241   350   723   698 
Other income, net  (168)  (19)  (182)  (80)
Total other expense  73   331   541   618 
                 
Net loss before income taxes  (276)  (950)  (3,851)  (2,403)
                 
Provision (benefit) for income taxes  (109)  64   (466)  132 
                 
Net loss  (167)  (1,014)  (3,385)  (2,535)
                 
Cumulative and imputed preferred stock dividends  (223)  (249)  (661)  (710)
                 
Net loss attributable to common shareholders $(390) $(1,263) $(4,046) $(3,245)
                 
Net loss per share -                
Basic and diluted $(0.04) $(0.15) $(0.44) $(0.42)
                 
Weighted average shares outstanding -                
Basic and diluted  10,019,109   8,182,103   9,117,969   7,698,635 
                 
                 
Comprehensive loss $(166) $(992) $(3,383) $(2,507)
                 
                 

See accompanying notes to unaudited condensed consolidated financial statements
 
 
24

DECISIONPOINT SYSTEMS, INC.
Unaudited Consolidated Statements of Stockholders’ Equity (Deficit)
(In thousands)
                          Accumulated    
  Convertible        Additional        Unearned  other  Total 
  Preferred stock  Common stock  paid-in  Treasury  Accumulated  ESOP  comprehensive  stockholders’ 
  Shares  Amount  Shares  Amount  capital  stock  deficit  shares  income  equity (deficit) 
                               
Balance at December 31, 2012  1,105  $7,370   9,300  $9  $16,132  $(205) $(21,674) $(767) $22  $887 
                                         
Net loss  -   -   -   -   -   -   (3,385)  -   -   (3,385)
Foreign currency translation adjustment  -   -   -   -   -   -   -   -   1   1 
Common stock issued to employee as                                        
part of a specified portion of their
regular annual cash bonus
  -   -   71   -   83   -   -   -   -   83 
Common stock issued in private
  placement,  net of costs
  -   -   2,927   3   400   -   -   -   -   403 
Employee stock-based compensation  -   -   -   -   6   -   -   -   -   6 
Accrued dividends on preferred stock  -   239   -   -   -   -   (661)  -   -   (422)
Principal payment from ESOP  -   -   -   -   -   -   -   103   -   103 
                                         
                                         
Balance at September 30, 2013  1,105  $7,609   12,298  $12  $16,621  $(205) $(25,720) $(664) $23  $(2,324)
                                         
See accompanying notes to unaudited condensed consolidated financial statements

5



DECISIONPOINT SYSTEMS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)

 Nine Months ended September 30,  Nine Months ended September 30, 
 2012  2011  2013  2012 
Cash flows from operating activities:            
Net loss $(2,534,965) $(5,233,377) $(3,385) $(2,535)
Adjustments to reconcile net loss to net cash                
provided by (used in) operating activities:        
(used in) provided by operating activities:        
Depreciation and amortization  43,312   24,998   1,497   992 
Amortization of intangible assets  948,627   386,250 
Amortization of deferred financing costs and note discount  160,407   115,607   140   160 
Employee stock-based compensation  49,724   170,639   6   50 
Non-employee stock-based compensation  341,250   237,848   -   341 
Non cash interest expense (income)  (23,715)  97,380 
Loss on debt extinguishment  -   2,268,859 
Non-cash interest income  -   (24)
Acquisition earn-out adjustment  (820)  - 
Change in fair value of warrants  (166)  - 
ESOP compensation expense  98,483   93,571   104   98 
Deferred taxes, net  (5)  28 
Allowance for doubtful accounts  13,507   20,000   56   13 
Other income related to collection of note receivable in excess of carrying value  -   (358,000)
Deferred taxes, net  28,226   - 
Loss on disposal of property and equipment  13   - 
Changes in operating assets and liabilities:                
Accounts receivable  3,899,254   2,980,847   (468)  3,899 
Due from related party  (357,326)  -   -   (357)
Inventory, net  (184,297)  298,677   (107)  (184)
Deferred costs  (583,465)  864,332   496   (583)
Prepaid expenses and other current assets  178,585   113,357   (578)  179 
Other assets, net  (11,188)  (41,485)  5   (11)
Accounts payable  (572,329)  (480,370)  1,961   (572)
Accrued expenses and other current liabilities  178,360   (826,274)  106   178 
Due to related parties  (790,787)  (952,706)  158   (791)
Unearned revenue  (185,960)  (1,185,976)  (1,163)  (186)
Net cash provided by (used in) operating activities  695,703   (1,405,823)
Net cash (used in) provided by operating activities  (2,150)  695 
                
Cash flows from investing activities                
Cash paid for Apex  (4,801,000)  - 
Cash paid for CMAC  -   (2,205,000)
Cash paid for Illume Mobile  (250,000)  - 
Collection of note receivable received in reverse recapitalization  -   458,000 
Cash paid for acquisitions  -   (5,051)
Purchases of property and equipment  (49,690)  (19,987)  (33)  (50)
Net cash used in investing activities  (5,100,690)  (1,766,987)  (33)  (5,101)
                
Cash flows from financing activities                
(Repayments) borrowings from lines of credit, net  718,071   (1,980,572)  817   718 
Proceeds from issuance of term debt  4,032,890   4,000,000   1,000   4,033 
Cash received in reverse recapitalization, net of expenses  1,500,000   1,981,350   -   1,500 
Repayment of debt  (961,870)  (750,000)  (1,552)  (962)
Paid financing costs  (296,060)  (108,639)  (119)  (296)
Dividends paid  (482,094)  (90,582)  (296)  (482)
Common stock issued in private placement, net of costs  1,502   - 
Net cash provided by financing activities  4,510,937   3,051,557   1,352   4,511 
Effect on cash of foreign currency translation  (79,340)  -   (2)  (79)
Net increase (decrease) in cash  26,610   (121,253)
Net (decrease) increase in cash  (833)  26 
Cash at beginning of period  365,814   315,169   1,103   366 
Cash at end of period $392,424  $193,916  $270  $392 
                
Supplemental disclosures of cash flow information:                
Interest paid $858,224  $1,221,000  $705  $858 
Income taxes paid  56,086   50,000   234   56 
                
Supplemental disclosure of non-cash financing activities:                
Accrued and imputed dividends on preferred stock $261,320  $268,098  $661  $261 
Preferred and common shares issued in exchange for debt        
and related accrued interest  -   4,117,333 
Preferred and common shares issued in exchange for accounts        
payable and related accrued interest  -   411,733 
Common shares issued as finders' fee in reverse recapitalization  -   353,931 
        
Warrants issued in connection with common stock private placement  1,099   - 
See accompanying notes to unaudited condensed consolidated financial statements
 
36


DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTSStatements
(Unaudited)


NOTE 1 - DESCRIPTION OF BUSINESS AND THE MERGER

Description of Business
 
DecisionPoint Systems, Inc. (“DecisionPoint”, “Company”), through its subsidiaries is a provider of Enterprise Mobility Systems.  Enterprise Mobility Solutions are those computer systems that give an enterprise mobility systems integrator that sellsthe ability to connect to people, control assets, and installstransact business from any location by using mobile computingcomputers, tablet computers, and wirelesssmartphones to securely connect the mobile worker to the back office software systems that are used both within a company’s facilities in conjunction withrun the enterprise. Technologies that support Enterprise Mobility Solutions include national wireless carrier networks, and in the field using carrier-based wireless networks.  These systems generally includeWi-Fi, local area networks, mobile computers, smartphones and tablets, mobile application software applications, middleware and related data capture equipment including bar code scannersdevice security and radio frequency identification (“RFID”) readers.management software.  The Company also provides professional services, proprietary and third party software and software customization as an integral part of its customized solutions for its customers.    The proprietary suite of software products utilizes the latest technologies to empower the mobile worker in many areas including merchandising, sales and delivery;delivery, field service;service, logistics and transportation;transportation, and warehouse management.

The Company, formerly known as Comamtech, Inc. (“Comamtech”), was incorporated on August 16, 2010, in Canada under the laws of the Ontario Business Corporations Act (“OCBA”).  On June 15, 2011, the Company entered into a Plan of Merger (the “Merger Agreement”) among the Company, its wholly-owned subsidiary, 2259736 Ontario Inc., incorporated under the laws of the Province of Ontario, Canada (the “Purchaser”) and DecisionPoint Systems, Inc., a Delaware corporation (“Old DecisionPoint”) incorporated on December 27, 2006, under the laws of the State of Delaware.  Pursuant to the Merger Agreement, under Section 182 of the OCBA, on June 15, 2011 (the “Effective Date”) Old DecisionPoint merged (the “Merger”) into the Purchaser and became a wholly owned subsidiary of the Company.  In connection with the Merger, the Company changed its name to DecisionPoint Systems, Inc., and the Purchaser changed its name to DecisionPoint Systems International, Inc. (“DecisionPoint Systems International”).  The Company and DecisionPoint Systems International each reincorporated in the State of Delaware, subsequent to the Merger.  Upon completion of the Merger, the Company adopted Old DecisionPoint’s business plan.

Accounting Treatment of the Merger; Financial Statement Presentation
Prior to the Merger, Comamtech was a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  The Merger was accounted for as a reverse recapitalization pursuant to the guidance in “SEC’s Division of Corporation Finance Financial Reporting Manual”.  These transactions are considered by the SEC to be capital transactions in substance, rather than business combinations.  The Merger has been accounted for as a recapitalization which resulted in an exchange ratio of one Old DecisionPoint share for every 7.23273 shares of Comamtech common stock outstanding prior to the Merger.  For accounting purposes, Old DecisionPoint is considered the acquirer and surviving entity in the reverse recapitalization.  Accordingly, 2,186,689 shares were deemed issued to the Comamtech shareholders in exchange for approximately $3.9 million of net assets received.  The accompanying historical consolidated financial statements prior to the Merger are those of Old DecisionPoint.
The accompanying unaudited condensed consolidated financial statements present the previously issued shares of Comamtech common stock as having been issued pursuant to the Merger on June 15, 2011, with the consideration received for such issuance being the net assets of Comamtech received in the Merger.  The shares of common stock of the Company issued to Old DecisionPoint’s stockholders in the Merger are presented as having been outstanding since the original issuance of the shares.  Further, the exchange ratio has been retroactively applied to all share, weighted average share, loss per share, and stock option and warrant disclosures.  See Footnote 1 of the Company's audited consolidated financial statements included in the Company's 2011 Annual Report on Form 10-K filed on March 30, 2012, for a comprehensive description of the Merger.
NOTE 2 - BASIS OF PRESENTATION, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements.  In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all of the adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company at the dates and for the periods indicated.  The interim results for the periodperiods ended September 30, 2012,2013, are not necessarily indicative of results for the full 20122013 fiscal year or any other future interim periods.
4

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
 
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, DecisionPoint Systems International and Apex Systems Integrators, Inc. (“Apex”).  DecisionPoint Systems International has two wholly-owned subsidiaries, DecisionPoint Systems Group, Inc. (“DPS Group”) and CMAC, Inc. (“CMAC”).  Apex was acquired on June 4, 2012, and as such, the operating results of Apex have been consolidated into the Company’s consolidated results of operations beginning on June 5, 2012.  In addition, on July 31, 2012, the Company consummated an asset purchase agreement (“Asset Purchase Agreement”) with MacroSolve, Inc.  Pursuant to the Asset Purchase Agreement, the Company purchased the business (including substantially all the related assets) of the seller’s Illume Mobile division (“Illume Mobile”). and is a division of the Company.  The Company currently operates in one business segment.  With the Company's acquisition of Apex (Note 5) and the acquisition of Illume Mobile (Note 4), the Company expects to update its assessment of its business segments in its fourth quarter of this fiscal year.
 
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the recorded amounts reported therein.  Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used.  The Company evaluates its estimates and assumptions on a regular basis.  The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ materially from these estimates and assumptions used in preparation of the unaudited condensed consolidated financial statements.
 
These unaudited condensed consolidated financial statements have been prepared by management and should be read in conjunction with the audited consolidated financial statements of DecisionPoint Systems, Inc. and notes thereto for the year ended December 31, 2011,2012, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2013.
7

Liquidity
In the quarter ended September 30, 2012.2013, the Company experienced a decrease in revenue of $1.0 million compared to the quarter ended September 30, 2012, and a $2.9 million increase in revenue compared to the previous sequential quarter ended June 30, 2013.  In the nine months ended September 30, 2013, the Company incurred approximately $1.3 million in increased expenses due to professional fees relating to capital raising activities, including the registration of common shares as a result of the Series D Preferred Stock offering completed in December 2012 and the private placement of common stock completed in August 2013 and associated audit fees, and other matters such as employee termination costs. The Company experienced a net loss of $0.2 million and $3.4 million for the three and nine month periods ended September 30, 2013. In addition, the Company has a substantial working capital deficit totaling $(11.5) million at September 30, 2013.  Although a portion of this deficit is associated with deferred costs and unearned revenues and term debt that has been classified current due to expected future covenant violations (see further discussion at Note 8), the liabilities of the Company that are expected to be satisfied in the foreseeable future in cash exceed the operating assets that are expected to be satisfied in cash.
 
Liquidity - AlthoughTo address this, the Company has historically experienced losses,plans to seek additional capital through sales of our securities. There is no assurance additional funding will be available on terms acceptable to us, or at all.  If the Company raises additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the ownership interest of our existing shareholders will be diluted.  The Company is also reducing non-essential expenses and completing the integration of our acquisitions of Apex and Illume Mobile, which is expected to result in further cost savings.   Such expense reduction measures include, but are not limited to, consolidation of administrative personnel, consolidation of information technology environments, reduction of outsourced consulting expertise and replacing certain service providers with lower cost providers. The result of these activities has reduced the expense structure of the consolidated business, however this reduction has not been material to date and we do not anticipate it becoming material in the foreseeable future. 
On August 15, 2013, the Company entered into a material partSecurities Purchase Agreement (the “Purchase Agreement”) with multiple accredited investors for the sale of those lossescommon stock for gross proceeds of $1,756,400 (including $100,000 from management and existing shareholders of the Company) for 2,927,333 shares of common stock.  The effective price of the offering was $0.60 per share of common stock. An initial closing for $1,556,400 was held on August 15, 2013.  The final closing for $200,000 was held on August 21, 2013.  Additionally, pursuant to the Purchase Agreement, the Company issued 1,463,667 warrants to multiple accredited investors at an exercise price of $1.00 per share.  Further, the Company issued 292,733 warrants to the placement agent at an exercise price of $0.60 per share.  The warrants received liability accounting treatment under existing accounting standards.  The Company received net proceeds of approximately $1.5 million from the offering, after deducting the placement agent’s fees of 10% and other offering expenses. (see Note 9 – Stockholders’ Equity and Note 3 – Warrant Liability).
In November 2013, the Company entered into definitive subscription agreements (“Series E Purchase Agreement”) with accredited investors for the sales of $3,835,000 in gross proceeds for 383,500 shares of Series E Convertible Preferred Stock (“Series E Preferred Shares”) for a purchase price of $10.00 per share.  The initial Conversion Price is $0.50, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. The Company received net proceeds of approximately $3.4 million (net of the fair value of placement agent warrants) from the initial closing, after deducting the placement agent’s fees of 8% and other offering expenses.  The Company issued to the Placement Agent five-year warrants to purchase 767,000 shares of our common stock (equal to 10% of the number of shares of common stock underlying the Series E Preferred Shares sold under the Series E Purchase Agreement) at an exercise price of $0.55 per share, in connection with the Series E Purchase Agreement initial closing. The Company expects to close a second round of Series E Preferred Shares with gross proceeds of $300,000-$700,000 shortly thereafter. (see Note 13 – Subsequent Event).
During 2012 and 2013, all principal payments on the Company’s term debt were from non-cash transactions.made within payment terms. The Company was not in compliance with certain financial covenants under the agreements with Royal Bank of Canada (“RBC Credit Agreement”) and BDC, Inc. (“BDC Credit Agreement”) as of December, 31, 2012, March 31, 2013 and June 30, 2013.  The Company has received waivers for non-compliance for past covenant violations.  On August 22, 2013, the BDC Credit Agreement was amended and certain financial covenants were modified.  Pursuant to the amended loan agreement, the Company is required to maintain, for the duration of the investment, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised annually 120 days after each year end.  We were in compliance with all of our BDC financial covenants as of September 30, 2013. We expect to continue to meet the requirements of our BDC financial covenants over the short and long term.  On August 16, 2013 the RBC Credit Agreement was amended and certain financial covenants were modified.  Pursuant to the amended credit agreement and commencing with the fiscal year ending December 31, 2013, the Company is required to maintain a fixed coverage ratio, calculated on a consolidated basis of not less than 1.15:1 with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter.  As part of these losses,the revised financial covenants, covenant testing was waived by RBC for September 30, 2013.  The Company does not believe that it will be in compliance with the reset covenants at December 31, 2013.  Although management of the Company has accumulated substantial net operating loss carry-forwardsbelieves it is improbable that RBC will exercise their rights up to, off-set future taxable income.  In order to maintain normal operations forand including, acceleration of the foreseeable future, the Company must continue to have access to its lines of credit, return to profitability and/or access additional equity capital.  Thereoutstanding debt, there can be no assurance RBC will not exercise their rights pursuant to the provisions of the debt obligation. Accordingly, the Company has classified this debt obligation as current at September 30, 2013 (see Note 8 – Term Debt).
8

At October 31, 2013, the outstanding balance on the line of credit with Silicon Valley Bank (“SVB”) is $3.7 million, down from $4.1 million at September 30, 2013, and the availability under the line of credit has decreased to $1.6 million (see Note 7 – Lines of Credit).  The Company relies on the line of credit to fund daily operating activities maintaining very little cash on hand.  As of December 31, 2012, the Company was in compliance with all of its financial covenants with SVB. As of May 31, 2013 and June 30, 2013, the Company was not in compliance with the Tangible Net Worth financial covenant as defined in the amended SVB Loan Agreement. SVB agreed to temporarily forbear exercising their rights and remedies under the facility until August 28, 2013 and agreed to waive the existing covenant violations if a gross capital raise of $1.5 million was completed by such date. The Company completed the capital raise and was able to achieve compliance with the forbearance agreement prior to August 28, 2013.  Except for any capital raises through August 28, 2013, the minimum Tangible Net Worth requirement of a $(9.7) million deficit will be further reduced by one half of any funds raised through sales of common stock (as only 50% of additional capital raises are given credit in the Tangible Net Worth calculation).  As of September 30, 2013, the Company was in compliance with the Tangible Net Worth financial covenant and had available a $0.3 million cushion over the requirement. In November 2013, the Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13).  Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, the Company believes that at the time of this filing it is compliant with the terms and provisions of its SVB lending agreement and expects to continue to meet the requirements of our SVB financial covenants over the short and long term. The Company is in currently discussions with SVB regarding the Tangible Net Worth covenant and a reduction of the 50% of additional capital raised to 25% of capital raised in November 2013. Should the Company continue to incur losses in a manner consistent with its recent historical financial performance, the Company will violate this covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.
In the near term, the Company’s successful restructuring of its operations and reduction of operating costs and/or its ability to raise additional capital at acceptable terms is critical to its ability to continue to operate for the foreseeable future.  If the Company continues to incur operating losses and/or does not raise sufficient additional capital, material adverse events may occur including, but not limited to, 1) a reduction in the nature and scope of the Company’s operations, 2) the Company’s inability to fully implement its current business plan and/or 3) continued defaults under the various loan agreements.  A covenant default would give the bank the right to demand immediate payment of all outstanding amounts which the Company would not be able to repay out of normal operations.  There are no assurances that the Company will become profitable or that it can raise additional funds requiredsuccessfully implement its plans with respect to continue its normal operations.these liquidity matters.  The accompanying unaudited condensed consolidated financial statements do not includereflect any adjustmentsadjustment that wouldmay be required shouldresulting from the Company not be successful with these activities.adverse outcome relating to this uncertainty.

Summary of Significant Accounting Policies
 
There have been no material changes to the Company's significant accounting policies during the nine months ended September 30, 2012.2013.  See Footnote 2 of the Company's consolidated financial statements included in the Company's 20112012 Annual Report on Form 10-K filed on March 30, 2012,28, 2013, for a comprehensive description of the Company's significant accounting policies.

Concentration of Credit Risk - The Company derived approximately 20%9.8% and 22%13.3% of revenues from twoone customer, and 21.1% and 26.2% of revenues from the top three customers in the nine months ended September 30, 2013 and 2012, and 2011, respectively.  Additionally there was one customer which comprised 15.5% of accounts receivable at September 30, 2013.  Customer mix can shift significantly from year to year, but a concentration of the business with a few large customers is typical in any given year.  A decline in revenues could occur if a customer which has been a significant factor in one financial reporting period gives significantly less business in the following period.

The Company’s contracts with these customers and other customers do not include any specific purchase requirements or other requirements outside of the normal course of business.  The majority of customer contracts are on an annual basis for service support while on a purchase order basis for hardware purchases.  Typical hardware sales are submitted on an estimated order basis with subsequent follow on orders for specific quantities.  These sales are ultimately subject to the time that the units are installed at each of the customer locations as per their requirements.  Service contracts are purchased on an annual basis generally and are the performance responsibility of the actual service provider as opposed to the Company.  Termination provisions are generally standard clauses based upon non-performance, but a customer can cancel with a certain reasonable notice period anywhere from 30 to 90 days.  General industry standards for contracts provide ordinary terms and conditions, while actual work and performance aspects are usually dictated by a Statement of Work which outlines what is being ordered, product specifications, delivery, installation and pricing.

Translation of Foreign Currencies - The Company's functional currency is the U.S. dollar.  The financial statements of the Company's foreign subsidiary is measured using the local currency, in this case the Canadian dollar (CDN$), as its functional currency and is translated to U.S. dollars for reporting purposes.  Assets and liabilities of the subsidiary are translated at exchange rates as of the balance sheet dates.  Revenues and expenses of the subsidiary are translated at the rates of exchange in effect during the year.
5


DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Comprehensive Loss - Comprehensive loss is comprised of net loss and other comprehensive loss.  The only component of comprehensive loss is the foreign currency translation adjustments.adjustments, which were nominal in amount.  There was no tax effect allocated to any component of other comprehensive loss during the periods presented.

9

Fair Value Measurement - Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
•  Level 1 — Quoted prices in active markets for identical assets or liabilities.
•  Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•  Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table presents the Company’s warrant liability measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, aggregated by the level in the fair-value hierarchy within which those measurements fall (in thousands):
             
             
  Balance  
Quoted prices in active markets
(Level 1)
  
Significant other observable inputs
(Level 2)
  
Significant other unobservable inputs
(Level 3)
 
             
Balance at December 31, 2012 $-   -   -  $- 
                 
Balance at September 30, 2013 $933   -   -  $933 
                 
The following table presents the activity for liabilities measured at estimated fair value using unobservable inputs (Level 3) from December 31, 2012 through September 30, 2013 (in thousands):

  Level 3 
    
Balance at December 31, 2012 $- 
     
Fair value of derivative warrants issued in connection with share purchase agreement (see Note 3)  1,099 
Adjustments to fair value (reflected in other income)  (166)
     
Balance at September 30, 2013 $933 
     
Reclassifications - Certain amounts in the prior period condensed consolidated financial statements and related notes theretoreclassifications have been reclassifiedmade to prior years to conform to the current period presentation.financial statement presentation with no effect on our previously reported consolidated financial position, results of operations, or cash flows.

New Accounting StandardsNOTE 3 – WARRANT LIABILITY

In May 2011,The Company has determined that certain warrants the Financial Accounting Standards Board (“FASB”)Company has issued new accountingcontain provisions that protect the holders from future issuances of the Company’s Common Stock at prices below such warrants’ then in effect respective exercise prices (see Note 9).  These provisions could result in modification of the warrants then in effect exercise price.  The Company evaluated the following guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity.  Pursuant to this guidance, the Company’s management concluded these instruments do not meet the criteria for classification as equity treatment and must be recorded as a liability as a result of the terms in the warrants that providesprovide for price protection in the event of a consistent definition offuture issuance. The Company recognized these Warrants as liabilities at their fair value and common requirements of and disclosure aboutre-measures them at fair value between GAAP and International Financial Reporting Standards (“IFRS”)on each reporting date. ASC 820 Fair Value Measurement provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition (see Note 2).
10


The guidance statesCompany uses Level 3 inputs for its valuation methodology for the concepts of highest and best use and valuation premisewarrant derivative liabilities. The estimated fair values were determined using a Monte Carlo option pricing model based on various assumptions.  The Company’s derivative liabilities are only relevant when measuringadjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of nonfinancial assets.  Enhanced disclosure requirements will require companiesderivative liabilities.  Various factors are considered in the pricing models the Company uses to disclose quantitative information about unobservable inputs used, a descriptionvalue the warrants, including the Company’s current stock price, the remaining life of the warrants, the volatility of the Company’s stock price, and the risk-free interest rate.  In addition, as of the valuation processes used, and a qualitative discussion aboutdates, management assessed the sensitivityprobabilities of the measurements for recurring Level 3 fair value measurements.  For assets and liabilities not recorded at fair value but where fair value is disclosed, companies must report the levelfuture financing assumptions in the fair value hierarchy of assets and liabilities.  This new guidance is effective for interim and annual periods beginning January 1, 2012.  The adoption ofMonte Carlo valuation models.  Future changes in these disclosure requirements did notfactors will have a materialsignificant impact on the unaudited condensed consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements.  ASU 2011-05 eliminates the option to present components of other comprehensive income as partcomputed fair value of the statement of equity.  In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers specific requirements to present reclassification adjustments for each component of accumulated other comprehensive income.  ASU 2011-05 was effective forwarrant liability.  As such, the Company expects future changes in the first quarter of 2012.  The Company’s adoption of this pronouncement did not have a material effect on the unaudited condensed consolidated financial statements.
In July 2012, The FASB has issued ASU No. 2012-02, Intangibles--Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and performwarrants to continue to vary from quarter to quarter.

The Company revalues the quantitative impairment test by comparingwarrants as of the end of each reporting period. The estimated fair value of the outstanding warrant liabilities was approximately $0.9 million and $0.0 million, as of September 30, 2013 and December 31, 2012, respectively. The change in fair value of the derivative liabilities for the three and nine months ended September 30, 2013 was approximately $166,000 and is included in other income in the unaudited condensed consolidated statement of operations and comprehensive loss.

The derivative warrant liabilities were valued at the closing dates of the Purchase Agreement (see Note 9 (c)) and the end of each reporting period using a Monte Carlo valuation model with the carrying amount in accordance with Codification Subtopic 350-30, Intangibles--Goodwill and Other, General Intangibles Other than Goodwill.
Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period.
The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company does not believe that the adoption of this pronouncement will have a material effect on the consolidated financial statements.
following assumptions:

  Placement Agent Warrants  Investor Warrants 
Investor Warrants 
September
30, 2013
  
August
21, 2013
  
September
30, 2013
  
August
21, 2013
  
August
15, 2013
 
                
Closing price per share of common stock $0.63  $0.84  $0.63  $0.84  $0.69 
Exercise price per share (range)  0.60   0.60   1.00   1.00   1.00 
Expected volatility  132.1%  134.9%  132.1%  134.9%  134.1%
Risk-free interest rate  1.4%  1.6%  1.4%  1.6%  1.6%
Dividend yield  -   -   -   -   - 
Remaining expected term of underlying securities (years)  4.9   5.0   4.9   5.0   5.0 
6

 
DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 34 – LOSS PER COMMON SHARE

Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding.  Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.  The weighted-average basic and diluted shares for each of the nine months ended September 30, 20122013 and 2011,2012 exclude approximately 0.60.5 million and 0.7 million, respectively, of ESOP shares that have not been committed to be released.

For periods presented in which there is a net loss, potentially dilutive securities are excluded from the computation of fully diluted net loss per share as their effect is anti-dilutive. Below is a reconciliation of the fully dilutive securities effect for the period with net income:
  Three Months Ended September 30, 2011 
  Income  Shares  Per-Share 
  (Numerator)  (Denominator)  Amount 
          
Net income $268,387       
Less: Cumulative preferred stock dividends  (213,898)      
           
Basic earnings per share          
Net income attributable to common shareholders  54,489   7,320,328  $0.01 
             
Effect of dilutive securities            
Stock options      97,227     
             
Diluted earnings per share            
Income attributable to common stockholders $54,489   7,417,555  $0.01 
             
All potentially dilutive securities include:are anti-dilutive due to the net loss incurred by the Company in the periods presented.
 
  Three Months Ended Septemer 30,  Nine Months Ended September 30, 
  2012  2011  2012  2011 
             
Convertible preferred stock  1,816,289   1,816,289   1,816,289   1,816,289 
Warrants to purchase common stock  276,521   429,298   276,521   429,298 
Options to purchase common stock  642,401   266,458   642,401   701,963 
                 
Total potentially dilutive securities  2,735,211   2,512,045   2,735,211   2,947,550 
11


Potential dilutive securities consist of (in thousands):
  Nine Months Ended September 30, 
  2013  2012 
       
Convertible preferred stock - Series A  270   270 
Convertible preferred stock - Series B  131   131 
Convertible preferred stock - Series C  -   1,415 
Convertible preferred stock - Series D  7,824   - 
Warrants to purchase common stock  2,737   277 
Options to purchase common stock  544   642 
         
Total potentially dilutive securities  11,506   2,735 
         
 
NOTE 45ACQUISITION OF ILLUME MOBILEBUSINESS COMBINATIONS

Illume Mobile

On July 31, 2012 (“Illume Closing Date”), the Company consummated an asset purchase agreement (“Asset Purchase Agreement”) with MacroSolve, Inc.  Pursuant to the Asset Purchase Agreement, the Company purchased the business (including substantially all the related assets) of the seller’s Illume Mobile division (“Illume Mobile”), based in Tulsa, Oklahoma.  Founded in 1996, Illume Mobile is a mobile business solutions provider that serves mobile products and platforms.  Illume Mobile’s initial core business is the development and integration of business applications for mobile environments.environments.  The Company accounted for the transaction using the purchase method of accounting and the operating results for Illume Mobile have been consolidated into the Company’s results of operations beginning on August 1, 2012.

In consideration for the business of Illume Mobile, the Company paid $1,000,000, of which $250,000 was paid in cash and $750,000 was paid in the form of 617,284 shares of the Company’s common stock.  The number of shares issued was based on the volume weighted-average closing price of the Company’s common stock of $1.215 per share over the twenty trading days prior to the Illume Closing Date.  The closing price of the Company’s common stock on the day of the Illume Closing was $1.13 per share.  Accordingly, the Company has valued the shares issued in conjunction with the acquisition at $697,531.$697,531.

7

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Pursuant to the Asset Purchase Agreement, the Company may bewas required to make an additional payment (“Earn Out Payment”) to the Sellerseller of up to $500,000 of which 50% will be paid in cash, and 50% will be paid in shares of the common stock of the Company.  The value of the shares will be based on the closing price of the Company’s common stock on the one year anniversary of the Illume Closing Date.  The Earn Out Payment will be paid within 30 days of the one year anniversary of the Closing Date.  Closing costs and associated expenses totaled approximately $140,000.  The Company paid Sigma Capital Advisors a fee of $45,000 for services provided in connection with the Asset Purchase Agreement.  The transaction was accounted for using the purchase method of accounting and the operating results for Illume Mobile have been consolidated into the Company’s results of operations beginning on August 1, 2012.

The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.  The following table summarizes the fair value of the Illume Mobile assets acquired and liabilities assumed atDate, July 31, 2012:
Assets acquired:   
Accounts receivable $16,270 
Other current assets  14,886 
Property and equipment  25,592 
Intangible assets  630,000 
Goodwill  443,801 
Total assets  1,130,549 
     
Liabilities assumed:    
Accounts payable and other accrued liabilities  38,838 
Unearned revenue  36,971 
Total liabilities assumed  75,809 
Net assets acquired $1,054,740 
     
Purchase consideration:    
Cash paid at closing $250,000 
Shares issued at closing  697,531 
Earn out consideration  107,209 
Total purchase consideration $1,054,740 
Under the Asset Purchase Agreement, the Earn Out Payment will be computed as follows:
(a)  If Net Revenue (as defined in the Purchase Agreement) attributable to Illume Mobile, during the one year period commencing on the Illume Closing Date is $1,500,000 or less, the Earn Out Payment will be $0.

(b)  If Net Revenue (as defined in the Purchase Agreement) is greater than $1,500,000 but less than $2,000,000, the Earn Out Payment will be $100,000.

(c)  If Net Revenue (as defined in the Purchase Agreement) is at least $2,000,000 but less than $3,000,000, the Earn Out Payment will be equal to the sum of (i) $100,000 plus (ii) 40% of the excess of the Net Revenue amount over $2,000,000.

(d) If Net Revenue (as defined in the Purchase Agreement) is $3,000,000 or more, the Earn Out Payment will be $500,000.

The Earn Out Payment amount was recorded as additional purchase price consideration and the fair value was estimated by using a probability weighting of achieving various future revenue results simulation model to calculate the present value of the earn out and determine the probability of reaching the earn out milestones.
The present value of the total earn out amount was calculated using a discount rate of 21.0%.  The discount rate was determined based on an estimated venture capital rate of return.2013.  The fair value of the Earn Out Payment was calculated to be approximately $107,000 andat the Closing Date.  At September 30, 2013, the calculated Earn Out Payment due under the Asset Purchase Agreement was zero.  Accordingly, there is recorded as$0 accrued for the Earn Out Payment included in accrued earn out consideration in the Company’s unaudited condensed consolidated balance sheetfinancial statements.  The adjustment was recorded as a separate component of operating expenses in the unaudited condensed consolidated statement of operations and comprehensive loss as of September 30, 2012.
8

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The fair value of the intangible assets acquired at July 31, 2012, and the estimated useful lives over which they are being amortized are:2013.

  Fair Value Estimated Useful life
     
Software $310,000 3.5 years
Customer relationships  100,000 3 years
Trade name  130,000 3 years
Covenant not to compete  90,000 2 years
      
  $630,000  
Amortization of proprietary software is calculated as the greater of the proportional revenue approach or the straight-line approach.  Amortization of customer relationships and trade names are calculated on the discounted cash flow methodology to more properly reflect the greater useful life of the assets in the early years and the covenant not to compete is amortized on a straight-line basis. 

The transaction resulted in a purchase price residual at the Illume Closing Date of approximately $434,000 for goodwill, representing the financial, strategic and operational value of the transaction to DecisionPoint.  Goodwill is attributed to the premium that the Company was willing to pay to obtain the value of the Illume Mobile business and the synergies created with the integration of key components of a commercial infrastructure.  The total amount of the goodwill acquired is deductible for tax purposes.

See Pro Forma financial information under Note 5.

NOTE 5– ACQUISITION OF APEXApex

On June 4, 2012 (“Closing Date”), pursuant to a Stock Purchase Agreement (“Purchase Agreement”), the Company acquired all of the issued and outstanding shares of Apex, a corporation organized under the laws of the Province of Ontario, Canada.  Apex is a provider of wireless mobile work force software solutions.  Its suite of products utilizes the latest technologies to empower the mobile worker in many areas including merchandising, sales and delivery; field service; logistics and transportation; and, warehouse management.  Its clients are North American companies that are household names whose products and services are used daily to feed, transport, entertain and care for people throughout the world.

In consideration for the shares of Apex, the Company paid CDN$5,000,000 (US$4,801,000 at the Closing Date) (“Closing Amount”) in cash.  The Company couldwas required to pay up to an undiscounted amount of CDN$3,500,000 (US$3,360,700 at the Closing Date) in consideration for Apex achieving certain levels of adjusted earnings before interest, depreciation, taxes and amortization (“EBITDA”), as defined by the Purchase Agreement, in the period ended July 2013.  The fair value of the earn out was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the Closing costs and associated expenses either previously paid, payable in cash orDate).  At September 30, 2013, the calculated Earn Out Payment due under the Purchase Agreement was CDN$341,000 (US$331,000).  The seller has disputed the Company’s calculation (see Note 12).  Accordingly, there is CDN$341,000 (US$331,000) recorded as deferred financing costs afterpotential additional purchase consideration in the Closing Date total approximately $2.2 million, which includes the issuanceunaudited condensed consolidated financial statements.  The adjustment of 325,000 shares of the Company’s common stock (Note 9). The shares were valued at $341,250 based on the market price of $1.05 per share on the Closing Date.  Of the total amount, approximately $190,000,CDN$735,000 (US$713,000) was reflected as deferred financing costs and the remainder was reflectedrecorded as a charge to selling, general and administrativeseparate component of operating expenses in the historical financial statementsunaudited condensed consolidated statement of the Companyoperations and comprehensive loss as follows: 1) fourth quarter ended December 31, 2011: $46,000; 2) first quarter ended March 31, 2012: $351,000: 3) second quarter ended June 30, 2012: $1,213,000; and 4) third quarter endedof September 30, 2012: $380,0002013.  The transaction wasCompany accounted for the transaction using the purchase method of accounting and the operating results for Apex have been consolidated into the Company’s results of operations beginning on June 5, 2012. The Company funded the purchase of Apex through borrowings as further explained below.
 
The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.  The following table summarizes the fair value of the Apex assets acquired and liabilities assumed at June 4, 2012:
 
912

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Assets acquired:   
Accounts receivable $242,992 
Due from related party  411,926 
Other current assets  63,456 
Property and equipment  29,780 
Intangible assets  4,465,890 
Goodwill  2,448,969 
Total assets  7,663,013 
     
Liabilities assumed:    
Accounts payable and other accrued liabilities  194,721 
Unearned revenue  297,518 
Deferred tax liability  1,183,927 
Total liabilities assumed  1,676,166 
Net assets acquired $5,986,847 
     
Purchase consideration:    
Cash paid at closing $4,801,000 
Earn out consideration  1,185,847 
Total purchase consideration $5,986,847 
Under the Purchase Agreement, the following post-closing adjustments will be made:
(a)  if the Closing Working Capital as defined in the Purchase Agreement as shown on the closing date balance sheet: (i) is less than CDN$200,000 (US$192,000 at the Closing Date), the Closing Amount shall be reduced on a dollar for dollar basis by the amount of the shortfall; (ii) is greater than CDN$200,000 (US$192,000 at the Closing Date), the Closing Amount shall be increased on a dollar for dollar basis by the amount of such excess; and (iii) is equal to than CDN$200,000 (US$192,000 at the Closing Date), there shall be no adjustment to the Closing Amount as a result of this provision; and
(b)  the Closing Amount shall be reduced on a dollar for dollar basis by the amount of any liabilities of Apex on the Closing Date as shown on the closing date balance sheet, including any taxes payable and indebtedness of Apex (other than the executory obligations under contracts and all accounts payable and accrued liabilities of Apex incurred in the ordinary course of business) and excluding any liabilities otherwise adjusted pursuant to (a) above.
Pursuant to the above, a working capital adjustment of approximately $412,000 was recorded at the Closing Date.  In July of 2012, pursuant to the above arrangement, the Closing Working Capital was audited and resulted in an adjustment of $76,414. The total due from the prior shareholder is reflected on the accompanying unaudited condensed consolidated balance sheet as due from related party. The adjustment of $76,414 is reflected as a reduction to goodwill in Note 6 below.
In addition, if EBITDA of Apex for the twelve months ending July 31, 2013 (“2013 EBITDA”), is equal to or less than CDN$2,000,000 (US$1,920,000 at the Closing Date), then Apex shall pay the former shareholders an amount equal to the product of the 2013 EBITDA multiplied by four less $4,801,000 (“2013 EBITDA Basic Earn Out Amount”), up to a maximum of CDN$3,000,000 (US$2,881,000 at the Closing Date).  An amount equal to 22.22% of the 2013 EBITDA Basic Earn Out Amount shall be paid in cash and the balance shall be paid by Apex issuing a subordinated convertible note (“Note”).
Under the terms of the Note, Apex will pay the principal sum due on the Note in eight quarterly payments beginning on January 31, 2014 (“Installment Dates”).  Interest from and after August 1, 2013, shall be paid in arrears on the last day of each calendar quarter commencing on January 31, 2014.  The interest rate shall be determined as follows:
·  9% per annum, calculated and compounded quarterly before November 1, 2014; and
·  11% per annum, calculated and compounded quarterly after October 31, 2014;
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DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
·  except, however, that, if, during the term of the Note, the Company raises Net Equity Capital (as defined  in the Note) in an amount greater than CDN$5,000,000 and this Note is not repaid in full within 30 days from the date that the Company receives such Net Equity Capital, the interest rate otherwise provided in the Note shall be 15% per annum from the end of such 30-day period to the first anniversary thereof and 20% per annum thereafter to the date of payment in full.
The Note is convertible, only on each Installment Date, at the option of the Note holder, into shares of the Company’s common stock at a conversion price that is equal to the greater of the market price of the Company’s common stock on the day prior to the conversion, or $1.00.  The shares issuable under the Note will be restricted but will have certain piggy back registration rights as set forth in the Purchase Agreement.
If the 2013 EBITDA is greater than CDN$2,000,000 (US$1,920,000 at the Closing Date), then Apex shall pay an amount (the “2013 EBITDA Additional Earn Out Amount”) by which the dollar-for-dollar 2013 EBITDA exceeds CDN$2,000,000 ($1,920,000 at the Closing Date), up to a maximum of CDN$500,000 (US$480,000 at the Closing Date).  The 2013 EBITDA Additional Earn Out shall be paid by the issuance of shares of the Company’s common stock.  The number of shares to be issued shall be determined by the amount due divided by the 30 day average daily closing price of the shares of the Company’s common stock in the month of July 2013.  The shares issued will be restricted but will have certain piggy back registration rights as set forth in the Purchase Agreement.
The obligations of Apex under the Purchase Agreement are guaranteed by the Company.
The 2013 EBITDA Basic Earn Out Amount and 2013 EBITDA Additional Earn Out Amount was recorded as additional purchase price consideration and the fair value was estimated by using a Monte Carlo simulation model to calculate the present value of the earn out and determine the probability of reaching the earn out milestones.  The Company simulated the EBITDA in the earn out periods by varying the following inputs:
·  
Revenue – Earn out period revenue was simulated based on management’s projected revenue and a standard deviation based on revenue variance shown throughout management’s 2012 - 2014 projections. 

·  
Cost of goods sold (“COGS”) margin – Earn out period COGS margin was simulated based on management’s projected margin and a standard deviation based on COGS margin variance shown throughout management’s 2012 - 2014 projections. 

·  
General and administrative expenses (“G&A”) – Earn out period G&A expense was simulated based on management’s projected G&A expense and a standard deviation based on G&A expenses variance shown throughout management’s 2012 - 2014 projections. 

Once the EBITDA was simulated in the earn out period, the Company then determined the amount of the 2013 EBITDA Basic Earn Out and the 2013 EBITDA Additional Earn Out that was achieved.
The present value of the total earn out amount was calculated using a discount rate of 19.7%.  The discount rate was determined based on: (i) a discount rate of 16.0% based on the cost of equity less 2.0 percent specific risk premium since the earn out period is only for one year, plus (ii) a counterparty risk of 3.7% based on the after-tax estimated cost of debt.  The fair value of the 2013 EBITDA Basic Earn Out Amount and 2013 EBITDA Additional Earn Out Amount was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the Closing Date).  At the balance sheet current translation rate, approximately $1,094,000 is recorded in accrued earn out consideration in the Company’s unaudited condensed consolidated balance sheet as of September 30, 2012.
As part of the Purchase Agreement, the Company is obligated to pay bonus consideration to the CEO of Apex. Such bonus is considered additional contingent purchase consideration as the Company is obligated to pay the bonus regardless of whether or not the CEO’s employment is retained.  The fair value of the bonus was calculated to be approximately CDN$160,000 (US$153,000 at the Closing Date).  At the current balance sheet translation rate, approximately $162,000September 30, 2013 there is CDN$160,000 (US$154,000) recorded in accrued earn out consideration in the Company’s unaudited condensed consolidated balance sheet as of September 30, 2012. See further discussion regarding the terms and provisions of the agreement at Note 12.sheets.
 
The fair value of the intangible assets acquired at June 4, 2012, and the estimated useful lives over which they are being amortized are:
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DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
     
  Fair Value Estimated Useful Life
     
     
Customer relationships $1,536,320 9 years
ApexWare software  2,483,077 3.5 years
Trade name  432,090 7 years
Covenant not to compete  14,403 1 year
      
  $4,465,890  
Amortization of ApexWare software is calculated as the greater of the proportional revenue approach or the straight-line approach.  Amortization of customer relationships and trade names are calculated on the discounted cash flow methodology to more properly reflect the greater useful life of the assets in the early years and the covenant not to compete is amortized on a straight-line basis.

The transaction resulted in a purchase price residual at the Closing Date of approximately $2,449,000 for goodwill, representing the financial, strategic and operational value of the transaction to DecisionPoint.  Goodwill is attributed to the premium that the Company was willing to pay to obtain the value of the Apex business and the synergies created with the integration of key components of a commercial infrastructure.  The total amount of the goodwill acquired is not deductible for tax purposes.

On June 4, 2012, Apex entered into a Credit Agreement (“RBC Credit Agreement”) with Royal Bank of Canada (“RBC”), pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000 (US$2,641,000 at the Closing date), including a revolving demand facility with an authorized limit of CDN$200,000 (US$192,000 at the Closing Date) (Note 7).  In addition, Apex entered into a Loan Agreement (”BDC Loan Agreement”) with BDC Capital Inc. (“BDC”), a wholly-owned subsidiary of Business Development Bank of Canada, pursuant to which  BDC made available to Apex a term credit facility (“BDC Credit Facility”) in the aggregate amount of CDN$1,700,000 (US$1,632,000 at the Closing Date) (Note 7). Further, the Company drew amounts under its line of credit with SVB (Note 7) to fund the remainder of the cash purchase price.
Pro Forma Financial Information:Information (unaudited):

The following summarizes the Company’s unaudited combinedconsolidated results of operations for the three and nine months ended September 30, 2012 and 2011 that includesas if the Apex and Illume Mobile (000’sacquisitions had occurred on January 1, 2012: (in thousands except per share data):

  Three Months ended September 30,  Nine Months ended September 30, 
  2012  2011  2012  2011 
             
Net revenues $18,669  $17,258  $56,346  $44,867 
Net loss attributable to common shareholders $(1,446) $(706) $(5,312) $(7,539)
                 
Net loss per share - basic and fully-diluted $(0.18) $(0.08) $(0.69) $(1.17)
                 
  
Three Months Ended
 September 30, 2012
  
Nine Months Ended
September 30, 2012
 
  As Reported  Pro Forma  As Reported  Pro Forma 
             
Net sales $18,567  $18,669  $54,144  $56,346 
Net loss attributable to common shareholders  (1,263)  (1,445)  (3,245)  (5,311)
                 
Net loss per share - basic and diluted  (0.15)  (0.18)  (0.42)  (0.69)
                 
 
Included in the pro forma combined results of operations are the following adjustments for Apex: (i) amortization of intangible assets for the three months ended September 30, 2012 and 2011 of $0 and $352,000, respectively, and for the nine months ended September 30, 2012 of $0 and 2011 of $572,000, and $1,056,000, respectively and (ii) a net increase in interest expense for the three months ended September 30, 2012 and 2011 of $0 and $179,000, respectively, and for the nine months ended September 30, 2012 of $0 and 2011 of $291,000, and $537,000, respectively.

Included in the pro forma combined results of operations are the following adjustments for Illume Mobile: (i) amortization of intangible assets for the three months ended September 30, 2012 and 2011 of $18,000 and $53,000, respectively, and for the nine months ended September 30, 2012 of $18,000 and 2011 of $125,000, and $160,000, respectively.  Net loss per share assumes the 325,000 shares issued in connection with the Apex acquisition and the 617,284 shares issued in connection with the Illume Mobile acquisition are outstanding for eachthe period presented (see discussion at Note 9).presented.
 
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The historical financial information of Apex has been extracted for the periods required from the historical financial statements of Apex Systems Integrators, Inc. which were prepared in accordance with U.S. generally accepted accounting principles.  The historical financial information of Illume Mobile has been derived from using internally generated management reports for the periods required.
 
DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations that would have been reported had the Apex and Illume Mobile acquisitions been completed as of the beginning of the period presented, nor should it be taken as indicative of the Company’s future consolidated results of operations.
 
The combined amounts of Apex and Illume Mobile’s revenue and net loss since the respective acquisition dates included in the Company’s unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2013 were $0.7 million, ($0.1) million and $2.6 million, ($1.8) million, respectively, and for the three and nine months ended September 30, 2012 were $0.6 million, ($0.7) million and $0.7 million, ($1.2) million, respectively.
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

The following summarizes the transactions effectingtransaction affecting goodwill through September 30, 2012:2013 (in thousands):

    
Balance at January 1, 2012 $5,538,466 
Acquisition of Apex in June  2,448,969 
Adjustment to Apex goodwill  37,485 
Effect of currency translation on Apex  148,046 
Acquisition of Illume Mobile on July 31  443,801 
Balance at September 30, 2012 $8,616,767 
     
Balance at December 31, 2012 $8,571 
     
Effect of currency translation on Apex  (86)
Balance at September 30, 2013 $8,485 
     
As of September 30, 20122013 and December 31, 2011,2012, the Company’s intangible assets and accumulated amortization consist of the following:following (in thousands):

  September 30, 2012 
     Accumulated    
  Gross  Amortization  Net 
          
Customer relationships $3,397,536  $(721,840) $2,675,696 
Contractor and resume databases  675,000   (236,250)  438,750 
Tradename  897,745   (159,765)  737,980 
Software  3,014,505   (329,465)  2,685,040 
Covenant not to compete  105,258   (16,308)  88,950 
             
  $8,090,044  $(1,463,628) $6,626,416 
             

 December 31, 2011  September 30, 2013  December 31, 2012 
     Accumulated       Accumulated        Accumulated    
 Gross  Amortization  Net  Gross  Amortization  Net  Gross  Amortization  Net 
                           
Customer relationships $1,670,000  $(279,000) $1,391,000  $3,319  $(1,498) $1,821  $3,373  $(966) $2,407 
Contractor and resume databases  675,000   (135,000)  540,000   675   (371)  304   675   (270)  405 
Tradename  310,000   (64,000)  246,000   878   (324)  554   893   (193)  700 
Software  74,000   (37,000)  37,000 
Internal use software  2,892   (1,137)  1,755   2,978   (545)  2,433 
Covenant not to compete  105   (67)  38   105   (27)  78 
                                    
 $2,729,000  $(515,000) $2,214,000  $7,869  $(3,397) $4,472  $8,024  $(2,001) $6,023 
                                    
The effect of foreign currency translation on the goodwill and intangible assets for the nine months ended September 30, 20122013 is approximately $148,000($86,000)  and 261,000,($120,000), respectively.

NOTE 7 – LINES OF CREDIT
 
The Company has a $10.0 million revolving line of credit with Silicon Valley Bank (“SVB”) which provides for borrowings based upon eligible accounts receivable, as defined in the Loan Agreement (“SVB Loan Agreement”).  Under the SVB Loan Agreement as amended, SVB has also provided the Company with a term loan as discussed at Note 8.  The SVB Loan Agreement is secured by substantially all the assets of the Company and matures in February 2013.2015.  As of September 30, 2012,2013, the outstanding balance on the line of credit is approximately $4.6$4.1 million and the interest rate is 7.5%7.0%.  The line of credit has a certain financial covenant and other non-financial covenants.  As of September 30,December 31, 2012, the Company was in compliance with these covenants.
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all of its financial covenants with SVB. As of May 31, 2013 and June 30, 2013, the Company was not incompliance with the Tangible Net Worth covenant as defined in the amended SVB Loan Agreement. On August 16, 2013, the Company and SVB signed an agreement (“Forbearance Agreement”) where SVB agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and agreed to waive the existing covenant violations, subject to the Company’s completion of a capital raise.  The Company completed the capital raise and was able to achieve compliance with the forbearance agreement prior to August 28, 2013. Except for any capital raises through August 28, 2013, the minimum Tangible Net Worth requirement of a $(9.7) million deficit will be further reduced by one half of any funds raised through sales of common stock (as only 50% of additional capital raises are given credit in the Tangible Net Worth calculation). As of September 30, 2013, the Company was in compliance with the Tangible Net Worth financial covenant and had available a $0.3 million cushion over the requirement. In November 2013, the Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13).  Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, the Company believes that at the time of this filing it is compliant with the terms and provisions of its SVB lending agreement and expects to continue to meet the requirements of our SVB financial covenants over the short and long term. The Company is in currently discussions with SVB regarding the Tangible Net Worth covenant and a reduction of the 50% of additional capital raised to 25% of capital raised in November 2013.  Should the Company continue to incur losses in a manner consistent with its recent historical financial performance, the Company will violate this covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Availability under the line of credit was approximately $2.7$4.3 million as of September 30, 2012.2013 and $1.6 million as of October 31, 2013.  The line of credit allows the Company to cause the issuance of letters of credit on account of the Company to a maximum of the borrowing base as defined in the Loan Agreement.  No letters of credit were outstanding as of September 30, 20122013 or December 31, 2011.2012.
On February 27, 2013, the SVB Loan Agreement was amended to provide for 1) an extension of the termination date of the line of credit to February 28, 2015, 2) the modification of the line of credit borrowing base, advance rate and financial covenants, 3) the inclusion of an additional $1.0 million term loan (See further discussion at Note 8, 5) a modification of the rate of interest of the line of credit to 3.75% above SVB’s prime rate and 5) other various terms and provisions.

The Company is party to a credit agreement, dated June 4, 2012 (the “RBC Credit Agreement”) with Royal Bank of Canada (“RBC”).  Under the RBC Credit Agreement, the revolving demand facility allows for borrowings up to CDN$200,000 based upon eligible accounts receivable.  Interest is based on the Royal Bank Prime (“RBP”) plus 1.5% and is payable on demand.  As of September 30, 2012,2013, the outstanding balance on the line of credit was $167,000$180,000 and the interest rate is 4.5%.  The RBC Credit Agreement is secured by the assets of Apex.  The revolving demand facility has certain financial covenants and other non-financial covenants.  As of SeptemberJune 30, 2013 and December 31, 2012, Apex was not in compliance with the Fixed Charge Coverage ratio covenant as defined in the RBC Credit Agreement.  At June 30, 2013, Apex was not in compliance with the Maximum Funded Debt to EBITDA ratio covenant as defined in the RBC Credit Agreement.  In March 2013 and May 2013, the Company received waivers for non-compliance of these covenants. covenants at December 31, 2012, March 31, 2013 and June 30, 2013.  The covenants were reset by RBC has indicatedon August 16, 2013.  The Company does not believe that it iswill be in process of providing a waiver forcompliance with the covenant violationsreset covenants at September 30, 2012.December 31, 2013.  See further discussion regarding this condition at Note 8.
 
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For the nine months ended September 30, 20122013 and 2011,2012, the Company’s interest expense for the lines of credit, including amortization of deferred financing costs, was approximately $251,000$262,000 and $289,000,$251,000, respectively.

RBC and SVB entered intoare party to a subordination agreement, pursuant to which RBC agreed to subordinate any security interest in assets of the Company granted in connection with the RBC Credit Agreement to SVB’s security interest in assets of the Company.

Under the RBC Credit Agreement, the lender provided Apex with a term loan as discussed at Note 8.
 
NOTE 8 – TERM DEBT
 
Term debt as of September 30, 2012,2013, consists of the following:following (in thousands):

          Amortization  Effect of    
 Balance        of Note  Currency  Balance                   
 January 1, 2012  Additions  Payments  Discount  Translation  September 30, 2012  
Balance
December 31, 2012
  Additions  Payments  Amortization of Note Discount  
Effect of
Currency
Translation
  
Balance
September 30,
2013
 
RBC term loan $-  $2,400,500  $(211,750) $-  $142,355  $2,331,105  $2,090  $-  $(608) $-  $(68) $1,414 
                        
Note discount  (38)  -       18  $1   (19)
BDC term loan  -   1,632,340   -   -   96,917   1,729,257   1,705   -   -   -   (56)  1,649 
                        
Note discount  (31)  -       5   1   (25)
SVB term loan  2,000,000   -   (750,000)  -   -   1,250,000   1,000   -   (750)  -   -   250 
Note discount  (29,840)  -   -   19,184   -   (10,656)  (4)  -   -   4   -   - 
SVB term loan, net  1,970,160   -   (750,000)  19,184   -   1,239,344 
SVB term loan-2  -   1,000   (194)  -   -   806 
Note discount  -   (19)  -   6   -   (13)
                                                
Total debt $1,970,160  $4,032,840  $(961,750) $19,184  $239,272   5,299,706  $4,722  $981  $(1,552) $33  $(122)  4,062 
                                                
Less current portion                   (1,847,675)
Less contractual current portionLess contractual current portion                   (1,377)
Less RBC debt long term classified as currentLess RBC debt long term classified as current               (586)
                                                
Debt, net of current portionDebt, net of current portion                  $3,452,031 Debt, net of current portion                  $2,099 
                                                

RBC Term Loan -- On June 4, 2012, Apex entered into the RBC Credit Agreement with RBC described in Notes 5 and 7, pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000, including a term facility (“RBC Term Loan”) in the amount of CDN $2,500,000 (US$2,400,5002,401,000 at the Closing Date). The RBC Term Loan accrues interest at RBPRoyal Bank Prime (“RBP”) plus 4% (7% at September 30,December 31, 2012). Principal and interest is payable over a three year period at a fixed principal amount of CDN $69,444$70,000 a month beginning in July 2012 and continuing through June 2015. Apex paid approximately $120,000 in financing costs, which has been recorded as deferred financing costs or note discount in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2012,2013, and is being amortized to interest expense over the term of the loan.
 
In addition, the RBC Term Loan calls for mandatory repayments based on 20% of Apex’s free cash flow as defined in the RBC Credit Agreement, before discretionary bonuses based on the annual year end audited financial statements of Apex, beginning with the fiscal year ended December 31, 2012, and payable within 30 days of the delivery of the annual audited financial statements, and continuing every six months through December 31, 2014. This amount is estimated to be $80,000$0 at September 30, 2013 and is included in the current portion of debt on the accompanying unaudited condensed consolidated balance sheets.December 31, 2012.
14

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements

The RBC Term Loan has certain financial covenants and other non-financial covenants. As of SeptemberJune 30, 2013 and December 31, 2012, Apex was not in compliance with the Fixed Charge Coverage ratio covenant as defined in the RBC Credit Agreement.  At June 30, 2013, Apex was not in compliance with the Maximum Funded Debt to EBITDA ratio covenant as defined in the RBC Credit Agreement.  In March 2013, May 2013 and August 2013, the Company received waivers for non-compliance of these covenants.covenants at December 31, 2012, March 31, 2013 and June 30, 2013. On August 16, 2013 the RBC has indicatedCredit Agreement was amended and certain financial covenants were modified.  Pursuant to the amended credit agreement and commencing with the fiscal year ending December 31, 2013, the Company is required to maintain a fixed coverage ratio, calculated on a consolidated basis of not less than 1.15:1 with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter.  As part of the revised financial covenants, covenant testing was waived by RBC for September 30, 2013.  The Company does not believe that it will be in compliance with the reset covenants at December 31, 2013.  Although the Company believes it is in processimprobable RBC will exercise their rights up to, and including, acceleration of providing a waiver for the covenant violationsoutstanding debt, there can be no assurance that RBC will not exercise their rights pursuant to the provisions of the debt obligation.  Accordingly, the Company has classified the term debt obligation as current at September 30, 2012.2013.
15

 
BDC Term Loan --On June 4, 2012, Apex also entered into thea loan agreement (the “BDC Loan Agreement”) with BDC Loan Agreement as described in Note 5,Capital, Inc. (“BDC”), pursuant to which BDC made available to Apex a term credit facility (“BDC Term Loan”) in the aggregate amount of CDN $1,700,000 (USD $1,632,340$1,632,000 at the Closing Date). The BDC Term Loan accruesinitially accrued interest at the rate of 12% per annum, and matures on June 23, 2016, with an available one year extension for a fee of 2%, payable at the time of extension.  On April 29, 2013, the BDC Term Loan was amended to accrue interest at the rate of 12.5% per annum.  In addition to the interest payable, consecutive quarterly payments of CDN$20,000 as additional interest are due beginning on June 23, 2012, and subject to compliance with bank covenants, Apex will make a mandatory annual principal payment in the form of a cash flow sweep which will be equal to 50% of the Excess Available Funds (as defined by the BDC Loan Agreement) before discretionary bonuses based on the annual year end audited financial statements of Apex. The maximum annual cash flow sweep in any year will be CDN$425,000. As of December 31, 2012 and at September 30, 2012,2013, the Company estimates that the cash sweep will be approximately $20,000 and as such, this amount is included in the current portion of debt on the accompanying unaudited condensed consolidated balance sheets.$0. Such payments will be applied to reduce the outstanding principal payment due on the maturity date. In the event that Apex’s annual audited financial statements are not received within 120 days of its fiscal year end, the full CDN$425,000 becomes due and payable on the next payment date. Apex paid approximately $70,000 in financing costs which has been recorded as deferred financing costs in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2012,2013, and is being amortized to interest expense over the term of the loan.

The terms of the BDC loan agreement also provide for a fee to BDC in the event of the occurrence of any of the following:

(a)  if 50% or more of any company comprising Apex or the Company (consolidated assets or shares) is sold or merged with an unrelated entity; or

(b)  if there is a change of control of Apex and/or the Company prior to the Maturity Date or any extended maturity date of the BDC Tern Loan,

In the event of (a) or (b) above, Apex will pay to the BDC a bonus in an amount equal to 2% of the aggregate value of Apex and the Company determined as at the closing date of such transaction, which bonus shall become due and payable at the time of the closing of such transaction. Notwithstanding any prepayment of the BDC Term Loan, the bonus and Apex’s obligation to pay same to the BDC will remain in full force and effect until the maturity date or any amended or extended maturity date agreed by the BDC such that in the event of any sale, initial public offering or similar transaction, Apex’s obligation to pay the bonus amount to the BDC will survive such prepayment.

The BDC Loan Agreement contains certain financial and non-financial covenants.  As of June 30, 2013 and December 31, 2012, Apex was not in compliance with the minimum working capital financial covenant.  In March 2013, May 2013 and August 2013, the Company received waivers for non-compliance of these covenants at December 31, 2012, March 31, 2013 and June 30, 2013.  On August 22, 2013, the BDC Term Loan was amended and certain financial covenants were modified.  Pursuant to the amended loan agreement, the Company is required to maintain, for the duration of the investment, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised yearly 120 days after each year end.  We were in compliance with all of our BDC financial covenants as of September 30, 2013. We expect to continue to meet the requirements of our BDC financial covenants over the short and long term.

In connection withthe event either or both of the RBC Loan Agreement or the BDC Loan Agreement were deemed to be in default, RBC or BDC, as applicable, could, among other things (subject to the RBC Credit Agreement,rights of SVB as the Company’s senior lender), terminate the facilities, demand immediate repayment of any outstanding amounts, and the Purchase Agreement,foreclose on June 4, 2012,our assets. Any such action would require us to curtail or cease operations, as the Company entered into a consent and waiver agreement (“Consent and Waiver”) with Sigma Opportunity Fund II, LLC (“Sigma Opportunity Fund”), Sigma Capital Advisors (“Sigma Advisors”), and Donald W. Rowley (the Company’s former Chief Financial Officer) (Note 9).  On October 3, 2012, the parties entered into an amended consent and waiver agreement (“Amended Consent and Waiver Agreement”) (Note 14).does not currently have alternative sources of financing.

SVB Term Loan - On December 31, 2010, pursuant to an Assumption and Amendment to Loan and Security Agreement ("Amended SVB Loan Agreement"), the Company borrowed $3.0 million (the “SVB Term Loan”) from Silicon Valley Bank (“SVB”). The SVB Term Loan was due in 36 equal monthly installments of principal plus interest beginning on February 1, 2011. The SVB Term Loan is secured by substantially all of the assets of the Company except for the assets of Apex.  On May 20, 2011, pursuant to a Consent and Amendment to Loan and Security Agreement (“Amendment”), the maturity date was amended to April 30, 2012, with the remaining principal due on that date to be paid as a balloon payment.  See below for amendment onOn September 27, 2011, the agreement was amended and certain covenants were replaced or modified resulting in the Company being in full compliance at September 30, 2011. The principal amount outstanding under the SVB Term Loan accrues interest at a fixed rate equal to 9% per annum. In addition, a final payment equal to 2% of the aggregate amount of the Term Loan is due on the earlier of the maturity date or the date the Term Loan is prepaid. This final payment of $60,000 has been recorded as a discount to the SVB Term Loan, which is being amortized to interest expense through December 2013, using the effective interest method.

The SVB Term Loan is secured by substantially all
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The Amended SVB Loan Agreement includes various customary covenants, limitations and events of default. Pursuant to the Amendment, the Company was,Financial covenants, among other requirements, to maintain a minimumothers, include liquidity and fixed charge ratio increasing from at least 1.10 to 1.00 in the first quarter of 2011.  This requirement was amended to a fixed charge ratio at least 1.75 to 1.00 over the life of the Term Loan.  The Amended SVB Loan Agreement also maintains certain additional affirmative and negative covenants, includingcoverage ratios, minimum tangible net worth requirements and limitations on incurring additional indebtedness.  As of September 30,December 31, 2012, the Company was in compliance with all of its covenants.financial covenants with SVB. As of May 31, 2013 and June 30, 2013, the Company was not incompliance with the Tangible Net Worth covenant as defined in the Amended SVB Loan Agreement.  On August 16, 2013, the Company and SVB signed an agreement (“Forbearance Agreement”) where SVB agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and agreed to waive the existing covenant violations if a gross capital raise of $1.5 million is completed by such date. The Company completed the capital raise and was able to achieve compliance with the forbearance agreement prior to August 28, 2013.  As of September 30, 2013, the Company was in compliance with the Tangible Net Worth financial covenant and had available a $0.3 million cushion over the requirement. In November 2013, the Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13).  Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, the Company believes that at the time of this filing it is compliant with the terms and provisions of its SVB lending agreement and expects to continue to meet the requirements of our SVB financial covenants over the short and long term. The Company is in currently discussions with SVB regarding the Tangible Net Worth covenant and a reduction of the 50% of additional capital raised to 25% of capital raised in November 2013.  See further discussion regarding this matter at Note 7.
 
15

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
On September 27, 2011, pursuant to a Limited Waiver and Amendment to Loan and Security Agreement, the Loan Agreement was amended and certain covenants were replaced or modified resulting inamended.

On February 27, 2013, the Company being in full compliance at September 30, 2011.  In addition,entered into an amended the maturity date was extended to the earlier of the maturity of the line of credit (see Note 7) or December 1, 2013, the original maturity of the SVB Term Loan and the principalSecurity Agreement which provided an additional term loan of $1,000,000. The new term loan is due in equal36 monthly installments with no balloon payment.of principal plus accrued interest beginning on April 1, 2013. The additional term loan accrues interest at 7.5% per annum.

For the nine months ended September 30, 20122013 and 2011,2012, the Company’s interest expense on the term debt, including amortization of deferred financing costs, was approximately $331,000$439,000 and $465,000,$331,000, respectively.
 
In the event either or both RBC Loan Agreement and/or the BDC Loan Agreement were deemed to be in default, then the Amended SVB Loan agreement would be in default, which could, among other things, terminate the facility and term loan, demand immediate repayment of any outstanding amounts, and foreclose on our assets. Any such action would require us to curtail or cease operations, as the Company does not currently have alternative sources of financing.
NOTE 9 – STOCKHOLDERS’ EQUITY
 
The Company is authorized to issue two classes of stock designated as common stock and preferred stock.  As of September 30, 2012,2013, the Company is authorized to issue 110,000,000 total shares of stock.  Of that amount, 100,000,000 shares shall beare common stock, each having a par value of $0.001.  The remaining 10,000,000 shares shall beare preferred stock, each having a par value of $0.001.$0.001, of which 500,000 shares are designated as Series A Preferred Stock, of which 269,608 are issued and outstanding, 500,000 shares are designated as Series B Preferred Stock, of which 131,347 are issued and outstanding, 5,000,000 shares are designated as Series C Preferred Stock, of which 0 shares are issued and outstanding and, 4,000,000 shares are designated as Series D Preferred Stock, of which 704,200 shares are issued and outstanding.
 
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(a) Cumulative Convertible Preferred Stock
 
A summary of the Preferred Stockpreferred stock outstanding as of September 30, 2012,2013 is as follows:follows (in thousands, except share data):

Description Amount 
    
Series A Preferred, $0.001 par value per share, 500,000 shares designated, 
269,608 shares issued and outstanding, liquidation preference of $975,000 
plus cumulative dividends of $265,668  1,240,668 
Series B Preferred, $0.001 par value per share, 500,000 shares designated, 
131,347 shares issued and outstanding, liquidation preference of $380,000 
plus cumulative dividends of $54,769  434,769 
Series C Preferred, $0.001 par value per share, 5,000,000 shares designated, 
1,415,334 shares issued and outstanding, liquidation preference of $9,058,114 
plus imputed dividends of $376,443  4,905,512 
     
Total cumulative convertible preferred stock $6,580,949 
     
Description    
     
Series A Preferred, $0.001 par value per share, 500,000 shares designated,   
  269,608 shares issued and outstanding, liquidation preference of $975   
  plus cumulative dividends of $344$1,319 
Series B Preferred, $0.001 par value per share, 500,000 shares designated,   
  131,347 shares issued and outstanding, liquidation preference of $380   
  plus cumulative dividends of $85                      465 
Series D Preferred, $0.001 par value per share, 4,000,000 shares designated,   
  704,200 shares issued and outstanding, liquidation preference of $7,042   
  (net of $1,374 in issuance costs) plus imputed dividends of $157                   5,825 
     
Total convertible preferred stock$7,609 
     
The stated value of the Series A Preferred Stock and Series B Preferred is $4.00 per share and $3.20 per share, respectively, which approximates their respective fair values.  The stated value of the Series C Preferred is $3.20 per share and the estimated fair value at the time of issuance on June 30, 2011, was $3.73 per share.  The stated value of the Series C Preferred is included in Cumulative Convertible Preferred Stock and the difference between the stated value and the estimated fair value is included in additional paid-in capital in the accompanying unaudited condensed consolidated balance sheets.  The rights, preferences, privileges and restrictions of the Series A, Series B, and Series C Preferred Stock (collectively, the “Preferred Stock”) are set forth in the Company’s Amended and Restated Certificate of Incorporation, and are summarized as follows:

Dividends - The holders of the Series A and Series B Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors, dividends at an annual rate of 8% of the stated value. The stated value of the Series A Preferred is $4.00 per share and the stated value of the Series B Preferred is $3.20 per share. Dividends shall be cumulative and shall accrue on each share of the outstanding Preferred Stockpreferred stock from the date of its issue.  The holders of the Series C Preferred shall be entitled to receive when and as declared by the Board of Directors, cumulative dividends payable per share in arrears, on March 31, June 30, September 30 and December 31 of each year in the form of cash or preferred stock, at the election of a majority in interest of the Series C Preferred Stock.  The dividend rate, as adjusted from time to time on each share of Series C Preferred was as follows through June 3, 2012: 8% per share per annum on the stated value of $3.20 per share for the period from the date of its issue through the last day of the sixteenth (16th) month after the date of its issue; 12% per share per annum on the stated value commencing on the first day of the seventeenth (17th) month through the last day of the thirtieth month (30th) after the date of its issue; and 20% per share per annum on the stated value for each dividend period thereafter commencing on the first day of the thirty-first (31st) month after the date of its issue.  Notwithstanding the foregoing, if at any time a breach event (as defined in the Company’s Articles of Incorporation) occurs, then the dividend rate shall be 20% per annum on the stated value for each dividend period or part thereof in which a breach event has occurred or is outstanding.  The Series C Preferred shall, with respect to dividend rights, rank senior to all classes and series of the Company’s common stock and pari passu with the Company’s Series A and Series B Preferred Stock.  On June 4, 2012, in connection with the Consent and Waiver as discussed in Note 8 and described in (b) below, the dividend rate was increased to 20% in perpetuity and as such, no additional imputed dividends will be accrued.

16

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Pursuant to the dividend rights of the holders of the Series C Preferred, the Company has accrued for cash dividends payable due as of September 30, 2012 and December 31, 2011, in the amount of $221,650 and $90,582, respectively.  This amount is included in accrued liabilities on the accompanying unaudited condensed consolidated balance sheets.  Imputed dividends relating to the implied discount resulting from the difference between the stepped dividend rate and the perpetual dividend rate of 20% for the Series C Preferred through June 3, 2012, total $376,433 and are included as an adjustment to retained earnings and preferred stock in the accompanying unaudited condensed consolidated financial statements.
Voting RightsThe holders of the Series A and Series B Preferred Stock shall have no voting rights except on matters affecting their rights or preferences. The holders of the Series C Preferred stock shall have full voting rights and powers equal to the voting rights and powers of holders of Common Stock.
LiquidationSubject to the rights of the Series CD Preferred Stock, upon any liquidation, dissolution or winding-up of the Company, the holders of the Series A (subject to the rights of the Series B Preferred) and Series B Preferred Stock shall be entitled to receive an amount equal to the stated value per share of $4.00 and $3.20, respectively, plus any accrued and unpaid dividends before any payments shall be made to the holders of any common stock or hereinafter issued preferred stock. The Series A Preferred Stock has preference over the Series B Preferred Stock in liquidation.  The holders of Series C Preferred shall be entitled to receive payment in an amount equal to twice the stated value, or $6.40 per share, plus any accrued and unpaid dividends, prior to and in preference of the holders of both the Series A and Series B Preferred.

Conversion - Each share of Series A Preferred Stock shall beis convertible, at the option of the holder, at a conversion price of $4.00 per share. Each share of Series B Preferred Stock shall beis convertible, at the option of the holder, at a conversion price of $3.20 per share.  Each share

Series C Preferred Stock

On December 20, 2012, the Company redeemed all issued and outstanding shares of Series C Preferred shall beStock using the proceeds generated from the sale of the Series D Preferred Stock.

Series D Preferred Stock

The Series D Preferred Stock has a Stated Value of $10.00 per share, votes on an as-converted basis with the common stock, and is convertible, at the option of the holder, into such number of shares of our common stock equal to the number of shares of Series D Preferred Stock to be converted, multiplied by the Stated Value, divided by the Conversion Price in effect at the time of the conversion. The initial Conversion Price is $1.00, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a conversionlower price per share, subject to certain exceptions.  As a result of the subsequent sales of common stock on August 15, 2013 and August 21, 2013 (see Note 9(b)), the Conversion Price of the Series D Preferred Stock was reduced to $0.90.  The Series D Preferred Stock entitles the holder to cumulative dividends, payable quarterly, at an annual rate of (i) 8% of the Stated Value during the three year period commencing on the date of issue, and (ii) 12% of the Stated Value commencing three years after the date of issue. We may, at the Company’s option, pay dividends in PIK Shares, in which event the applicable dividend rate will be 12% and the number of such PIK Shares issuable will be equal to the aggregate dividend payable divided by the lesser of (x) the then effective Conversion Price or (y) the average volume weighted average price of $3.20 per share.  Thethe Company’s common stock for the five prior consecutive trading days.  On October 15, 2013, the Company paid a cash dividend of $142,000 on the Series CD preferred Stock for the period from July 1, 2013 to September 30, 2013.

Upon any liquidation, dissolution or winding-up of our Company, holders of Series D Preferred Stock provideswill be entitled to receive, for certain anti-dilution provisions which have the effecteach share of reducing the conversion price for certain dilutive events, as defined, in additionSeries D Preferred Stock, an amount equal to the standard anti-dilution provisions provided byStated Value of $10.00 per share plus any accrued but unpaid dividends thereon before any distribution or payment may be made to the holders of any common stock, Series A andPreferred Stock, Series B Preferred.Preferred Stock, or subsequently issued preferred stock.
 
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In addition, commencing on the trading day on which the closing price of the common stock is greater than $2.00 for thirty consecutive trading days with a minimum average daily trading volume of at least 5,000 shares for such period, and at any time thereafter, the Company may, in its sole discretion, effect the conversion of all of the outstanding shares of Series D Preferred Stock to common stock (subject to the condition that, all of the shares issuable upon such conversion may be re-sold without limitation under an effective registration statement or pursuant to Rule 144 under the Securities Act).
The Series D Preferred Stock holders also were granted registration rights which required the Company to file a registration statement with the SEC within 60 days of the final closing date (December 31, 2012), and to have the registration statement declared effective within 90 days thereafter.  The initial registration statement was filed on February 12, 2013.  Failure of the registration statement to be declared effective by May 12, 2013, resulted in a partial liquidated damage equal to 0.1% of the purchase price paid by each investor to become payable on each monthly anniversary until the registration statement was declared effective.  On July 30, 2013, the registration statement was declared effective by the U.S. Securities and Exchange Commission.  On October 15, 2013, the Company paid liquidated damages of $18,000.

Pursuant to the Series D Certificate of Designation, commencing two years from the termination or expiration of the offering of the Series D Preferred Stock (which termination occurred on December 31, 2012), and at any time thereafter, the Company in its sole discretion may redeem all of the outstanding shares of Series D Preferred Stock at a purchase price of $10.00 per share plus any accrued but unpaid dividends.

(b) Common Stock
 
For the nine months ended September 30, 2013

On August 15, 2013, the Company entered into a Purchase Agreement with multiple accredited investors relating to the issuance and sale of Common Stock in a private offering.  On August 15, 2013, the initial closing date (the “Initial Closing”) of the Purchase Agreement, we sold (i) an aggregate of 2,594,000 shares of our Common Stock for $0.60 per share and (ii) Common Stock Purchase Warrants (the “Investor Warrants”) for the purchase of an aggregate of 1,297,000 shares for aggregate gross proceeds of $1,556,400.  The Investor Warrants have a five-year term, an exercise price of $1.00 and contain certain provisions for anti-dilution and price adjustments in the event of a future offering.

On August 21, 2013, the final closing date (the “Final Closing”) of the Purchase Agreement, we sold (i) an aggregate of 333,333 shares of our Common Stock for $0.60 per share and (ii) 166,667 Investor Warrants for aggregate gross proceeds of $200,000.

For a period commencing on the Initial Closing and terminating on a date which is 24 months from the Initial Closing, in the event the Company issues or grants any shares of Common Stock or securities convertible, exchangeable or exercisable for shares of Common Stock pursuant to which shares of Common Stock may be acquired at a price less than $0.60 per share, then the Company shall promptly issue additional shares of Common Stock to the investors under the Purchase Agreement in an amount sufficient that the subscription price paid, when divided by the total number of shares issued (shares purchased under the Purchase Agreement plus the additional shares issued under this provision), will result in an actual price paid by the Subscriber per share of Common Stock equal to such lower price.

If the Company at any time while the Investor Warrants are outstanding, shall sell or grant an option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue any common stock or securities convertible, exchangeable or exercisable for shares of common stock (as, at an effective price per share less than the exercise price of the Investor Warrants then in effect, the exercise price of the Investor Warrants will be reduced to equal to such lower price

Pursuant to the terms in the Purchase Agreement, on September 23, 2013, the Company filed a Registration Statement on Form S-1 (the “Form S-1”) for the registration of the 2,927,333 shares of Common Stock and the 1,463,667 shares issuable upon exercise of the Investor Warrants sold under the Purchase Agreement. On October 4, 2013, the Form S-1 was declared effective by the SEC.

The Company paid the placement agent $175,600 in commissions (equal to 10% of the gross proceeds), and issued to the placement agent five-year warrants (the “Placement Agent Warrants”) to purchase 292,733 shares of our common stock (equal to 10% of the number of shares of common stock sold under the Purchase Agreement).  The Placement Agent Warrants have a five-year term, an exercise price of $0.60 and contain provisions for anti-dilution and price adjustments in the event of a future offering.

If the Company at any time while the Placement Agent Warrants are outstanding, shall sell or grant an option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue any common stock or securities convertible, exchangeable or exercisable for shares of common stock, at an effective price per share less than the exercise price of the Placement Agent Warrants then in effect, the exercise price of the Placement Agent Warrants will be reduced to equal to such lower price.
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The Company recorded the Investor Warrants and Placement Agent Warrants as a liability (see further disclosure at Note 3).  Accordingly, the net proceeds raised ($1.7 million in gross offering proceeds, net of $0.2 million in cost), were allocated to the fair value of the warrant liability of $1.1 million and the remainder was recorded as equity ($0.4 million).

On April 26, 2013, the Company issued 70,207 shares of its common stock to 3 employees as part of a specified portion of their regular annual cash bonus.

For the year ended December 31, 2012

On June 4, 2012, the Company issued 325,000 shares of its common stock as consideration for acquisition related expenses in conjunction with the Apex transaction. The shares were valued at $341,000 and were recorded as part of selling, general and administrative expenses in the consolidated statement of operations and comprehensive loss as of December 31, 2012. (Note 5)

On July 31, 2012, pursuant to the Asset Purchase Agreement with MacroSolve, the Company issued 617,284 shares of its common stock to purchase the business of Illume Mobile, a division of MacroSolve. The shares were valued at $697,531$698,000 and were recorded as part of the purchase price. (Note 5)

In connection with the BDC Loan Agreement, the RBC Credit Agreement, and the Purchase Agreement described in Notes 5, 7 and 8, on June 4,On November 15, 2012, the Company entered into the Consent and Waiveran agreement (the “Sigma Agreement”) with Sigma Opportunity Fund II, LLC (“Sigma Opportunity Fund”), and Sigma Capital Advisors, LLC (“Sigma Advisors”), and Donald W. Rowley (the Company’s former Chief Financial Officer - see Note 8).  Pursuant to the Consent and Waiver:

o  Sigma Opportunity Fund and Sigma Advisors agreed that they would not exercise their demand registration rights under the Investor Rights Agreement, dated June 30, 2011, among the Company, Sigma Opportunity Fund and Sigma Advisors until the earlier of the date the number of shares of the Company’s common stock issuable to the sellers pursuant to the 2013 EBITDA Additional Earn Out Amount have been determined or June 30, 2013.

o  The Company paid Sigma Advisors a fee of $400,000, and Sigma Advisors agreed that no further payments will be due under the Advisory Services Agreement, dated May 18, 2011, between the Company and Sigma Advisors, with respect to the Purchase Agreement, the BDC Loan Agreement, the RBC Credit Agreement, and the transactions contemplated thereunder.  This amount is included in the total transaction costs outlined in Note 5.
17


DECISIONPOINT SYSTEMS, INC.
NotesSigma Agreement, the Company issued to Unaudited Condensed Consolidated Financial Statements
o  Sigma Opportunity Fund waived certain provisions of the exchange agreement, dated June 30, 2011, between the Company and Sigma Opportunity Fund, and the Certificate of Designation of Series C Preferred Stock (the “Certificate of Designation”), as they relate to the Purchase Agreement, the BDC Loan Agreement, and the RBC Credit Agreement, and the transactions contemplated thereunder.

o  Effective June 4, 2012, the dividend rate on the Series C Preferred (as defined in the Certificate of Designation) will be 20%, the definition of Breach Event included in the Certificate of Designations will include any default under the Consent and Waiver, under the loan documentation with any lender to the Company, its subsidiaries or affiliates, and any breach or default under any agreement relating to the acquisition of Apex.  The parties will negotiate in good faith until November 15, 2012, relating to any other changes to the Certificate of Designation that the parties may wish to agree upon in order to protect the interests of the holders of the Series C Preferred Stock and the Company will file such mutually agreeable amended Certificate of Designation within two weeks thereafter.  On June 4, 2012, the dividend rate was increased to 20% in perpetuity, and as such, no additional imputed dividends will be accrued.

o  If the parties are unable to agree as to the form of revised Certificate of Designations within such period, the Company will amend the Certificate of Designation within two weeks thereafter as set forth in the first sentence of this paragraph and previously committed options to purchase common stock will be issued (not to exceed 100,000 shares) at the then fair market value (being the closing price on the day prior to issuance) per share pursuant to the Company’s equity compensation plan, thereby causing the Conversion Value (as defined in the Certificate of Designation) of the Series C Preferred Stock to be reset to such fair market value.   The fair value of the options will be calculated on the date of grant.

o  The Company has issued 272,727 shares of common stock to Sigma Opportunity Fund, 25,000 shares of common stock to Sigma Advisors, and 27,273 shares of common stock to Donald W. Rowley in consideration of the agreement to delay exercise of its demand registration right.  The shares were recorded as an expense of $341,250 in general and administrative expense based on the closing price of the Company’s stock on the date of the transaction.

o  Effective upon the increase in the dividend rate, the interest rate on the balance of the AP Amount (as defined in the Agreement among the Company, Sigma Opportunity Fund and Donald W. Rowley, dated June 30, 2011) will increase to 25% per annum.  On June 4, 2012, the interest rate was increased to 25%. The AP balance was paid in full during the third quarter of 2012.
the holders of the Series C Preferred Stock an aggregate of 175,364 shares of common stock as an anti-dilution adjustment.

(c) Warrants

For the nine months ended September 30, 2013

During the nine months ended September 30, 2013, the Company issued 1,463,667 Investor Warrants and 292,733 Placement Agent Warrants as discussed above. The exercise price of the Investor Warrants and the Placement Agent Warrants will be adjusted in the event of future issuances of the Company’s Common Stock at prices below the exercise price then in effect (“down-round” protection).  The Company evaluated the following guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity.  Based on this guidance, the Company’s management concluded these instruments are to be accounted for as liabilities instead of equity due to the down-round protection feature available on the exercise price of the Warrants. The Company recognized these Warrants as liabilities at their fair value and will re-measure them at fair value on each reporting date. ASC 820 Fair Value Measurement provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition (see Note 2).  Fair values for warrants are determined using the Monte-Carlo Simulation Model valuation technique. The Monte-Carlo Simulation Model valuation model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to expected conversion.  In addition, management assessed the probabilities of future financing assumptions.
As of August 15, 2013 and August 21, 2013, the dates of issuance, we recorded the warrant liability at $1,099,000.  At September 30, 2013, the warrants were re-valued with a fair value of $933,000 with the difference of $166,000 recorded to other income in the unaudited condensed consolidated statement of operations and comprehensive loss.

The following table summarizes information about the Company’s outstanding common stock warrants as of September 30, 2012:2013:
       Total    Weighted
       Warrants Total  Average
 Date Strike  Outstanding Exercise  Exercise
 IssuedExpiration Price  and Exercisable Price  Price
             
Senior Subordinated NotesDec-09Dec-14 $3.62   138,260  $500,000   
Senior Subordinated NotesDec-09Dec-14  4.34   138,260   600,000   
Placement Agent Preferred Stock - Class DDec-12Dec-17  1.10   704,200   774,620   
Common Stock Investor WarrantsAug-13Aug-18  1.00   1,297,000   1,297,000   
Common Stock Investor WarrantsAug-13Aug-18  1.00   166,667   166,667   
Placement Agent Warrants - Common StockAug-13Aug-18  0.60   292,733   175,640   
         2,737,120  $3,513,927 $1.28
20

NOTE 10 – ESOP PLAN

The Company has an Employee Stock Ownership Plan (the “ESOP”) which covers all non-union employees.  The Company’s contribution expense for the nine months ended September 30, 2013, was $134,000 representing approximately $104,000 for the ESOP principal payment and $30,000 for the ESOP interest.  ESOP shares are allocated to individual employee accounts as the loan obligation of the ESOP to the Company is reduced.  These amounts were previously calculated on an annual basis by an outside, independent financial advisor.   Compensation costs relating to shares released are based on the fair value of shares at the time they are committed to be released.  The unreleased shares are not considered outstanding in the computation of earnings per common share.  ESOP compensation expense consisting of both cash contributions and shares committed to be released for the nine months ended September 30, 2013 was approximately $78,000.  The fair value of the shares was $0.94 per share, based on the average of the daily market closing share price.
        Total     Weighted 
        Warrants  Total  Average 
 Date   Strike  Outstanding  Exercise  Exercise 
 Issued Expiration Price  and Exercisable  Price  Price 
                
Senior Subordinated Notes12/01/09 12/17/14 $3.62   138,260  $500,000  $- 
Senior Subordinated Notes12/01/09 12/17/14  4.34   138,260   600,000   - 
                    
          276,520  $1,100,000  $3.98 
                    
NOTE 1011 - STOCK OPTION PLAN
 
In December 2010, the Company established the 2010 Stock Option Plan (the “Plan”).  The Plan authorizes the issuance of 1,000,000 shares of common stock. Pursuant to the terms of the Merger Agreement, the Company assumed all of Old DecisionPoint’s obligations under their outstanding stock option plans.
18


DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Under the Plan, common stock incentives may be granted to officers, employees, directors, consultants, and advisors.  As of September 30, 2012, incentives under the Plan may be granted only in the form of non-statutory stock options and all stock options of Old DecisionPoint that were assumed by the Company became non-statutory options on the date of the assumption.

The Plan is administered by the Board of Directors, or a committee appointed by the Board of Directors, which determines recipients and types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule.  The term of stock options granted under the Plans cannot exceed ten years.  Options shall not have an exercise price less than 100% of the fair market value of the Company’s common stock on the grant date, and generally vest over a period of five years.  If the individual possesses more than 10% of the combined voting power of all classes of stock of the Company, the exercise price shall not be less than 110% of the fair market of a share of common stock on the date of grant.
 
A summary of the status of the Plans as of September 30, 2012,2013, and information with respect to the changes in options outstanding is as follows:

        Weighted -    
  Options     Average  Aggregate 
  Available  Options  Exercise  Intrinsic 
  for Grant  Outstanding  Price  Value 
             
January 1, 2012  298,037   701,963  $2.02    
Granted  -   -   -    
Exercised  -       -    
Forfeited  59,562   (59,562)  -    
September 30, 2012  357,599   642,401  $2.01  $- 
                 
Exercisable options at September 30, 2012   497,677  $1.97  $- 
                 
        Weighted -    
  Options     Average  Aggregate 
  Available  Options  Exercise  Intrinsic 
  for Grant  Outstanding  Price  Value 
             
December 31, 2012  455,495   544,505  $1.82  $- 
Granted  -   -   -   - 
Exercised  -   -   -   - 
Forfeited  -   -   -   - 
September 30, 2013  455,495   544,505  $1.82  $- 
                 
Exercisable options at September 30, 2013      446,374  $1.75  $- 
                 
The following table summarizes information about stock options outstanding as of September 30, 2012:2013:

   Options Outstanding  Options Exercisable 
      Weighted-        Weighted-    
      Average  Weighted-     Average  Weighted- 
Range of     Remaining  Average     Remaining  Average 
Exercise  Number  Contractual  Exercise  Number  Contractual  Exercise 
Prices  Outstanding  Life (Years)  Price  Exercisable  Life (Years)  Price 
                    
$1.33 - 2.03   365,620   1.58  $1.65   355,461   1.53  $1.64 
$2.06 - 4.34   178,885   7.60   2.16   90,913   7.54   2.16 
                           
Total   544,505   3.56  $1.82   446,374   2.76  $1.75 
 
      Weighted-       Weighted-   
      Average Weighted-    Average Weighted-
Range of    Remaining Average    Remaining Average
Exercise Number Contractual Exercise Number Contractual Exercise
Prices Outstanding Life (Years) Price Exercisable Life (Years) Price
                    
$1.33 - 2.03   403,262   2.53  $1.67   388,025   2.46  $1.66 
$2.06 - 4.34   224,853   7.41   2.30   95,366   5.73   2.49 
$7.00   14,286   0.23   7.00   14,286   0.23   7.00 
                           
Total   642,401   4.19  $2.01   497,677   3.03  $1.97 
                           
No awards were exercised during the nine months ended September 30, 2013 and 2012, respectively.  The total fair value of awards vested for the nine month periodsmonths ended September 30, 2013 and 2012 was $40,000 and 2011, was $72,664 and $1,261,$73,000, respectively.

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period, which is generally equal to the vesting period.  NoThere were no stock options were grantedoption grants during the nine months ended September 30, 2013 and 2012.

Due to the limited time that the Company’s common stock has been publicly traded, management estimates expected volatility based on the average expected volatilities of a sampling of five companies with similar attributes to the Company, including: industry, size and financial leverage.  The expected term of the awards represents the period of time that the awards are expected to be outstanding.  Management considered expectations for the future to estimate employee exercise and post-vest termination behavior.  The Company does not intend to pay dividends in the foreseeable future, and therefore has assumed a dividend yield of zero.  The risk-free interest rate is the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term of the awards.
 
19

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has no material historical basis for determining expected forfeitures as of period end and, as such, compensation expense for stock-based awards does not include an estimate for forfeitures in the current period.

Employee stock-based compensation costs for the three months ended September 30, 2012 and 2011, was approximately $11,000 and $29,000, respectively, and for the nine months ended September 30, 2013 and 2012, was $31,000 and 2011, was $50,000, and $47,000, respectively, and is included in selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.operations.  As of September 30, 2012,2013, total unrecognized estimated employee compensation cost related to stock options granted prior to that date was $165,000$109,000 which is expected to be recognized over a weighted-average vesting period of 3.672.69 years.
 
NOTE 11 – ESOP PLAN

The Company has an Employee Stock Ownership Plan (the “ESOP”) which covers all non-union employees.  The Company’s contribution expense for the nine months ended September 30, 2012, was $135,000 representing approximately $99,000 for the ESOP principal payment and $36,000 for the ESOP interest.  ESOP shares are allocated to individual employee accounts as the loan obligation of the ESOP to the Company is reduced.  These amounts were previously calculated on an annual basis by an outside, independent financial advisor.   Compensation costs relating to shares released are based on the fair value of shares at the time they are committed to be released.  The unreleased shares are not considered outstanding in the computation of earnings per common share.  ESOP compensation expense consisting of both cash contributions and shares committed to be released for the nine months ended September 30, 2012 was approximately $99,000.  The fair value of the shares was $1.10 per share, based on the average of the daily market closing share price.
NOTE 12 – COMMITMENTS AND CONTINGENCIES

Leases - The Company leases its officefacilities and warehouse facilitiescertain equipment under various operating leases.  Its corporate headquartersleases which expire at various dates through fiscal 2018 and sales operations, including sales administration, software development, depot operation and the financial management were located in Foothill Ranch, California where the Company leased 7,500 square feet of office space.  The monthly rental expense was $7,765, and the lease expired in July 2012.  In May 2012, the Company entered intorequire us to pay a new office lease agreement for 10,325 square feet beginning in July 2012.  The current monthly base rent is $12,390 per month and the lease expires in July 2017.
In addition, the Company has a lease for 4,100 square feet in Shelton, Connecticut for its East coast sales and operations which expires in April 2015.  The Company also leases 6,800 square feet in Edison, New Jersey, at $5,500 per month, which expires in December 2014.  The Company has a sales and administrative office located in Alpharetta, Georgia where it leases 4,330 square feet for general office purposes.  The lease expires in April 2015.  In addition, the Company has a lease for 4,800 square feet in Alpharetta, Georgia for its technology lab center which expired in April 2012.  During April, the lease was extended for an additional 3 years until April 2015, under the same terms and conditions.
Effective upon the Closing Dateportion of the purchase of Apexrelated operating expenses such as maintenance, property taxes, and insurance. There have been no material changes to our lease arrangements during the nine months ended September 30, 2013.  Please refer to Note 14 to the audited consolidated financial statements for the year ended December 31, 2012, included in June 2012, the Company assumed Apex’s lease of 7,800 square feet in Burlington, Ontario, Canada, which expires in March 2016. The current monthly rental expense is approximately CDN$10,000 per month.
Effective upon the Illume Closing Date, the Company assumed the Illume lease of 10,000 square feet in Tulsa, Oklahoma which expires September 2013,Company’s Annual Report on Form 10-K filed with the same termsSecurities and conditions as the underlying lease. The current monthly rental expense is approximately $12,000.Exchange Commission on March 28, 2013.
 
Rent expense for the nine months ended September 30, 2013 and 2012, was $511,000 and $353,000, respectively.
Apex Earn Out Obligations - If EBITDA (as uniquely defined in the agreement), of Apex for the twelve months ending July 31, 2013 (“2013 EBITDA”), is equal to or less than CDN$2,000,000, Apex shall pay an amount, to its former owners, equal to the product of the 2013 EBITDA multiplied by four less CDN$5,000,000 (“2013 EBITDA Basic Earn-Out Amount”), up to a maximum of CDN$3,000,000. An amount equal to 22.22% of the 2013 EBITDA Basic Earn-Out Amount shall be paid in cash and the balance shall be paid by Apex issuing a subordinated convertible note (the “Note”) (see Note 5).

Under the terms of the Note, Apex will pay the principal sum due on the Note in eight quarterly payments beginning on January 31, 2014 (“Installment Dates”). Interest from and after August 1, 2013, shall be paid in arrears on the last day of each calendar quarter commencing on January 31, 2014. The interest rate shall be determined as follows:

(i)  9% per annum, calculated and compounded quarterly before November 1, 2014; and

(ii)  11% per annum, calculated and compounded quarterly after October 31, 2014;

(iii)  except, however, that, if, during the term of the Note, the Company raises Net Equity Capital (as defined in the Note) in an amount greater than CDN$5,000,000 and this Note is not repaid in full within 30 days from the date that the Company receives such Net Equity Capital, the interest rate otherwise provided in the Note shall be 15% per annum from the end of such 30-day period to the first anniversary thereof and 20% per annum thereafter to the date of payment in full.

The Note is convertible, only on each Installment Date, at the option of the Note holder, into shares of our common stock at a conversion price that is equal to the greater of the market price of our common stock on the day prior to the conversion, or $1.00. The shares issuable under the Note will be restricted but will have certain piggy back registration rights as set forth in the Purchase Agreement.

If the 2013 EBITDA is greater than CDN$2,000,000, Apex shall pay an amount, to its former owners, (the “2013 EBITDA Additional Earn-Out Amount”) by which the dollar-for-dollar 2013 EBITDA exceeds CDN$2,000,000, up to a maximum of CDN$500,000. The 2013 EBITDA Additional Earn-Out shall be paid by the issuance of shares of the Company’s common stock. The number of shares to be issued shall be determined by the amount due divided by the 30 day average daily closing price of the shares of the Company’s common stock in the month of July 2013. The shares issued will be restricted but will have certain piggy back registration rights as set forth in the Purchase Agreement.
The fair value of the earn out was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the Closing Date).  At September 30, 2013, the calculated Earn Out Payment due under the Purchase Agreement was CDN$341,000 (US$331,000).  Accordingly, there is CDN$341,000 (US$331,000) recorded as potential additional purchase consideration in the unaudited condensed consolidated financial statements.  The adjustment of CDN$735,000 (US$713,000) was recorded as a separate component of operating expenses in the unaudited condensed consolidated statement of operations and comprehensive loss as of September 30, 2013.  On October 31, 2013 the Sellers disputed the Company’s calculation of the Earn Out Payment due and has stated the payment should be $1.6 million.  Per the terms of the Purchase Agreement, the seller and the Company have ten business days to reconcile any differences in the calculation of the Earn Out Payment.  The ten business days concludes on November 14, 2013.  If a reconciliation cannot be completed in that time period, the Company and the seller will refer the matter to a mutually agreed upon accounting firm to conclude the accuracy of the Earn Out Payment.  The accounting firm will have 45 calendar days to review the seller and the Company’s calculation of the Earn Out Payment, which will conclude on December 31, 2013.

The Company also entered into an employment agreement with Donald Dalicandro, the Former Chief Executive Officer of Apex, as a result of the Apex acquisition. Under the employment agreement, the Company further agreed Mr. Dalicandro would be appointed to the Company’s board of directors effective June 4, 2012, and 2011,would not be removed from the Company’s board of directors during the Earn-Out Period (as defined in the employment agreement) and the Bonus Period (as defined in the employment agreement) except by death, bankruptcy, incapacity or voluntary resignation. The agreement calls for annual bonus upon achieving certain results of operation at Apex for the 12 months ending July 31, 2013, 2014, and 2015.  Such bonuses are considered additional contingent purchase consideration as the Company is obligated to pay the bonus regardless of whether or not his employment is retained (see Note 5).
As part of the Purchase Agreement, we are obligated to pay bonus consideration to the CEO of Apex. Such bonus is considered additional contingent purchase consideration as we are obligated to pay the bonus regardless of whether or not the CEO’s employment is retained.  The fair value of the bonus was $353,000calculated to be approximately CDN$160,000 (US$153,000 at the Closing Date).  At September 30, 2013 there is CDN$160,000 (US$154,000) recorded in accrued earn out consideration in the Company’s unaudited condensed consolidated balance sheets.
Apex Escrow Obligation - As part of the Apex Purchase Agreement, from the Closing Date up until the expiry of the bonus period, the Company is obligated to escrow 25% of any Equity Capital raised in excess of $500,000.  The funds in the escrow are to be used to pay the 2013 EBITDA Basic Earn-Out and 297,000, respectively.the 2013 EBITDA Additional Earn-Out and the additional bonus consideration.  In December 2012, the Company raised $7,042,000 as part of the Series D Purchase Agreement.   These funds have not been placed into escrow pending agreement between the Company and the sellers of Apex regarding the financial institution that will escrow the funds, the amount of funds that are to be placed in escrow and the terms of the escrow agreement itself.

Contingencies - The Company is not a party to any material pending legal proceedings other than ordinary routine litigation incidental to the business; the outcome of which the Company believes will not have a material adverse effect on the business, financial condition, cash flows or results of operations.  These matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
 
The Company is subject to the possibility of various loss contingencies, including claims, suits and complaints, arising in the ordinary course of business.  The Company considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss, in determining loss contingencies.  An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated.  The Company regularly evaluates current information available to it to determine whether such accruals should be adjusted and whether new accruals are required.
 
Under the Company’s bylaws, directors and officers have certain rights to indemnification by the Company against certain liabilities that may arise by reason of their status or service as directors or officers.  The Company maintains director and officer insurance, which covers certain liabilities arising from the obligation to indemnify directors and officers and former directors in certain circumstances.  No material indemnification liabilities were accrued at September 30, 2012.2013.
 
20

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has twois party to employment agreements with twocertain of its key executive officers.  Additionally, the Company has an employment agreement with the CEOofficers as of Apex.September 30, 2013.  The agreements do not provide for any material, out of ordinary course of business provisions or benefits other than the bonus feature includedbenefits.
Included in the key executive officer agreements is an employment agreement of the Apex CEO.  The Company is obligated to pay the bonus regardless of whether the CEO’s employment is retained.  The terms and provisions of the bonus are as follows:
§  Apex shall pay the CEO an amount equal to 8.75% of the amount, if any, by which the 2013 net revenues for the twelve month period ending July 31, 2013 (the “2013 Net Revenues”) exceed the net revenues for the twelve month period ending July 31, 2011 (the 2011 Net Revenues”).
§  Apex shall pay the CEO an amount equal to 8.75% of the amount, if any, by which the 2014 net revenues for the twelve month period ending July 31, 2014 (the “2014 Net Revenues”) exceed the greater of: (i) the 2011 Net Revenues and (ii) the 2013 Net Revenues.
§  Apex shall pay the CEO an amount equal to 8.75% of the amount, if any, by which the 2015 net revenues for the twelve month period ending July 31, 2014 exceed the greatest of: (i) the 2011 Net Revenues, (ii) the 2013 Net Revenues and (iii) the 2014 Net Revenues.
NOTE 13 - RELATED PARTIES
The Company purchases and sells certain products and services from iTEK Services, Inc. (“iTEK”), a privately held company owned by an unrelated ESOP.  iTEK was affiliated with the Company through limited overlapping management and Board representation by the Company'sits Chief Executive Officer (“CEO”) and former Chief Financial Officer (“CFO”).  Purchases from iTEK are on similar terms that the Company would have received from an unrelated third-party.
Effective upon the resignation of the Company’s former CFO during July 2012, and the concurrent discontinuance of the CEO’s iTEK Board representation, the parties have no further overlapping management and therefore are no longer considered related parties effective August 2012.
The Company had accounts payable to its former CFO of approximately $0 and $855,000 at September 30, 2012 and December 31, 2011, respectively, including accrued interest.  The outstanding accounts payable balance accrued interest at 12% per annum until June 4, 2012, at which time the interest rate increased to 25% pursuant to the Consent and Waiver described in Note 9.  Following the resignation of the Company’s former CFO in July 2012, the Company fully repaid the amount due to the former CFO.  The Company incurred interest expense to these related parties totaling approximately $114,000 and $251,000, for the nine months ended September 30, 2012 and 2011, respectively.
The Company has a related party receivable of $357,326 from the seller of Apex in connection with the Working Capital requirement as defined in the Purchase Agreement and described in Note 5.
Separation Agreement - On July 23, 2012, the Company and Donald W. Rowley (“DWR”) entered into a Separation Agreement and General Release (“Separation Agreement”).Operating Officer.  Pursuant to the Separation Agreement, DWR resigned asagreement, the Company’s Chief Financial Officer and Director as of July 23, 2012, and asofficer is entitled to an employee ofannual bonus calculated pursuant to terms set forth in the Company on July 23, 2012.  Pursuant to the Separation Agreement, the Company agreed to pay DWR a total of $205,292 in equal installments in accordance with the Company’s payroll cycle beginning on August 1, 2012 through December 31, 2012. This amount was fully accrued for during the quarter ended September 30, 2012.agreement. The Separation Agreementagreement also contains a general release from DWR.severance provision providing up to twelve months of salary in certain situations.

Under the Separation Agreement, the Company also acknowledged that it owes DWR the amount of $890,633 as of July 23, 2012, which will be paid in accordance with an Accounts Payable Payment Plan agreement, between the Company and DWR dated July 23, 2012 (“Accounts Payable Agreement”).  Pursuant to the Account Payable Agreement, the Company agreed to pay interest monthly in arrears (beginning on August 1, 2012) to DWR with interest computed daily on the outstanding balance at an annual interest rate of 25%.  Under the Accounts Payable Agreement, the Company will make payments to DWR of $36,000 per month due on the first day of each month beginning May 1, 2013. The total amount due to DWR under the Accounts Payable Agreement was paid in full during the quarter ended September 30, 2012.

21

DECISIONPOINT SYSTEMS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 14 -13 – SUBSEQUENT EVENT

On October 3, 2012,In November 2013, the Company Sigma Opportunity Fund II, LLC, Sigma Capital Advisors and Donald W. Rowley entered into Amendment No. 1 todefinitive subscription agreements (“Series E Purchase Agreement”) with accredited investors for the Consent and Waiver Agreement dated assales of June 4, 2012 (the “Consent and Waiver Amendment”).

Pursuant to the Consent and Waiver Amendment, the parties agreed to amend the Certificate of Designations of the Powers, Preferences, and Relative Participating, Optional and Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions thereof$3,835,000 in gross proceeds for 383,500 shares of Series C CumulativeE Convertible Preferred Stock (“Series E Preferred Shares”) for a purchase price of the Company which was filed with the Secretary of State of Delaware on July 1, 2011 (the “Certificate of Designations”)$10.00 per share. The initial Conversion Price is $0.50, subject to increase the Dividend Rate (as defined therein) to 20% on the Stated Value (as defined therein) for each dividend period beginning June 4, 2012.  The parties also agreed to amend the Certificate of Designations to modify the definition of Breach Event.

Pursuant to the Consent and Waiver Amendment, the parties agreed that if the Company does not redeem on a pro rata basis for cash at least $2,206,000 in Stated Value (as definedadjustment in the Certificateevent of Designations) of the Series C Preferred Stock on or before October 31, 2012, then the parties will negotiate in good faith until November 15, 2012 relating to changes to the Certificate of Designationsstock splits, stock dividends and other related matters that the parties may wish to agree upon in order to protect the interests of the Series C Preferred Stocksimilar transactions, and the Company will file the amended Certificate of Designations within two weeks thereafter. If the Company and a majority in interest of the Series C Preferred Stock are unable to agree upon revised terms by November 15, 2012, the Company will file an amendment to the Certificate of Designations no later than November 15, 2012 to provide that the Conversion Value (as defined in the Certificateevent of Designations) will be equal to thesubsequent equity sales at a lower of (i) the Conversion Value then in effect, (ii) $1.20price per share, or (iii) the closing price of the Company’s common stock on October 31, 2012 (in each case subject to the continuing antidilution provisions contained in the Certificate of Designations).

Pursuant to the Consent and Waiver Amendment, thecertain exceptions.  The Company also agreed to issue an aggregate of 175,364 shares of its common stock to the holders of the Series C Preferred Stock on November 15, 2012. An expensereceived net proceeds of approximately $154,000 related to$3.4 million  (net of the fair value of placement agent warrants) from the expected issuanceinitial closing, after deducting the placement agent’s fees of these8% and other offering expenses.  The Company paid the Placement Agent $306,800 in commissions (equal to 8% of the gross proceeds), and issued to the Placement Agent five-year warrants to purchase 767,000 shares has been recordedof our common stock (equal to 10% of the number of shares of common stock underlying the Series E Preferred Shares sold under the Series E Purchase Agreement) at an exercise price of $0.55 per share, in selling, general and administrative expenseconnection with the Series E Purchase Agreement initial closing.  The Company expects to close a second round of Series E Preferred Shares with gross proceeds of $300,000-$700,000 shortly thereafter. 

The Series D Preferred Stock’s initial Conversion Price was $1.00, subject to adjustment in the third quarterevent of 2012 based on the October 3, 2012 share price of $0.88 per share. This amount has been recorded in accrued expensesstock splits, stock dividends and other current liabilitiessimilar transactions, and in the accompanying unaudited condensed consolidated balance sheet asevent of September 30, 2012 and will be trued up uponsubsequent equity sales at a lower price per share, subject to certain exceptions.  As a result of the issuance of Common Stock in connection with the shares.August 15, 2013 private placement (see Note 9(b)), the Conversion Price of the Series D Preferred Stock was reduced to $0.90.  As a result of the sale of Series E Preferred Shares described above, the Conversion Price of the Series D Preferred Stock was further reduced to $0.75 per share on November 12, 2013. The Company expects a second closing of Series E Preferred shortly after November 12, 2013 of approximately $300,000- $700,000.  If the second closing is for $700,000 the revised conversion price would be reduced to $0.73 per share. The Series D Preferred Stock contained certain anti-dilution provisions whereby the subsequent sale of Series E Preferred Shares may potentially create an imputed dividend that would impact EPS.
On August 15, 2013, the Company entered into a Purchase Agreement with multiple accredited investors relating to the issuance and sale of Common Stock in a private offering (see Note 9(b)).  For a period commencing on the Initial Closing and terminating on a date which is 24 months from the Initial Closing, in the event the Company issues or grants any shares of Common Stock or securities convertible, exchangeable or exercisable for shares of Common Stock pursuant to which shares of Common Stock may be acquired at a price less than $0.60 per share, then the Company shall promptly issue additional shares of Common Stock to the investors under the Purchase Agreement in an amount sufficient that the subscription price paid, when divided by the total number of shares issued (shares purchased under the Purchase Agreement plus the additional shares issued under this provision), will result in an actual price paid by the Subscriber per share of Common Stock equal to such lower price. As a result of the sale of Series E Preferred Shares described above, the Company is required to issue up to 585,467 additional common shares to the subscribers in the private offering,

The conversion price of the Investor Warrants issued in connection with the August 15, 2013 private placement was $1.00 per share.  If the Company at any time while the Investor Warrants are outstanding, shall sell or grant an option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue any common stock or securities convertible, exchangeable or exercisable for shares of common stock (as, at an effective price per share less than the exercise price of the Investor Warrants then in effect, the exercise price of the Investor Warrants will be reduced to equal to such lower price.  As a result of the sale of Series E Preferred Shares described above, the conversion price of the Investor Warrants was reduced to $0.50 per share on November 12, 2013.

The conversion price of the Placement Agent Warrants issued in connection with the August 15, 2013 private placement was $0.60 per share.  If the Company at any time while the Placement Agent Warrants are outstanding, shall sell or grant an option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue any common stock or securities convertible, exchangeable or exercisable for shares of common stock (as, at an effective price per share less than the exercise price of the Placement Agent Warrants then in effect, the exercise price of the Placement Agent Warrants will be reduced to equal to such lower price.  As a result of the sale of Series E Preferred Shares described above, the conversion price of the Placement Agent Warrants was reduced to $0.50 per share on November 12, 2013.

ITEM 2.MANAGEMENT’S’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Some of the statements contained in this Form 10-Q that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:
 
Our ability to raise capital when needed and on acceptable terms and conditions;
Our ability to manage the growth of our business through internal growth and acquisitions;
The intensity of competition;
General economic conditions and,
Our ability to attract and retain management, and to integrate and maintain technical information and management information systems.
 
All written and oral forward-looking statements made in connection with this Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements. Except as may be required under applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result more information, future events or occurrences.

OVERVIEWOverview

DecisionPoint enables our clients to “move decisions closer to the customer” by “empowering the mobile worker”.  We define the mobile worker as those individuals that are on the front line in direct contact with customers.  These workers include field repair technicians, sales associates, couriers, public safety employees and millions of other workers that deliver goods and or services throughout the country.  Whether they are blue or white collar, mobile workers have many characteristics in common.   Mobile workers need information, access to corporate resources, decision support tools and the ability to capture and report information back to the organization.
DecisionPoint empowers these mobile workers through the implementation of various mobile technologies including specialized mobile business applications, wireless networks, mobile computers (for example, rugged, tablets, and smartphones) and a comprehensive suite of consulting, integration, deployment and support services.
Mobile computing capabilities and usage continue to grow.  With choice comes complexity so helping our customers navigate the myriad of options is what we do best.  The right choice may be an off-the-shelf application or a custom business application to fit a very specific business process.  DecisionPoint has the specialized resources and support structure to address the needs of mobile applications in the retail, transportation, field workforce sales/service and the warehousing market segments.  We continue to invest in building out our capabilities to support these markets and business needs.  For example, in July 2012, we invested in the expansion of our custom software development capabilities through the acquisition of Illume Mobile in Tulsa, OK, which specializes in the custom development of specialized mobile business applications for Apple, Android and Windows Mobile devices.  Additionally, through the acquisition of Illume Mobile we acquired a cloud-based, horizontal software application “ContentSentral” which manages and distributes multiple types of corporate content (for example, PDF, video, images, and spreadsheets) on mobile tablets used by field workers.  We also dramatically increased our software products expertise with the acquisition in June 2012 of APEX in Canada.  The APEXWare™ software suite significantly expanded our field sales/service software offerings.  APEXWare™ is a purpose-built mobile application suite ideally suited to the automation of field sales/service and warehouse workers.  Additionally, we continue to expand our deployment and MobileCare support offerings.  In 2012 we moved our headquarters location to a larger facility in Irvine, CA in order to accommodate the expansion of our express depot and technical support organizations. We also continue to invest in our “MobileCare EMM” enterprise mobility management offering.  In 2008, we recognized the need for customers to outsource their mobile device management (“MDM”) needs, thus we invested in building out a MDM practice that offers these services under a comprehensive managed service model.  We have extended this offering from our historically ruggedized mobile computer customer base to address the growth of consumer devices in the enterprise and support the Bring Your Own Device (BYOD) and Bring Your Own Application (BYOA) movement.
Recognizing that we cannot build every business application, we have developed an ‘ecosystem’ of partners which support our custom and off-the-shelf solutions.  These partners include suppliers of mobile devices (Apple, Intermec, Motorola, among others), wireless carriers (AT&T, Sprint, T-Mobile, Verizon),  mobile peripheral manufactures (Zebra Technologies Corporation, Datamax - O’Neil), in addition to a host of specialized independent software vendors such as AirWatch, VeriFone GlobalBay, XRS and Wavelink.
We are anfocused on several commercial enterprise systems integrator that provides mobility systems integrationmarkets.  These include retail, field sales/service, warehousing and supply chain systems integration, as well as traditional scanningdistribution and mobility hardware solutions.transportation.   With the continued growth of the mobile internet, we expect to see growth in our current markets in addition to the emergence of new markets.  In order to identify these new markets we recently created a new internal organization whose sole purpose is to identify and nurture new market opportunities. We design, deploy and support mobile computing and wireless systems that enableexpect our customers to access enterprise data at the pointcontinue to embrace and deploy new technology to better enhance their own customers’ experiences and improve their own operations while lowering their operating costs.  Our expertise and understanding of decision whether they are on the retail selling floor, warehouse loading dock or on the road making deliveries.  We provide developmentour customers’ operations and integrationbusiness operations in general, coupled with our expertise and understanding of business applications for mobile environments.  These systems generally include mobile computers and related devices such as tablet computers, and smartphones, mobile application software for tablet computers and smartphones, and related data capturetechnology equipment including bar code scanners and radio frequency identification (“RFID”) readers.  We also provide professional services including consulting, proprietary and third party software and software customization as an integral part ofofferings enables us to identify new trends and opportunities and provide these new solutions to our customized solutions for ourexisting and potential customers.  Our supply chain systems integration offerings include Warehouse Management Systems, Transportation Management Systems, and Enterprise Resource Planning Systems as well as legacy systems.  We operate in one business segment.

WeAt DecisionPoint, we deliver to our customers the ability to make better, faster and more accurate business decisions by implementing industry-specific, enterprise wireless and mobile computing systems for their front-line employees,mobile workers, inside and outside of the ‘four-walls’.traditional workplace.  It is these systems whichthat provide the information to improve the hundreds of individual business decisions made each day.  The “productivity paradox” is that theHistorically, critical information remainshas remained locked away in theirthe organization’s enterprise computing system, and historically,systems, accessible only when employees were at their desk.desks.  Our solutions solveunlock this productivity issue.information and deliver it to employees when needed regardless of their location.  As a result, our customers are able to move their business decision points closer to their own customers whowhich we believe in turn drive their own improved productivityimproves customer service levels, reduces cost and operational efficiencies.

We accomplish this by providing our customers with everything they need to achieve their enterprise mobility goals, starting with the planning of their systems, to the design and build stage, to the deployment and support stage, and finally to achieving their projected Return On Investment.  We serve the mobile app development needs of a wide range of customers, from Fortune 500 companies to small and medium-sized businesses.  We deliver advanced, mobile apps for many device platforms including iPad, iPhone and Android with functionality including 3D animation, mobile video, augmented reality, GPS, and more.  Our unique combination of creativity, technical savvy, years of mobile experience and market insight enables our customers to envision their mobile applications and bring them to reality, providing the most value in the shortest amount of time.accelerates business growth.
 
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We have developed an ‘ecosystem’ of partners which we bring to every customer situation.  The standout partner in this ecosystem is the Motorola Solutions, Inc. (“Motorola Solutions”), for whom we consistently are rated one of its top Value Added Resellers (“VAR”) and which provides the vast amount of our re-sold products including bar code scanners, battery’s charging stations and accessories.  We also partner with other top equipment and software suppliers such as Zebra Technologies Corporation, Datamax - O’Neil — a unit of the Dover Corporation, in addition to a host of specialized independent software vendors such as AirVersent, AirWatch, Antenna Software, Verifone GlobalBay and Wavelink.
We are focused on several commercial enterprise markets.  These include retail, manufacturing, distribution, transportation and logistics.  We are also increasingly focused on the markets for these systems in the markets where there are large groups of field services workers.  These markets include maintenance and repair, inspections, deliveries, and other specialized business services such as uniform rental.  This part of our business did not exist a few years ago.  But with the continued growth of the mobile internet, we expect to add resources in this area in order to take advantage of the increasing opportunities.  We expect our customers to continue to embrace and deploy new technology to enhance their own customers’ experience with business and improve their own operations to lower their operating costs and better service their customers.  Our expertise and understanding of our customers’ operations and business operations in general, coupled with our expertise and understanding of new technology for equipment and software offerings enables us to identify new trends and opportunities to implement new solutions to our existing and potential customers.

We have several offices throughout the U.SNorth America which allows us to serve any customer on a nation-wide basis.our multi-location clients and their mobile workforces.  We can provide depot services through our West and East coast facilities.

We have recently seen indications that the major retailers are optimistic about the future economic climate which will translate into increased opportunities in our largest target market.  Additionally, we are always keenly aware of potential acquisition candidates that can provide complementary products and service offerings to our customer base.
Business Combinations

Acquisition of Illume Mobile Acquisition

On July 31, 2012 (“Illume Closing Date”), we consummated an asset purchase agreement (“Asset Purchase Agreement”) with MacroSolve, Inc. Pursuant to the Asset Purchase Agreement, the Companywe purchased the business (including substantially all the related assets) of the seller’s Illume Mobile division (“Illume Mobile”), based in Tulsa, Oklahoma.

Founded in 1996, Illume Mobile is a mobile business solutions provider that services mobile products and platforms. Illume Mobile’s initial core business is the development and integration of business applications for mobile environments. Today, Illume Mobile serves the mobile application development needs of a wide range of customers, from Fortune 500s to small and medium-sized businesses. It delivers advanced, mobile apps for many device platforms including iPad, iPhone and Android with functionality including 3D animation, mobile video, augmented reality, GPS, and more. Illume Mobile seeks to leverage its combination of creativity, technical savvy, years of mobile experience, and market insight to enable customers to envision their mobile applications and bring them to reality, providing the most value in the shortest amount of time.

In consideration for the business of Illume Mobile, we paid $1,000,000, of which $250,000 was paid in cash and $750,000 was paid in the form of 617,284 shares of our common stock.  The number of shares issued was based on the volume weighted-average closing price of our common stock of $1.215 per share over the twenty trading days prior to the Illume Closing Date.  The closing price of our common stock on the last business day prior to the Illume Closing was $1.13 per share.  Accordingly, we valued the shares issued in conjunction with the acquisition at $697,531.

Pursuant to the Asset Purchase Agreement, we may be required to make an additional payment (“Earn Out Payment”) to the Seller of up to $500,000 of which 50% will be paid in cash, and 50% will be paid in shares of our common stock.  The value of the shares will be based on the closing price of our common stock on the one year anniversary of the Illume Closing Date.  The Earn Out Payment will be paid within 30 days of the one year anniversary of the Closing Date.  Closing costs and associated expenses totaled $0.1 million.  We paid Sigma Capital Advisors a fee of $45,000 for services provided in connection with the Asset Purchase Agreement.  The transaction was accounted for using the purchase method of accounting and the operating results for Illume Mobile have been consolidated into our results of operations beginning on August 1, 2012.


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The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.  The following table summarizes the fair value of the Illume Mobile assets acquired and liabilities assumed at July 31, 2012:
     
Assets acquired:    
Accounts receivable $16,270 
Other current assets            14,886 
Property and equipment            25,592 
Intangible assets          630,000 
Goodwill          443,801 
Total assets       1,130,549 
     
Liabilities assumed:    
Accounts payable and other accrued liabilities          38,838 
Unearned revenue            36,971 
Total liabilities assumed            75,809 
  Net assets acquired $1,054,740 
     
Purchase consideration:    
Cash paid at closing $250,000 
Shares issued at closing          697,531 
Accrued earn out consideration          107,209 
  Total purchase consideration$1,054,740 
     
Under the Asset Purchase Agreement, the Earn Out Payment will be computed as follows:
(a)  If Net Revenue (as defined in the Purchase Agreement) attributable to Illume Mobile, during the one year period commencing on the Illume Closing Date) is $1,500,000 or less, the Additional Payment will be $0.

(b)  If Net Revenue (as defined in the Purchase Agreement) is greater than $1,500,000 but less than $2,000,000, the Earn Out will be $100,000.

(c)  If Net Revenue (as defined in the Purchase Agreement) is at least $2,000,000 but less than $3,000,000, the Earn Out payment will be equal to the sum of (i) $100,000 plus (ii) 40% of the excess of the Net Revenue amount over $2,000,000.

(d) If Net Revenue (as defined in the Purchase Agreement) is $3,000,000 or more, the Earn Out will be $500,000

The Earn Out amount was recorded as additional purchase price consideration and the fair value was estimated by using a probability weighting of achieving various future revenue results simulation model to calculate the present value of the earn out and determine the probability of reaching the earn out milestones.
The present value of the total earn out amount was calculated using a discount rate of 21.0%.  The discount rate was determined based on an estimated venture capital rate of return.  The fair value of the Earn Out was calculated to be approximately $107,000.
The fair value of the intangible assets acquired at July 31, 2012, and the estimated useful lives over which they are being amortized are:
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  Fair Value Estimated Useful life
     
Software $310,000 3.5 years
Customer relationships  100,000 3 years
Trade name  130,000 3 years
Covenant not to compete  90,000 2 years
      
  $630,000  
Amortization of proprietary software is calculated as the greater of the proportional revenue approach or the straight-line approach.  Amortization of customer relationships and trade names are calculated on the discounted cash flow methodology to more properly reflect the greater useful life of the assets in the early years and the covenant not to compete is amortized on a straight-line basis.

The transaction resulted in a purchase price residual at the Illume Closing Date of approximately $434,000 for goodwill, representing the financial, strategic and operational value of the transaction to us.  Goodwill is attributed to the premium that we were willing to pay to obtain the value of the Illume Mobile business and the synergies created with the integration of key components of a commercial infrastructure.  The total amount of the goodwill acquired is deductible for tax purposes.

Acquisition of Apex Systems Integrators Inc.Acquisition

On June 4, 2012 (“Closing Date”), pursuant to a Stock Purchase Agreement (“Purchase Agreement”), we acquired all of the issued and outstanding shares of Apex Systems Integrators Inc. (“Apex”), a corporation organized under the laws of the Province of Ontario, Canada. Apex is a leading provider of wireless mobile work force software solutions.solutions. Its suite of products utilizes the latest technologies to empower the mobile worker in many areas including merchandising, sales and delivery; field service; logistics and transportation; and, warehouse management. Its clients are North American companies that are household names whose products and services are used daily to feed, transport, entertain and care for people throughout the world.

In consideration for the shares of Apex, we paid CDN$5,000,000 (US$4,801,000 at the Closing Date) (“Closing Amount”) in cash.  We could pay up to an undiscounted amount of CDN$3,500,000 (US$3,360,700 at the Closing Date) in consideration of achieving certain levels of adjusted earnings before interest, depreciation, taxes and amortization (“EBITDA”)in the period ended June 2013.  Closing costs and associated expenses either previously paid, payable in cash or recorded as deferred financing costs after the Closing Date total approximately $2.2 million which includes the issuance of 325,000 shares of the Company’s common stock. The shares were valued at $341,250 based on the market price of $1.05 per share on the Closing Date.  Of the total amount, approximately $190,000, was reflected as deferred financing costs and the remainder was reflected as a charge to selling, general and administrative expenses in our historical financial statements as follows: 1) fourth quarter ended December 31, 2011: $46,000; 2) first quarter ended March 31, 2012: $351,000: 3) second quarter ended June 30, 2012: $1,213,000; and 4) third quarter ended September 30, 2012: $380,000.  The transaction was accounted for using the purchase method of accounting and the operating results for Apexof Illume Mobile have been consolidated intoincluded in our results of operations beginning onAugust 1, 2012 and operating results of Apex have been included in our results of operations beginning June 5, 2012.  We funded the purchase

Pro Forma Disclosure of Apex through borrowings as further explained below.Financial Information (unaudited)

The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.  
The following table summarizes the fair value of the Apex assets acquired and liabilities assumed at June 4, 2012:
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Assets acquired:   
Accounts receivable $242,992 
Due from related party  411,926 
Other current assets  63,456 
Property and equipment  29,780 
Intangible assets  4,465,890 
Goodwill  2,448,969 
  Total assets  7,663,013 
     
Liabilities assumed:    
Accounts payable and other accrued liabilities  194,721 
Unearned revenue  297,518 
Deferred tax liability  1,183,927 
  Total liabilities assumed  1,676,166 
  Net assets acquired $5,986,847 
     
Purchase consideration:    
Cash paid at closing $4,801,000 
Earn out consideration  1,185,847 
  Total purchase consideration $5,986,847 
     
Under the Purchase Agreement, the following post-closing adjustments will be made:
(a)  if the Closing Working Capital as defined in the Purchase Agreement as shown on the closing date balance sheet: (i) is less than CDN$200,000 (US$192,000 at the Closing Date), the Closing Amount shall be reduced on a dollar for dollar basis by the amount of the shortfall; (ii) is greater than CDN$200,000 (US$192,000 at the Closing Date), the Closing Amount shall be increased on a dollar for dollar basis by the amount of such excess; and (iii) is equal to than CDN$200,000 (US$192,000 at the Closing Date), there shall be no adjustment to the Closing Amount as a result of this provision; and
(b)  the Closing Amount shall be reduced on a dollar for dollar basis by the amount of any liabilities of Apex on the Closing Date as shown on the closing date balance sheet, including any taxes payable and indebtedness of Apex (other than the executory obligations under contracts and all accounts payable and accrued liabilities of Apex incurred in the ordinary course of business) and excluding any liabilities otherwise adjusted pursuant to (a) above.
Pursuant to the above, a working capital adjustment of approximately $412,000 was recorded at the Closing Date.  In July of 2012, pursuant to the above arrangement, the Closing Working Capital was audited and resulted in an adjustment of $76,414. The total due from the prior shareholder is reflected on the accompanying unaudited condensed consolidated balance sheet as due from related party and a reduction to goodwill.
In addition, if EBITDA, of Apex for the twelve months ending July 31, 2013 (“2013 EBITDA”), is equal to or less than CDN$2,000,000 (US$1,920,000 at the Closing Date), then Apex shall pay an amount equal to the product of the 2013 EBITDA multiplied by four less $4,801,000 (“2013 EBITDA Basic Earn Out Amount”), up to a maximum of CDN$3,000,000 (US$2,881,000 at the Closing Date).  An amount equal to 22.22% of the 2013 EBITDA Basic Earn Out Amount shall be paid in cash and the balance shall be paid by Apex issuing a subordinated convertible note (“Note”).
Under the terms of the Note, Apex will pay the principal sum due on the Note in eight quarterly payments beginning on January 31, 2014 (“Installment Dates”).  Interest from and after August 1, 2013, shall be paid in arrears on the last day of each calendar quarter commencing on January 31, 2014.  The interest rate shall be determined as follows:
(i)  9% per annum, calculated and compounded quarterly before November 1, 2014; and
(ii)  11% per annum, calculated and compounded quarterly after October 31, 2014;
(iii)  except, however, that, if, during the term of the Note, we raise Net Equity Capital (as defined in the Note) in an amount greater than CDN$5,000,000 and this Note is not repaid in full within 30 days from the date that we receive such Net Equity Capital, the interest rate otherwise provided in the Note shall be 15% per annum from the end of such 30-day period to the first anniversary thereof and 20% per annum thereafter to the date of payment in full.
The Note is convertible, only on each Installment Date, at the option of the Note holder, into shares of our common stock at a conversion price that is equal to the greater of the market price of our common stock on the day prior to the conversion, or $1.00.  The shares issuable under the Note will be restricted but will have certain piggy back registration rights as set forth in the Purchase Agreement.
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If the 2013 EBITDA is greater than CDN$2,000,000 (US$1,920,000 at the Closing Date), then Apex shall pay an amount (the “2013 EBITDA Additional Earn Out Amount”) by which the dollar-for-dollar 2013 EBITDA exceeds CDN$2,000,000 ($1,920,000 at the Closing Date), up to a maximum of CDN$500,000 (US$480,000 at the Closing Date).  The 2013 EBITDA Additional Earn Out shall be paid by the issuance of shares of our common stock.  The number of shares to be issued shall be determined by the amount due divided by the 30 day average daily closing price of the shares of our common stock in the month of July 2013.  The shares issued will be restricted but will have certain piggy back registration rights as set forth in the Purchase Agreement.
The obligations of Apex under the Purchase Agreement are guaranteed by us.
The 2013 EBITDA Basic Earn Out Amount and 2013 EBITDA Additional Earn Out Amount were recorded as additional purchase price consideration and the fair value was estimated by using a Monte Carlo simulation model to calculate the present value of the earn out and determine the probability of reaching the earn out milestones.  We simulated the EBITDA in the earn out periods by varying the following inputs:
·  
Revenue – Earn out period revenue was simulated based on management’s projected revenue and a standard deviation based on revenue variance shown throughout management’s 2012 - 2014 projections. 

·  
Cost of Goods Sold (“COGS”) Margin – Earn out period COGS margin was simulated based on management’s projected margin and a standard deviation based on COGS margin variance shown throughout management’s 2012 - 2014 projections. 

·  
General and Administrative Expenses (“G&A”) – Earn out period G&A expense was simulated based on management’s projected G&A expense and a standard deviation based on G&A expenses variance shown throughout management’s 2012 - 2014 projections. 

Once the EBITDA was simulated in the earn out period, we then determined the amount of the 2013 EBITDA Basic Earn Out and the 2013 EBITDA Additional Earn Out that was achieved.
The present value of the total earn out amount was calculated using a discount rate of 19.7%.  The discount rate was determined based on: (i) a discount rate of 16.0% based on the cost of equity less 2.0 percent specific risk premium since the Earn Out period is only for one year, plus (ii) a counterparty risk of 3.7% based on the after-tax estimated cost of debt.  The fair value of the earn out was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the Closing Date).  At the current balance sheet translation rate, approximately $1,094,000 is recorded in accrued earn out consideration in our unaudited condensed consolidated balance sheet as of September 30, 2012.
As part of the Purchase Agreement, we are obligated to pay an additional bonus consideration to the CEO of Apex. Such bonus is considered additional contingent purchase consideration as we are obligated to pay the bonus regardless of whether or not the CEO’s employment is retained.  The fair value of the bonus was calculated to be approximately CDN$160,000 (US$153,000 at the Closing Date).  At the current balance sheet translation rate, approximately $162,000 is recorded in accrued earn out consideration in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2012.
The fair value at June 4, 2012, of the intangible assets acquired and the estimated useful lives over which they are being amortized are:
     
  Fair Value Estimated Useful Life
     
     
Customer relationships $1,536,320 9 years
ApexWare software  2,483,077 3.5 years
Trade name  432,090 7 years
Covenant not to compete  14,403 1 year
      
  $4,465,890  
Amortization of the ApexWare software is calculated as the greater of the proportional revenue approach or the straight-line approach.  Amortization of customer relationships and trade names are calculated on the discounted cash flow methodology to more properly reflect the greater useful life of the assets in the early years and the covenant not to compete is amortized on a straight-line basis.

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The transaction resulted in a purchase price residual at the Closing date of approximately $2,449,000 for goodwill, representing the financial, strategic and operational value of the transaction to us.  Goodwill is attributed to the premium that we were willing to pay to obtain the value of the Apex business and the synergies created with the integration of key components of a commercial infrastructure.  The total amount of the goodwill acquired is not deductible for tax purposes.

On June 4, 2012, Apex entered into a Credit Agreement (“RBC Credit Agreement”) with Royal Bank of Canada (“RBC”), pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000 (US$2,641,000 at the Closing date), including a revolving demand facility with an authorized limit of CDN$200,000 (US$192,000 at the Closing Date).  In addition, Apex entered into a Loan Agreement (”BDC Loan Agreement”) with BDC Capital Inc. (“BDC”), a wholly-owned subsidiary of Business Development Bank of Canada, pursuant to which  BDC made available to Apex a term credit facility (“BDC Credit Facility”) in the aggregate amount of CDN$1,700,000 (US$1,632,000 at the Closing Date). Further, we drew amounts under our line of credit with SVB to fund the remainder of the cash purchase price.
Pro Forma Financial Information:

The following summarizes the Company’s unaudited combined results of operations for the three and nine months ended September 30, 2012 and 2011 that includesas if the Apex and Illume Mobile: (000’sacquisitions had occurred on January 1, 2012 (in thousands except per share data):

  Three Months ended September 30,  Nine Months ended September 30, 
  2012  2011  2012  2011 
             
Net revenues $18,669  $17,258  $56,346  $44,867 
Net loss attributable to common shareholders $(1,446) $(706) $(5,312) $(7,539)
                 
Net loss per share - basic and fully-diluted $(0.18) $(0.08) $(0.69) $(1.17)
                 
  
Three Months Ended
September 30, 2012
  
Nine Months Ended
September 30, 2012
 
  As Reported  Pro Forma  As Reported  Pro Forma 
             
Net sales $18,567  $18,669  $54,144  $56,346 
Net loss attributable to common shareholders  (1,263)  (1,445)  (3,245)  (5,311)
                 
Net loss per share - basic and diluted  (0.15)  (0.18)  (0.42)  (0.69)
                 
Included in the pro forma combined results of operations are the following adjustments for Apex: (i) amortization of intangible assets for the three months ended September 30, 2012 and 2011 of $0 and $352,000, respectively, and for the nine months ended September 30, 2012 of $0 and 2011 of $572,000, and $1,056,000, respectively and (ii) a net increase in interest expense for the three months ended September 30, 2012 and 2011 of $0 and $179,000, respectively, and for the nine months ended September 30, 2012 of $0 and 2011 of $291,000, and $537,000, respectively.

Included in the pro forma combined results of operations are the following adjustments for Illume Mobile: (i) amortization of intangible assets for the three months ended September 30, 2012 and 2011 of $18,000 and $53,000, respectively, and for the nine months ended September 30, 2012 of $18,000 and 2011 of $125,000, and $160,000, respectively.  Net loss per share assumes the 325,000 shares issued in connection with the Apex acquisition and the 617,284 shares issued in connection with the Illume Mobile acquisition are outstanding for each period presented (see discussion at Note 9)5 – “Business Combinations” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
The historical financial information of Apex has been extracted for the periods required from the historical financial statements of Apex Systems Integrators, Inc. which were prepared in accordance with U.S. generally accepted accounting principles.  The historical financial information of Illume Mobile has been derived from using internally generated management reports for the periods required.
 
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’sour consolidated results of operations that would have been reported had the Apex and Illume Mobile acquisitions been completed as of the beginning of the period presented, nor should it be taken as indicative of our future consolidated results of operations.

Recent Business Developments

Retail solution sales have continuedDuring the third quarter of 2013, we focused on improving customer service levels and increasing our ability to bounce back asleverage consumer class mobile devices and cloud services to support our enterprise applications.  We released a new customer ordering portal that enables our enterprise customers to easily order additional products using electronic payment methods thus reducing the industry ispaperwork and time associated with generating repetitive purchase orders.  We also consolidated our east and west coast depot facilities into a single facility in the beginning stages of a technology upgrade that will enhance retailers’ own competitiveness.  Our tablet-based assisted shopping solution suite for in-store applications is a revenue generation and productivity tool that continuesour Irvine, CA location.  This consolidation enables us to gain acceptance with existing and new retail customers.  In field mobility applications our major wireless carrier partners are embracing our Grapevine Push-to-Talk solution for enterprise and small business applications.  In addition we recently introducedthe economies of scale created by a number of packaged solutionssingle location while also allowing us to be sold through our carrier partners which have been well received byextend the market.  These encouraging demand trends reinforce our belief that revenue will continue to grow in 2012.

In connection with these trends, in September 2012 we announced further upgrades to twoservice hours of our bundled solutions -- Fleet Control and the Field Force Manager Pro Kit -- developed in cooperation with and fulfilled for a major Wireless Carrier.  XRS Corporation provides vehicle management applications for these mobile workforce efficiency solutions.
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An Android version of APEXWare™ Field Service has been ported to a mobile application that went into beta with one account in June 2012.

In July 2012,east coast customers. Lastly, we relocated our Foothill Ranch, CA officeOklahoma, software development center to a larger facilityhistoric building that is located in Irvine, CA.the heart of downtown Tulsa.  The new facility provides additional space was designed by DecisionPoint to accommodatemeet the needs of our customers and employees.
With the continued expansion of consumer class tablet computers and smart phones into the Express Depotenterprise, we released the 2.7 version of ContentSentral, our mobile content management solution.  Some of the enhancements in this release include improvements to the user interface, extended support for additional file types and staging operation.  Additionally,enhanced email and printing capabilities.  We are also increasing our support of Android devices.  In addition to extending APEXWare FS to the Motorola Android product line we have also become a Samsung partner and joined the Samsung APP Exchange.  Furthering our efforts to support cloud computing and the SaaS software deployment model, DecisionPoint was selected to be part of the Amazon Web Service (AWS) Partner Network as an APN Consulting Partner.  APN Consulting Partners are professional service firms that help customers design, architect, migrate or build new building provides expansion for our technical support team as well as larger customer meetingapplications on AWS.  Consulting Partners are given access to a range of resources and product demonstration areas.training to better help customers deploy, run and manage applications in the AWS cloud.


Company History
 
DecisionPoint Systems, Inc., formerly known as Comamtech, Inc. (the "Company”, “DecisionPoint”, “we”, “our” or “us”), was incorporated on August 16, 2010, in Canada under the laws of the Ontario Business Corporations Act (“OCBA”).  On June 15, 2011, we entered into a Plan of Merger (“Merger Agreement”) among the Company, its wholly-owned subsidiary, 2259736 Ontario Inc., incorporated under the laws of the Province of Ontario, Canada (“Purchaser”) and DecisionPoint Systems, Inc., (“Old DecisionPoint”).  Pursuant to the Merger Agreement, under Section 182 of the OCBA, on June 15, 2011 (“Effective Date”), Old DecisionPoint merged (“Merger”) into the Purchaser and became a wholly-owned subsidiary of the Company.  Prior to the Merger, Comamtech was a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (“Exchange Act”)).  In connection with the Merger, we changed our name to DecisionPoint Systems, Inc., and the Purchaser changed its name to DecisionPoint Systems International, Inc. (“DecisionPoint Systems International”).  On June 15, 2011, both companies were reincorporated in the State of Delaware.  Since the Merger, the business conducted by us has been the business conducted by Old DecisionPoint prior to the Merger.

The accompanying unaudited condensed consolidated financial statements present the previously issued shares of Comamtech common stock as having been issued pursuant to the Merger on June 15, 2011, in exchange for the net assets of Comamtech totaling approximately $3.9 million as consideration received.  The shares of common stock of the Company issued to Old DecisionPoint’s stockholders in the Merger are presented as having been outstanding since the original issuance of the shares.  Further, the exchange ratio has been retroactively applied to all shares, weighted-average share, loss per share, and stock option and warrant disclosures. 

We have two wholly-owned subsidiaries, Apex and DecisionPoint Systems International.  Apex was acquired on June 4, 2012.  DecisionPoint Systems International has two wholly-owned subsidiaries, DecisionPoint Systems Group Inc. (“DPS Group”) and CMAC, Inc.   DecisionPoint Systems International acquired CMAC on December 31, 2010.  CMAC was founded and incorporated in March 1996, and is a logistics consulting and systems integration provider focused on delivering operational and technical supply chain solutions, headquartered in Alpharetta, Georgia.

DPS Group has two wholly-owned subsidiaries, DecisionPoint Systems CA, Inc. and DecisionPoint Systems CT, Inc.  DecisionPoint Systems CA, Inc., formerly known as Creative Concepts Software, Inc. was founded in 1995 and is a leading provider of Enterprise Mobility Solutions.  Enterprise Mobility Solutions are those computer systems that give an enterprise the ability to connect to people, control assets, and transact business from any location by using mobile computers, tablet computers, and smartphones to securely connect the mobile worker to the back office software systems that run the enterprise.  Technologies that support Enterprise Mobility Solutions include national wireless carrier networks, Wi-Fi, local area networks, mobile computers, smartphones and tablets, mobile software applications, middleware and device security and management software.  DecisionPoint Systems CT, Inc. formerly known as Sentinel Business Systems, Inc. was founded in 1976, and has developed over time a family of powerful enterprise data collection software solutions, products and services.  The combined company is a data collection systems integrator that sells and installs mobile devices, software, and related bar coding equipment, radio frequency identification systems technology and provides custom solutions and other professional services.

The acquisitionResults of the Illume Mobile business was completely integrated into the operations of DPS Group in August 2012.

RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations is based upon the unaudited results of operations for the three and nine months ended September 30, 2012, as compared to the same periods ended September 30, 2011.  These should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this Form 10-Q along with our Form 10-K, filed with the Securities and Exchange Commission on March 30, 2012.Operations

For comparison purposes, all dollar amounts have been rounded to the nearest million while all percentages are actual.  Due to rounding, totals in the tables presented may not sum to the total presented in the table.

 
Three Months Ended
September 30,
  Increase  
Nine Months Ended
September 30,
  Increase 
 2013 2012  (Decrease)  2013 2012  (Decrease) 
                
Total revenue $17.6  $18.6   (5.3%)  $46.1  $54.1   (14.9%)
Gross profit  3.5   4.1   (16.0%)   9.9   11.6   (15.0%)
Total operating expenses  3.7   4.7   (22.7%)   13.2   13.4   (1.6%)
Loss from operations  (0.2)  (0.6)  (67.2%)   (3.3)  (1.8)  85.4%
Loss before provision for income taxes  (0.3)  (1.0)  (71.0%)   (3.9)  (2.4)  60.2%
 

 
Comparison of the Quarters Ended September 30, 2012 and 2011Total Revenue

Revenues for the three and nine months ended September 30, 2013 and 2012 is summarized below:


 
Three Months Ended
September 30,
   Increase  
Nine Months Ended
September 30,
  Increase 
 2013 2012 (Decrease)  2013 2012  (Decrease) 
               
Hardware $11.9  $12.1  (2.3%) $28.7  $36.8   (21.9%)
Professional services  4.3   4.7  (7.4%)  12.7   12.6   0.8%
Software  0.9   1.4  (32.9%)  3.5   3.2   6.9%
Other  0.5   0.4  20.8%  1.2   1.6   (21.8%)
  $17.6  $18.6  (5.3%) $46.1  $54.1   (14.9%)
                        

Revenues were $18.5$17.6 million for the quarterthree months ended September 30, 2012,2013, compared to $16.4$18.6 million for the same period ended September 30, 2011, an increase2012, a decrease of $2.1$1.0 million or 12.9%5.3%.  The increasedecrease in revenue was primarilypartially offset due to the increased field mobility solution salesinclusion of the operating results of our Apex and increased professional services revenue from our CMAC subsidiaryIllume Mobile acquisitions in 2012 asmid-2012.  Revenues for Apex were $0.5 million for the three months ended September 30, 2013, compared to 2011.  The incremental revenue from our acquisitions$0.4 million for the same period ended September 30, 2012.  Revenues for Illume Mobile were $0.2 million in the three months ended September 30, 2013 compared to $0.2 million for the same period ended September 30, 2012.  Excluding the impact of Apex and Illume Mobile has not been materialacquisitions in mid-2012, revenues decreased by $1.2 million, or 6.6% over the same quarter in the quarter.prior year with the largest decrease occurring in software where sales decreased by 32.9%.

Revenues were $46.1 million for the nine months ended September 30, 2013, compared to $54.1 million for the same period ended September 30, 2012, a decrease of $8.0 million or 14.9%.  The returndecrease in revenue was partially offset due to the inclusion of normal product availability fromthe operating results of our principal hardware vendor enabled usApex and Illume Mobile acquisitions in mid-2012.  Revenues for Apex were $1.9 million for the nine months ended September 30, 2013, compared to fulfill our increased field mobility solutions sales$0.5 million for the same period ended September 30, 2012.  Revenues for Illume Mobile were $0.7 million in the current period.nine months ended September 30, 2013, compared to $0.2 million for the same period ended September 30, 2012.  Excluding the impact of Apex and Illume Mobile acquisitions in mid-2012, revenues decreased by $10.0 million, or 18.7% over the same period in the prior year with the largest decrease occurring in hardware sales where sales decreased by 21.9%.

During 2011, we experienced decreases in traditional mobility solutions revenue which historically generated lower gross margins, while our field mobility solutions and professional services revenues have continued to grow.  While the slowly improvingThe improved economic conditions in the U.S. havewhich had begun in the first half of 2010, and continued improvement throughout 2011 and 2012 had a positive effect generally, we have continuedon our sales in those years.  Prior to experience greater competitive forces in the market place within our core traditional solutions business.  Major2010, major retail chains had deferred new technology implementation and delayed systems’ refresh in recent years.refresh.  Conversely, the economic environment in 2012 has continuedstabilized whereupon we benefitted from renewed interest and more importantly, fundamental need to improve slightly, and accordingly we are continuing to see an increased volume of requests for implementation ofimplement new cost saving technology.  In the first nine months of 2013, we did not have the same level of customers with new technology which will enable our customers to competeimplementation and systems’ refresh.  As a result, the hardware revenues for the ultimate consumer spendingthree and nine months ended September 30, 2013 declined by 2.3% and 21.9%, respectively, which was due to the decrease in theirsystem upgrades of mobile computing at the retail stores.level.  The slight increase in professional services for the nine months ended September 30, 2013 compared to the same period in 2012 of 0.8%, related to deployment and staging services to support our customers’ prior technology upgrades.  For the three months ended September 30, 2013, we did not have the same level of customers in professional services which resulted in a decrease of $0.4 million, or 7.4% over the same period in the prior year.  Our increase in software revenues for the nine months ended September 30, 2013 compared to the same period in 2012 is attributable to contributions of software revenues from the Apex and Illume Mobile acquisitions.  The slight decrease in other revenues for the nine months ended September 30, 2013 compared to the same period in the prior year relates to a reallocation of our corporate resources away from the lower volume for consumables and towards the professional services business.

Cost of Sales

Cost of sales were $14.2 million for the quarterthree and nine months ended September 30, 2013 and 2012 compared to $13.0 million for the quarter ended September 30, 2011, an increase of $1.2 million or 9.2%.  Our gross profit was $4.3 million for the quarter ended September 30, 2012, compared to $3.4 million for the quarter ended September 30, 2011, an increase of $0.9 million or 26.5%.  Our realized gross margin percentage has increased by 2.6 percentage points to 23.5% in the 2012 quarter, from 20.9% in the comparable quarter of 2011.  The increase is due to the higher gross margin from our professional services revenue including CMAC and improved utilization of our professional services resources.  We believe that we would have realized even better gross margins had it not been for the very competitive environment for hardware sales across our entire customer base, as noted above.  Additionally, we have continued our increased emphasis on cost control and improved utilization and efficiency of our professional services personnel and related costs.  We expect to realize increased gross margins as our two recent acquisitions begin to ramp up their revenue as their product offerings become more integral with our existing sales force and customer base.

Selling, general and administrative expenses were $5.0 million for the quarter ended September 30, 2012, compared to $3.3 million for the quarter ended September 30, 2011, an increase of $1.7 million or 51.2%.  Substantially all of the increase was due to increased personnel and operating expenses relating to the Illume Mobile and Apex acquisitions of $0.6 million, Illume Mobile and Apex acquisition related costs of $0.5 million, and accrued severance for a terminated employee of $0.2 million.

Interest expense, which is related to our lines of credit, subordinated debt (in 2011) and our obligations to related parties, was $0.3 million for the quarter ended September 30, 2012, compared to $0.2 million for the quarter ended September 30, 2011.  The $0.1 million increase in interest expense was the result of increased borrowings outstanding as a result of the Apex acquisition in June 2012.
summarized below:
 

  
Three Months Ended
September 30,
  Increase     
Nine Months Ended
September 30,
  Increase 
  2013  2012  (Decrease)  2013  2012  (Decrease) 
                   
Hardware $9.8  $10.0   (2.4%) $23.4  $30.5   (23.4%)
Professional services  2.9   3.0   (2.0%)  8.6   8.4   2.2%
Software  1.1   1.2   (8.7%)  3.4   2.7   27.0%
Other  0.3   0.2   30.8%  0.9   1.0   (11.4%)
  $14.1  $14.4   (2.3%) $36.2  $42.6   (14.9%)
                         
 
 
In connection with the Apex acquisition in June 2012, we obtained two additional new term loan facilities from separate Canadian lendersThe types of expenses included in the totalcost of amount $4.0 million.  Principalsales line are hardware costs, third party licenses, costs associated with third party professional services, salaries and interest are obligations of Apex.  Expenses directly related to obtaining the financing of $0.2 million were recorded as deferred financing costsbenefits for project managers and amortized over the term of the respective loans in our unaudited condensed consolidated statements of operationssoftware engineers, freight, consumables and comprehensive loss as of September 30, 2012.

Comparison of the Nine Months Ended September 30, 2012 and 2011accessories.
 
NetCost of sales were $54.1$36.2 million for the nine months ended September 30, 2012,2013, compared to $42.5$42.6 million for the same period ended September 30, 2012, a decrease of $6.4 million or 14.9%. The decrease in cost of sales for hardware of 23.4% for the nine months ended September 30, 2013 compared to the same period in 2012 was slightly higher than the hardware revenue decrease due to a fewer large orders which usually have reduced pricing. The increase in cost of sales for professional services from the nine months ended September 30, 2013 to the nine months ended September 30, 2012 was 2.2% compared to the revenue growth rate of 0.8%. The increase in cost of sales for software of 27.0% for the nine months ended September 30, 2013 compared to the same period in 2012 was slightly higher due to the impact of software intangible asset amortization.  The decrease in other cost of sales was related to the decrease in other revenues.
Gross Profit

Our gross profit was $3.5 million for the three months ended September 30, 2013, compared to $4.1 million for the same period ended September 30, 2012, a decrease of $0.6 million or 16.0%.  Our gross margin percentage decreased by 250 basis points to 19.7% in 2013, from 22.2% in the comparable period of 2012.

Our gross profit was $9.9 million for the nine months ended September 30, 2011, an increase of2013, compared to $11.6 million for the same period ended September 30, 2012, a decrease of $1.7 million or 27.3%15.0%.  The increase in net sales in the current nine monthsOur gross margin percentage was due to the revenues earned by CMAC and the increase in our core revenue from the comparable period in 2011.  The incremental revenue from our two acquisitions has not been material in 2012.

Cost of sales was $42.3 million21.4% for the nine months ended September 30, 2012,2013, compared to $34.0 million21.4% for the comparable period of 2012.

The decrease in gross margin percentage for the three months ended September 30, 2013 was due to a few large orders which usually have reduced pricing.  For the nine months ended September 30, 2011, an increase of $8.3 million or 24.2%, in line2013, our gross margin was comparable with the increase in net sales.  Our gross margin and gross profit were 21.9% and $11.9 million for the nine monthssame period ended September 30, 2012, respectively, as compared to 19.8% and $8.4 million for the nine months ended September 30, 2011, respectively.2012.  We have continued to implementimplementation of increased cost control for the products and services which we resell, and our professional servicesservice costs were positively impacted by our better utilization associated with greater recognized revenue from these services in the current three and nine months and therefore, we did realizerealized higher margins on those services. We have continued personnel reductionsAdditionally, the benefits of increased cost control were partially offset due to amortization of intangible software assets, offset by the lower volume of hardware sales which carry a lower gross margin, combined with a higher proportion of sales from professional services.
Selling, General and Administrative Expenses

            
  
Three Months Ended
September 30,
  Increase 
 
Nine Months Ended
September 30,
  Increase 
  2013  2012   (Decrease) 2013  2012  (Decrease) 
                  
Selling, general and administrative expenses $4.5  $4.7  (5.4%) $14.0  $13.4   4.6%
As a percentage of sales  25.5%  25.5% (0.0%)  30.3%  24.7%  5.7%
                       
Adjustment to earn-out obligations $(0.8) $-    $(0.8) $-     
                       
Selling, general and administrative expenses were $4.5 million for the three months ended September 30, 2013, compared to $4.7 million for the same period in the first nine months that will be fully realized in the fourth quarterprior year.  This represents a decrease of 2012.$0.2 million, or 5.4%. The decrease was primarily due to reduced legal and other professional fees.

Selling, general and administrative expenses were $13.6$14.0 million for the nine months ended September 30, 2012,2013, compared to $10.3$13.4 million for the same period in the prior year.  This represents an increase of $0.6 million, or 4.6%. The increase was primarily due to the increase in sales salary related expenses of $0.6 million which, in part relates to the expansion of the sales force in the U.S. tasked with bringing the APEXWare™ product to the U.S. market offset partially by reduced legal and other professional fees.

The adjustment recorded for the earn-out obligations were $0.8 million for the three and nine months ended September 30, 2013. The adjustment for Apex was $0.7 million and $0.1 million for Illume Mobile.
           
  
Three Months Ended
September 30,
 Increase  
Nine Months Ended
September 30,
 Increase 
  2013  2012 (Decrease)  2013  2012 (Decrease) 
Depreciation and amortization                
In cost of sales $0.2  $0.2 (8.9%)  $0.6  $0.3 110.4
In operating expenses  0.3   0.3 (16.5%)   0.9   0.7 26.5
Total depreciation and amortization $0.5  $0.6 (13.5%)  $1.5  $1.0 51.2
As a percentage of sales  2.8%   3.1%    3.2%  1.8%  

In addition to the differences above, selling, general and administrative costs were lower for the nine months ended September 30, 2011, an increase2013 due to amortization of $3.3 million or 31.9%.  The increase in the current nine months was primarily the directintangible assets as a result of costs of $2.1 million incurred to complete our acquisitions ofthe Apex and Illume Mobile.  Additionally, there were increased personnel and operating costs relating to the two acquisitions of $0.7 million which impacted the current nine month period.in 2012.

Interest Expense

Interest expense, which is primarily related to our linesline of credit, and term loans, andsubordinated debt, was $0.2 million for the three months ended September 30, 2013, compared to $0.3 million for the same period in the prior year.

Interest expense, which is related to our line of credit, subordinated debt, was $0.7 million for the nine months ended September 30, 2012,2013, compared to $1.0$0.7 million for the ninesame period in the prior year.

The $0.1 million decrease in interest expense for the three months ended September 30, 2011, a decrease of $0.3 million.  Interest expense due related parties was $0.1 million and $.0.2 million for2013 compared to the 2012 and 2011 periods. respectively.  The decreasesame period in interest expensethe prior year was the result of decreased general debt obligations offset by an amendment to BDC Loan Agreement on April 29, 2013 to accrue interest at the exchangerate of our subordinated notes for preferred stock in June 2011, lower amounts outstanding on our lines of credit12.5% per annum and term loans in the first five months of 2012, prioramendment to the issuance of term debt for the Apex financing.

In connectionLoan and Security Agreement with the Apex acquisitionSVB entered in June 2012, we obtained twoto on February 27, 2013 which provided an additional new term loan facilities from separate Canadian lenders in the total of amount $4.0 million.  Principal and interest are obligations$1 million at a rate of Apex.  Expenses directly related7.5%.  Due to obtaining the financing of $0.2 million were recorded as deferred financing costs and amortized over the term of the respective loans in our unaudited condensed consolidated statements of operations and comprehensive loss as of September 30, 2012.

In June 2011, we sold $4.0 million of secured debt and exchanged that same debt for convertible preferred stock in the same period.  The accruedthese additional borrowings, interest expense and preferred stock issued as relating towas slightly less during the debt exchange along with an additional issuance of common shares, at no cost, were all treated as a loss on debt extinguishment which is recorded as a separate line in ‘other expense’ in our unaudited condensed consolidated statements of operations and comprehensive loss as of September 30, 2011.  This one-time, non-cash expense totaled $2.6 million in the period.  There were no further expenses related to this transaction in the subsequent periods.

Revenue Concentration - We derived approximately 20% and 22% of our revenues from two customers in the ninethree months ended September 30, 2012 and 2011, respectively.  Customer mix can shift significantly from year to year, but a concentration of the business with a few large customers is typical in any given year.  A decline in our revenues could occur if a customer which has been a significant factor in one financial reporting period gives us significantly less business in the following period.2013.

Liquidity and Capital Resources

Credit Facility

In December 2006, pursuant to a Loan and Security Agreement (“Loan Agreement”), we obtained a $6.5 million line of credit, which provides for borrowings based upon eligible accounts receivable.  In March 2009, pursuant to an Amendment to the Loan Agreement (“First Amendment”), the line of credit was renewed through March 2011, and the amount available for borrowing was increased to $8.5 million.  We are required to pay an annual renewal fee of one percent of the total line of credit facility.  Pursuant to the First Amendment, the rate at which interest accrues is prime plus 4%, with a potential interest rate reduction of 0.50% based on future profitability.

The amount outstanding under our lines of credit at September 30, 2012, was approximately $4.7 million with interest accruing at 7.5%.  Availability under our lines of credit was approximately $2.7 million at September 30, 2012.  During the first quarter we paid an annual renewal fee of $100,000.

In December 2010, the line of credit was temporarily reduced to $7.0 million in conjunction with a new Term Loan of $3.0 million in order to facilitate the CMAC acquisition.  The Term Loan was used to acquire CMAC and repay all of our remaining subordinated debt.  We paid a $60,000 commitment fee over the first six quarters of the loan and will pay a final payment of $60,000, or 2% of the principal amount borrowed, at the earlier of the maturity date in December 2013, or date of prepayment of the Term Loan.  The Term Loan accrues interest at a fixed rate of 9% and $1.25 million was outstanding at September 30, 2012.

In February 2011, pursuant to a Second Amendment to the Loan Agreement the line of credit was renewed for an additional two year period and the amount available for borrowing was increased to $10.0 million.  We paid an annual renewal fee of $100,000.  The overall credit facility with our financial institution was $13.0 million and reducing as the term loan principal is repaid over the 36 month term.

In May 2011, pursuant to a Consent and Amendment to Loan and Security Agreement (“Amendment”), the maturity date was amended to April 30, 2012, with the remaining principal due on that date to be paid as a balloon payment.  The principal amount outstanding under the Term Loan accrues interest at a fixed rate equal to 9% per annum.  In addition, a final payment equal to 2% of the aggregate amount of the Term Loan is due on the earlier of the maturity date or the date the Term Loan is prepaid.  This final payment of $60,000 has been recorded as a discount to the Term Loan, which is being amortized to interest expense over the term of the Loan using the effective interest method.  In September 2011, pursuant to a Limited Waiver and Amendment to Loan and Security Agreement, the Loan Agreement was amended and certain covenants were replaced or modified resulting in our being in full compliance at September 30, 2011.  In addition, the maturity date was extended to the earlier of the maturity of the line of credit (see Note 7 of the Notes to the attached unaudited condensed consolidated financial statements) or December 1, 2013, the original maturity of the Term Loan and the principal is due in equal installments with no balloon payment.
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In conjunction with the acquisition of Apex 0n June 4, 2012, we increased our fix term loan debt as follows:

RBC Term Loan -- On June 4, 2012, Apex entered into the RBC Credit Agreement with RBC described in Notes 5 and 8 of the Notes to the attached unaudited condensed consolidated financial statements pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000, including a term facility (“RBC Term Loan”) in the amount of CDN $2,500,000 (US$2,400,500 at the Closing Date).  The RBC Term Loan accrues interest at RBP plus 4% (7% at September 30, 2012).  Principal and interest is payable over a three year period at a fixed principal amount of CDN $69,444 a month beginning in July 2012.  Apex paid approximately $120,000 in financing costs, which has been recorded as deferred financing costs in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2012, and is being amortized to interest expense over the term of the loan.
In addition, the RBC Term Loan calls for mandatory repayments based on 20% of Apex’s free cash flow as defined in the RBC Credit Agreement, before discretionary bonuses based on the annual year end audited financial statements of Apex, beginning with the fiscal year ended December 31, 2012, and payable within 30 days of the delivery of the annual audited financial statements, and continuing every six months through December 31, 2014.  This amount is estimated to be $80,000.
The RBC Term Loan has certain financial covenants and other non-financial covenants.  As of September 30, 2012, Apex was not in compliance with these covenants.  RBC has indicated it is in process of providing a waiver for the covenant violations at September 30, 2012.

BDC Term Loan -- On June 4, 2012, Apex also entered into the BDC Loan Agreement (Note 5), pursuant to which BDC made available to Apex a term credit facility (“BDC Term Loan”) in the aggregate amount of CDN $1,700,000 (USD $1,632,340 at the Closing Date).  The BDC Term Loan accrues interest at the rate of 12% per annum, and matures on June 23, 2016, with an available one year extension for a fee of 2%, payable at that time.  In addition to the interest payable, consecutive quarterly payments of CDN$20,000, as additional interest are due beginning on June 23, 2012.  Apex paid approximately $70,000 in financing costs.
Subject to compliance with bank covenants, Apex will make a mandatory annual principal payment in the form of a cash flow sweep which will be equal to 50% of the Excess Available Funds (as defined by the BDC Loan Agreement) before discretionary bonuses based on the annual year end audited financial statements of Apex.  The maximum annual cash flow sweep in any year will be CDN$425,000.  As of September 30, 2012, the Company estimates that the cash sweep will be approximately $20,000.  Such payments will be applied to reduce the outstanding principal payment due on the maturity date.  In the event that Apex’s annual audited financial statements are not received within 120 days of its fiscal year end, the full CDN$425,000 becomes due and payable on the next payment date.
The terms of the BDC loan agreement also provide for a fee to BDC in the event of the occurrence of any of the following:
(a) if 50% or more of any company comprising Apex or the Company (consolidated assets or shares) is sold or merged with an unrelated entity; or

(b) if there is a change of control of Apex and/or DecisionPoint prior to the Maturity Date or any extended maturity date of the BDC Tern Loan,
In the event of (a) or (b) above,  Apex will pay to the BDC a bonus in an amount equal to 2% of the aggregate value of Apex and DecisionPoint determined as at the closing date of such transaction, which bonus shall become due and payable at the time of the closing of such transaction. Notwithstanding any prepayment of the BDC Term Loan, the bonus and Apex’s obligation to pay same to the BDC will remain in full force and effect until the Maturity Date or any amended or extended maturity date agreed by the BDC such that in the event of any sale, initial public offering or similar transaction, Apex’s obligation to pay the bonus amount to the BDC will survive such prepayment.
We believe that cash on hand, plus amounts anticipated to be generated from operations and from other contemplated financing transactions, whether from issuing additional long term debt or from the sale of equity securities through a private placement, as well as borrowings available under our line of credit, will be sufficient to support our operations through September 2013.  If we are not able to raise funds through private placements, we may choose to modify our growth plans to the extent of available funding, if any, and further reduce our selling, general and administrative expenses.
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Cash and Cash Flow

We have seen our revenue increase in the nine months almost 27%, due to increases in our core field mobility solutions and professional services provided by CMAC.  Our gross margin percentage improved as a result of improved utilization of our professional services resources.  Selling, general and administrative expenses increased due to significant professional fees and other expenses associated with the completion of the acquisitions of Apex and Illume Mobile of approximately $2.1 million in 2012.  Had we not incurred those substantial professional fees, our net loss of $2.4 million for the nine month period ended September 30, 2012 would have approximated breakeven.

We believe that our strategic shift to higher margin field mobility solutions, and with additional ApexWare software and professional service revenues, will improve our results through this improving economic period.

As a matter of course, we do not maintain significant cash balances on hand since we are financed by lines of credit.  Typically, any excess cash is automatically applied to the then outstanding line of credit balance.  As long as we continue to generate revenues, we are permitted to draw down on our lines of credit to fund our normal working capital needs.  As such, we anticipate that we will have more than sufficient borrowing capacity to continue our operations in the normal course of business unless unforeseeable, material economic events occur that are beyond our control.  Availability on our line of credit was $2.7 million at September 30, 2012.

In the last three complete years of operations from 2009 through 2011, we have not experienced any significant effects of inflation on our product and service pricing, revenues or our income from continuing operations.

As of September 30, 2012 and December 31, 2011, we had cash on hand of approximately $0.4 million.  We have used, and plan to use, such cash for general corporate purposes, including working capital.

For the nine months ended September 30, 2012, net cash provided by operating activities was $0.7 million, primarily due to a $3.9 million increase in accounts receivable offset by an increase in accounts payable of $0.6 million.  All of these have offset our net loss of $2.5 million in the nine month period ended September 31, 2012.  Net cash used in investing activities was $5.1 million, for the acquisitions of Apex and Illume Mobile.  Net cash provided by financing activities was $4.5 million for the nine months ended September 30, 2012, primarily from the proceeds of issuance of term debt for the acquisition of Apex in the net amount of $4.0 million, collection of a $1.5 million receivable in connection with Comamtech merger, the net reduction in our credit line of $0.7 million, the payments on our term loan of $1.0 million, paid financing expenses of $0.3 million and the payment of dividends of $0.5 million.

For the nine months ended September 30, 2011, net cash used in operating activities was $1.4 million, primarily due to a $3.0 million increase in accounts receivable offset by a reduction in accounts payable of $0.5 million and $0.8 million reduction in accrued expenses.  All of these have offset our net loss of $5.2 million in the 2011 for the period and which was also reduced by the non-cash loss debt extinguishment of $2.3 million.  Net cash used in investing activities was $1.8 million, primarily due to a $2.2 million cash payment for the acquisition of CMAC, offset by the collection of a note receivable of $0.4 million in connection with the Comamtech merger.  Net cash provided by financing activities was $3.1 million for the nine months ended September 30, 2011, primarily from the proceeds of the issuance of subordinated debt of $4.0 million, the net reduction on our credit line facility of $2.0 million, cash received in the merger with Comamtech of $2.0 million and the repayment on our term loan of $0.8 million.

As of September 30, 2012, we have negative working capital of $9.2 million and total stockholders’ equity of $0.9 million.  Included in our current liabilities is unearned revenue of $6.4 million, which reflects services that are to be performed in future periods but that have been paid and/or accrued for and therefore, do not generally represent additional future cash outflow requirements.  Included in our current assets are deferred costs of $3.6 million which reflect costs paid for third party extended maintenance services that are being amortized over their respective service periods, which do not generally represent future cash outflows.  The increase in the unearned revenue, offset by the deferred costs, continues to provide a benefit in future periods as the amounts convert to net realized revenue.

For the periods presented, the table below sets forth a non-GAAP presentation of our ‘cash’ working capital position after removing the accrual effect of the current deferred assets and liabilities and should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto:
34


  September 30,  December 31, 
(000's) 2012  2011 
       
Current assets $16,227  $20,342 
Current liabilities  25,448   24,104 
         
Working capital - GAAP  (9,221)  (3,762)
Deferred cost  (3,603)  (3,469)
Unearned revenue  6,368   6,756 
         
Adjusted working capital - non-GAAP measure $(6,456) $(475)
         
Liquidity – Although we have historically experienced losses, a material part of those losses were from non-cash transactions (refer to the accompanying unaudited Condensed Consolidated Statements of Cash Flows.) In connection with these losses, we have accumulated substantial net operating loss carry-forwards to off-set future taxable income. In order to maintain normal operations for the foreseeable future, we must continue to have access to our line of credit, become profitable and/or access additional equity capital. There can be no assurance that we will become profitable or that we can continue to raise additional funds required to continue our normal operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that would be required should we not be successful with these activities.

Funds generated by operating activities and our credit facilities continue to be our most significant sources of liquidity.  For the nine months ended September 30, 2013, our revenue decreased approximately 14.9%, compared to the nine months ended September 30, 2012, partially due to the lower level of retail customers’ system refreshes and system implementations.  Excluding the impact of Apex and Illume Mobile Earn-Out adjustment, we also had an increased level of selling, general and administrative expenses in the first nine months of 2013 compared to the same period in 2012 due to inclusion of the results from Apex and Illume Mobile along with increased selling expenses, professional expenses and investor relations expenses related to being a public company along with an increase in amortization expense of intangible assets, all resulted in higher operating loss for the first nine months of 2013.

We believe that our strategic shift to higher margin field mobility solutions with additional APEXWare™ software and professional service revenues will improve our results as economic conditions continue to improve.
In the quarter ended September 30, 2013, we experienced a decrease in revenue of $1.0 million compared to the quarter ended September 30, 2012, and a $2.9 million increase in revenue compared to the previous sequential quarter ended June 30, 2013.  In the nine months ended September 30, 2013, we incurred approximately $1.3 million in increased expenses due to professional fees relating to capital raising activities, the registration of common shares as a result of the Series D Preferred Stock offering and associated audit fees, and other matters such as employee termination costs. We experienced a net loss of $0.2 million and $3.4 million for the three and nine month periods ended September 30, 2013, which were far in excess of the internal forecast maintained by the management team. In addition, we have a substantial working capital deficit totaling $(11.5) million at September 30, 2013.  Although a portion of this deficit is associated with deferred costs and unearned revenues and term debt that has been classified current due to expected future covenant violations (see Note 8 – “Term Debt” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements), our liabilities that are expected to be satisfied in the foreseeable future in cash far exceed the operating assets that are expected to be satisfied in cash. As a result, the availability under our credit line has contracted significantly and our overall liquidity has become significantly constrained.
To address this, we have plans to seek additional capital through sales of our securities. There is no assurance additional funding will be available on terms acceptable to us, or at all.  If we raise additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the ownership interest of our existing shareholders may be diluted.  We are also reducing non-essential expenses and completing the integration of our acquisitions of Apex and Illume Mobile, which is expected to result in further cost savings.   Such expense reduction measures include, but are not limited to, consolidation of administrative personnel, consolidation of information technology environments, reduction of outsourced consulting expertise and replacing certain service providers with lower cost providers. The result of these activities has reduced the expense structure of the consolidated business, however this reduction has not been material to date and we do not anticipate it becoming material in the foreseeable future.
On August 15, 2013, we entered into a securities purchase agreement (the “Purchase Agreement”) with accredited investors for the sale of common stock for gross proceeds of $1,756,400 (including $100,000 from management and existing shareholders of the Company) for 2,927,333 shares of common stock.  The effective price of the offering was $0.60 per share of common stock. An initial closing for $1,556,400 was held on August 15, 2013.  The final closing for $200,000 was held on August 21, 2013.  Additionally, pursuant to the Purchase Agreement, the Company issued 1,463,667 warrants to accredited investors at an exercise price of $1.00 per share. Further, the Company issued 292,833 warrants to the placement agent at an exercise price of $0.60 per share. The warrants received liability accounting treatment under existing technical standards.  We received net proceeds of approximately $1.5 million from the offering, after deducting the placement agent’s fees of 10% and other offering expenses. (see Note 9 – “Stockholders’ Equity” and Note 3 – “Warrant Liability” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
In November 2013, the Company entered into definitive subscription agreements (“Series E Purchase Agreement”) with accredited investors for the sales of $3,835,000 in gross proceeds for 383,500 shares of Series E Convertible Preferred Stock (“Series E Preferred Shares”) for a purchase price of $10.00 per share. The initial Conversion Price is $0.50, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions.  The Company received net proceeds of approximately $3.4 million  (net of the fair value of placement agent warrants) from the initial closing, after deducting the placement agent’s fees of 8% and other offering expenses.  The Company issued to the Placement Agent five-year warrants to purchase 767,000 shares of our common stock (equal to 10% of the number of shares of common stock underlying the Series E Preferred Shares sold under the Series E Purchase Agreement) at an exercise price of $0.55 per share, in connection with the Series E Purchase Agreement initial closing.  The Company expects to close a second round of Series E Preferred Shares with gross proceeds of $300,000-$700,000 shortly thereafter (see Note 13 –Subsequent Event” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
During 2012 and 2013, all principal payments on our term debt were made within payment terms. We were not in compliance with certain financial covenants under the agreements with Royal Bank of Canada (“RBC Credit Agreement”) and BDC, Inc. (“BDC Credit Agreement”) as of December, 31, 2012, March 31, 2013 and June 30, 2013.  We have received waivers for non-compliance for past covenant violations.  On August 22, 2013, the BDC Credit Agreement was amended and certain financial covenants were modified.  Pursuant to the amended loan agreement, we are required to maintain, for the duration of the investment, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised yearly 120 days after each year end.  We were in compliance with all of our BDC financial covenants as of September 30, 2013. We expect to continue to meet the requirements of our BDC financial covenants over the short and long term.  On August 16, 2013 the RBC Credit Agreement was amended and certain financial covenants were modified.  Pursuant to the amended credit agreement and commencing with the fiscal year ending December 31, 2013, we are required to maintain a fixed coverage ratio, calculated on a consolidated basis of not less than 1.15:1 with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter.  As part of the revised financial covenants, covenant testing was waived by RBC for September 30, 2013.  We do not believe that we will be in compliance with the reset covenants at December 31, 2013.  Although we believe it is improbable that RBC will exercise their rights up to, and including, acceleration of the outstanding debt, there can be no assurance RBC will not exercise their rights pursuant to the provisions of the debt obligation. Accordingly, we have classified this debt obligation as current at September 30, 2013 (see Note 8 – “Term Debt” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
At October 31, 2013, the outstanding balance on the line of credit with Silicon Valley Bank (“SVB”) is $3.7 million, down from $4.1 million at September 30, 2013, and the availability under the line of credit has decreased to $1.6 million (see Note 7 – Lines of Credit).  We rely on the line of credit to fund daily operating activities maintaining very little cash on hand.  As of December 31, 2012, we were in compliance with all of our financial covenants with SVB. As of May 31, 2013 and June 30, 2013, we were not in compliance with the Tangible Net Worth financial covenant as defined in the amended SVB Loan Agreement. SVB has agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and has agreed to waive the existing covenant violations if a gross capital raise of $1.5 million is completed by such date. We completed the capital raise and were able to achieve compliance with the forbearance agreement prior to August 28.2013.  Except for any capital raises through August 28, 2013, the minimum Tangible Net Worth requirement of a $(9.7) million deficit will be further reduced by one half of any funds raised through sales of common stock (as only 50% of additional capital raises are given credit in the Tangible Net Worth calculation).  As of September 30, 2013, we were in compliance with the Tangible Net Worth financial covenant and had available a $0.3 million cushion over the requirement. In November 2013, the Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13).  Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, we believe that at the time of this filing we are in compliant with the terms and provisions of its SVB lending agreement and expect to continue to meet the requirements of our SVB financial covenants over the short and long term. The Company is in currently discussions with SVB regarding the Tangible Net Worth covenant and a reduction of the 50% of additional capital raised to 25% of capital raised in November 2013. Should we continue to incur losses in a manner consistent with its recent historical financial performance, we will violate this covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.
In the near term, our successful restructuring of our operations and reduction of operating costs and/or our ability to raise additional capital at acceptable terms is critical to our ability to continue to operate for the foreseeable future.  If we continue to incur operating losses and/or do not raise sufficient additional capital, material adverse events may occur including, but not limited to, 1) a reduction in the nature and scope of the Company’s operations, 2) the Company’s inability to fully implement its current business plan and/or 3) continued defaults under the various loan agreements.  A covenant default would give the bank the right to demand immediate payment of all outstanding amounts which we would not be able to repay out of normal operations.  There are no assurances that we will successfully implement our plans with respect to these liquidity matters.  The unaudited condensed consolidated financial statements do not reflect any adjustment that may be required resulting from the adverse outcome relating to this uncertainty.

As a matter of course, we do not maintain significant cash balances on hand since we are financed by a line of credit.  Typically, we use any excess cash to repay the then outstanding line of credit balance.  As long as we continue to generate revenues and meet our financial covenants, we are permitted to draw down on our line of credit to fund our normal working capital needs.  As of September 30, 2013, the outstanding balance on our SVB line of credit was approximately $4.1 million and the interest rate is 7.0%.  As of September 30, 2013, there was $4.3 million available under the line of credit.  As of October 31, 2013, the outstanding balance under the line of credit was $3.7 million and there was $1.3 million available under the line of credit.  On February 27, 2013, we obtained an additional $1.0 million term loan from SVB (see below under “2013 Financing” for terms of the line of credit and the term loan.)

In connection with our Preferred Series D Private Placement in December 2012, 25% of the net proceeds are to be restricted for the Apex payment of the contingent consideration and the additional bonus consideration (see below under “2012 Financing.”)  These funds have not been placed into escrow pending agreement between the Company and former owners of Apex regarding the financial institution that will escrow the funds, the amount of funds to be escrowed and the terms of the escrow agreement itself.

In the last four complete years of operations from 2009 through 2012, we have not experienced any significant effects of inflation on our product and service pricing, revenues or our income from continuing operations.

As of September 30, 2013 and December 31, 2012, we had cash of approximately $0.3 million and $1.1 million, respectively.  We have used, and plan to use, such cash for general corporate purposes, including working capital.

As of September 30, 2013, we had negative working capital of $11.5 million and total stockholders’ deficit of ($2.3) million.  As of December 31, 2012, we had negative working capital of $9.1 million and total stockholders’ equity of $0.9 million.  We experienced a net loss of $0.2 million and $3.4 million for the three and nine month periods ended September 30, 2013.  Although a portion of this deficit is associated with deferred costs and unearned revenues and term debt that has been classified current due to expected future covenant violations (see further discussion at Note 8 – “Term Debt” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements), the liabilities of the Company that are expected to be satisfied in the foreseeable future in cash exceed the operating assets that are expected to be satisfied in cash.

2013 Financing, Common Stock Private Placement and Preferred Series E Private Placement

CRITICAL ACCOUNTING ESTIMATESSilicon Valley Bank Financing

On February 27, 2013, we and Silicon Valley Bank (“SVB”), entered into an Amendment (the “Amendment”) to Loan and Security Agreement, which amended the terms of the Loan and Security Agreement dated as of December 15, 2006 (as amended, the “Loan Agreement”). Pursuant to the Amendment, SVB made a new term loan to us on February 27, 2013, of $1,000,000 (“Term Loan II”). Repayment of Term Loan II, together with accrued interest thereon, is due in 36 monthly installments commencing on the first day of the month following the month in which the funding date of Term Loan II occurred.

 
Pursuant to the Amendment, the Loan Agreement was amended to provide that the revolving credit line thereunder will accrue interest at an annual rate equal to 3.75 percentage points above the Prime Rate, which may be further reduced to 3.25 percentage points above the Prime Rate after we achieve two consecutive fiscal quarters (beginning with any fiscal quarter ending on or after March 31, 2013) of profitability. In addition, the maturity date of the revolving credit line under the Loan Agreement was extended to February 28, 2015, the principal amount outstanding under the Term Loan under the Loan Agreement will accrue interest at a fixed annual rate equal to 9.0%, the principal amount outstanding under the Term Loan II will accrue interest at a fixed annual rate equal to 7.5%, and we agreed to pay an anniversary fee of $100,000 on February 28, 2014.

The Loan Agreement includes customary covenants, limitations and events of default. Financial covenants which may materially impact our liquidity include minimum liquidity and fixed charge coverage ratios (1.5 to 1), minimum tangible net worth requirements ($9.7 million) and limitations on indebtedness. Additionally, the Loan Agreement has customary cross-default covenants which will cause us to be in default if we are in default in other loan agreements.  As of December 31, 2012, we were in compliance with all of our financial covenants with SVB. As of May 31, 2013 and June 30, 2013, we were not on compliance with the Tangible Net Worth financial covenant as defined in the amended SVB Loan Agreement.

On August 16, 2013, we signed an agreement with SVB (“Forbearance Agreement”) where SVB has agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and has agreed to waive the existing covenant violations if a gross capital raise of $1.5 million is completed by such date.  We completed the capital raise and were able to achieve compliance with the Forbearance Agreement prior to August 28, 2013. Accordingly, we believe that at the time of this filing it is compliance with the terms and provisions of its SVB lending agreements.  Except for any capital raises through August 28, 2013, the minimum Tangible Net Worth requirement of a $(9.7) million deficit will be further reduced by one half of any funds raised through sales of common stock (as only 50% of additional capital raises are given credit in the Tangible Net Worth calculation).  As of September 30, 2013, we were in compliance with the Tangible Net Worth financial covenant and had available a $0.3 million cushion over the requirement. In November 2013, the Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13).  Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, we believe that at the time of this filing it is compliant with the terms and provisions of its SVB lending agreement and expect to continue to meet the requirements of our SVB financial covenants over the short and long term. The Company is in currently discussions with SVB regarding the Tangible Net Worth covenant and a reduction of the 50% of additional capital raised to 25% of capital raised in November 2013. Should we continue to incur losses in a manner consistent with its recent historical financial performance, we will violate this covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.

Common Stock Private Placement

 On August 15, 2013, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with multiple accredited investors relating to the issuance and sale of Common Stock in a private offering.  On August 15, 2013, the initial closing date (the “Initial Closing”) of the Purchase Agreement, we sold (i) an aggregate of 2,594,000 shares of our Common Stock for $0.60 per share and (ii) Common Stock Purchase Warrants (the “Investor Warrants”) for the purchase of an aggregate of 1,297,000 shares for aggregate gross proceeds of $1,556,400.  The Investor Warrants have a five-year term, an exercise price of $1.00 and contain certain provisions for anti-dilution and price adjustments in the event of a future offering.

On August 21, 2013, the final closing date (the “Final Closing”) of the Purchase Agreement, we sold (i) an aggregate of 333,333 shares of our Common Stock for $0.60 per share and (ii) 166,667 Investor Warrants for aggregate gross proceeds of $200,000.

For a period commencing on the Initial Closing and terminating on a date which is 24 months from the Initial Closing, in the event we issue or grant any shares of Common Stock or securities convertible, exchangeable or exercisable for shares of Common Stock pursuant to which shares of Common Stock may be acquired at a price less than $0.60 per share, then we shall promptly issue additional shares of Common Stock to the investors under the Purchase Agreement in an amount sufficient that the subscription price paid, when divided by the total number of shares issued (shares purchased under the Purchase Agreement plus the additional shares issued under this provision), will result in an actual price paid by the investor per share of Common Stock equal to such lower price.

If we at any time while the Investor Warrants are outstanding, shall sell or grant an option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue any common stock or securities convertible, exchangeable or exercisable for shares of common stock, at an effective price per share less than the exercise price of the Investor Warrants then in effect, the exercise price of the Investor Warrants will be reduced to equal to such lower price.

Pursuant to the terms in the Purchase Agreement, on September 23, 2013, the Company filed a Registration Statement on Form S-1 (the “Form S-1”) for the registration of the 2,927,333 shares of Common Stock and the 1,463,667 shares issuable upon exercise of the Investor Warrants sold under the Purchase Agreement. On October 4, 2013, the Form S-1 was declared effective by the SEC.
We paid the placement agent $175,600 in commissions (equal to 10% of the gross proceeds), and issued to the Placement Agent five-year warrants (the “Placement Agent Warrants”) to purchase 292,733 shares of our common stock (equal to 10% of the number of shares of common stocksold under the Purchase Agreement).  The Placement Agent Warrants have a five-year term, an exercise price of $0.60 and contain provisions for anti-dilution and price adjustments in the event of a future offering.

If we at any time while the Placement Agent Warrants are outstanding, shall sell or grant an option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue any common stock or or securities convertible, exchangeable or exercisable for shares of common stock, at an effective price per share less than the exercise price of the Placement Agent Warrants, the exercise price of the Placement Agent Warrants then in effect will be reduced to equal to such lower price.
We recorded the Investor Warrants and Placement Agent Warrants as a liability (see further disclosure at Note 3 – “Warrant Liability” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements)).  Accordingly, the net proceeds raised ($1.7 million in gross offering proceeds, net of $0.2 million in cost) were allocated to the fair value of the warrant liability of $1.1 million and the remainder was recorded as equity ($0.4 million).

Preferred Series E Private Placement
In November 2013, the Company entered into definitive subscription agreements (“Series E Purchase Agreement”) with accredited investors for the sales of $3,835,000 in gross proceeds for 383,500 shares of Series E Convertible Preferred Stock (“Series E Preferred Shares”) for a purchase price of $10.00 per share. The initial Conversion Price is $0.50, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. The Company received net proceeds of approximately $3.4 million  (net of the fair value of placement agent warrants) from the initial closing, after deducting the placement agent’s fees of 8% and other offering expenses.  The Company paid the Placement Agent $306,800 in commissions (equal to 8% of the gross proceeds), and issued to the Placement Agent five-year warrants to purchase 767,000 shares of our common stock (equal to 10% of the number of shares of common stock underlying the Series E Preferred Shares sold under the Series E Purchase Agreement) at an exercise price of $0.55 per share, in connection with the Series E Purchase Agreement initial closing.  The Company expects to close a second round of Series E Preferred Shares with gross proceeds of $300,000-$700,000 shortly thereafter (see Note 13 – Subsequent Event” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
2012 Financing and Preferred Series D Private Placement

Royal Bank of Canada and BDC Capital, Inc. Financing

On June 4, 2012, Apex entered into a Credit Agreement (“RBC Credit Agreement”) with Royal Bank of Canada (“RBC”), pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000 (US$2,641,000 at the Closing Date), including a revolving demand facility with an authorized limit of CDN$200,000 (US$192,000 at the Closing Date).  The RBC Term Loan accrues interest at RBP plus 4% (7% at December 31, 2012). Principal and interest is payable over a three year period at a fixed principal amount of CDN$69,444 a month beginning in July 2012 and continuing through June 2015. Apex paid approximately $120,000 in financing costs, which has been recorded as deferred financing costs and is being amortized to interest expense over the term of the loan.

In addition, the RBC Term Loan calls for mandatory repayments based on 20% of Apex’s free cash flow as defined in the RBC Credit Agreement, before discretionary bonuses based on the annual year end audited financial statements of Apex, beginning with the fiscal year ended December 31, 2012, and payable within 30 days of the delivery of the annual audited financial statements, and continuing every six months through December 31, 2014. As of September 30, 2013 and December 31, 2012, the Company estimates that the mandatory repayment based on 20% of Apex’s free cash flow will be $0.
The RBC Term Loan has certain financial covenants and other non-financial covenants.  As of June 30, 2013 and December 31, 2012, Apex was not in compliance with the Fixed Charge Coverage ratio (as defined by the RBC Credit Agreement).  Under the RBC Credit Agreement, violation of this covenant is an Event of Default which grants RBC the right to demand immediate payment of outstanding balances.  In March 2013, May 2013 and August 2013, we received waivers for non-compliance of these covenants at December 31, 2012, March 31, 2013 and June 30, 2013.  On August 16, 2013 the RBC Credit Agreement was amended and certain financial covenants were modified.  Pursuant to the amended credit agreement and commencing with the fiscal year ending December 31, 2013, We are required to maintain a fixed coverage ratio, calculated on a consolidated basis of not less than 1.15:1 with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter.   As part of the revised financial covenants, covenant testing was waived for September 30, 2013.  We do not believe that we will be in compliance with the reset covenants at December 31, 2013.  Although we believe it is improbable RBC will exercise their rights up to, and including, acceleration of the outstanding debt, there can be no assurance that RBC will not exercise their rights pursuant to the provisions of the debt obligation.  Accordingly, we have classified the term debt obligation as current at September 30, 2013.

On June 4, 2012, Apex also entered into the BDC Loan Agreement with BDC Capital Inc. (“BDC”), a wholly-owned subsidiary of Business Development Bank of Canada, pursuant to which BDC made available to Apex a term credit facility (“BDC Credit Facility”) in the aggregate amount of CDN $1,700,000 (USD $1,632,340 at the Closing Date). The BDC Term Loan initially accrued interest at the rate of 12% per annum, and matures on June 23, 2016, with an available one year extension for a fee of 2%, payable at the time of extension.  On April 29, 2013, the BDC Term Loan was amended to accrue interest at the rate of 12.5% per annum.  In addition to the interest payable, consecutive quarterly payments of CDN$20,000 as additional interest are due beginning on June 23, 2012, and subject to compliance with bank covenants, Apex will make a mandatory annual principal payment in the form of a cash flow sweep which will be equal to 50% of the Excess Available Funds (as defined by the BDC Loan Agreement) before discretionary bonuses based on the annual year end audited financial statements of Apex. The maximum annual cash flow sweep in any year will be CDN$425,000. As of December 31, 2012 and at September 30, 2013, the Company estimated the cash sweep will be approximately $0.  Such payments will be applied to reduce the outstanding principal payment due on the maturity date.  In the event that Apex’s annual audited financial statements are not received within 120 days of its fiscal year end, the full CDN$425,000 becomes due and payable on the next payment date. Apex paid approximately $70,000 in financing costs which has been recorded as deferred financing costs and is being amortized to interest expense over the term of the loan.

The BDC Loan Agreement contains certain financial and non-financial covenants which may materially impact our liquidity, including minimum working capital requirements, tangible net worth requirements and limitations on additional indebtedness.  Under the BDC Loan Agreement, violation of this covenant is an Event of Default which grants BDC the right to demand immediate payment of outstanding balances.  In March 2013, May 2013 and August 2013, we received waivers for non-compliance of these covenants at December 31, 2012, March 31, 2013 and June 30, 2013.  On August 22, 2013, the BDC Term Loan was amended and certain financial covenants were modified.  Pursuant to the amended loan agreement, the Company is required to maintain, for the duration of the investment, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised yearly 120 days after each year end.  We were in compliance with all of our BDC financial covenants as of September 30, 2013. Currently, we expect to continue to meet the requirements of our BDC financial covenants over the short and long term.

In connection with the BDC Loan Agreement, BDC executed a subordination agreement in favor of Silicon Valley Bank, pursuant to which BDC agreed to subordinate any security interest in assets of the Company granted in connection with the BDC Loan Agreement to Silicon Valley Bank’s existing security interest in assets of the Company.  The subordination agreement contains cross-default provisions which may materially impact our liquidity.

In the event either or both of the RBC Loan Agreement or the BDC Loan Agreement were deemed to be in default, RBC or BDC, as applicable, could, among other things (subject to the rights of SVB as the Company’s senior lender), terminate the facilities, demand immediate repayment of any outstanding amounts, and foreclose on our assets. Any such action would require us to curtail or cease operations. The Company does not have alternative sources of financing.

Preferred Series D Private Placement

On December 20, 2012, we entered into and closed a securities purchase agreement (the “Series D Purchase Agreement”) with accredited investors (the “Investors”), pursuant to which we sold an aggregate of 633,600 shares of Series D Convertible Preferred Stock (the “Series D Preferred Shares”) for a purchase price of $10.00 per share, for aggregate gross proceeds of $6,336,000 (the “Series D First Closing”).

We retained Taglich Brothers, Inc. (the “Placement Agent”) as the placement agent for the Series D First Closing. We paid the Placement Agent $506,880 in commissions (equal to 8% of the gross proceeds), and issued to the Placement Agent five-year warrants (the “Placement Agent Warrants”) to purchase 633,600 shares of our common stock (equal to 10% of the number of shares of common stock underlying the Series D Preferred Shares sold under the Purchase Agreement) at an exercise price of $1.10 per share, in connection with the Series D First Closing. The Investors included certain of our officers, directors and employees, who purchased an aggregate of 20,700 Series D Preferred Shares.  We used $4.7 million of the proceeds from the Series D Closing to redeem all of our outstanding shares of Series C Preferred Stock.

On December 31, 2012, we sold an additional 70,600 shares of Series D Preferred Stock for a purchase price of $10.00 per share, for aggregate gross proceeds of $706,000 (the “Series D Second Closing”, and together with the Series D First Closing, the “Series D Closings”) pursuant to the Series D Purchase Agreement for an aggregate of 704,200 shares of Series D Preferred Stock sold.  The Placement Agent acted as the placement agent for the Series D Second Closing as well. We paid the Placement Agent $56,480 in commissions (equal to 8% of the gross proceeds), and issued to the Placement Agent Placement Agent Warrants to purchase 70,600 shares of common stock (equal to 10% of the number of shares of common stock underlying the Series D Preferred Shares sold under the Series D Purchase Agreement) at an exercise price of $1.10 per share, in connection with the Series D Second Closing for an aggregate of 704,200 such Placement Agent Warrants.  The Investors included one of our officers who purchased an aggregate of 2,500 Series D Preferred Shares.

Our proceeds from the Series D Closings, before deducting placement agent fees and other expenses, were approximately $7.0 million. We used $4.7 million for redemption of all of our outstanding shares of Series C Preferred Stock. Approximately $1.0 million was used to pay fees and expenses of the offering, and $1.3 million are funds are available for general corporate purposes.  Pursuant to the Stock Purchase Agreement, we are required to place 25% of net offering proceeds, as defined, in an escrow account to satisfy our payment obligations of certain earn-out provisions. These funds have not been placed into escrow pending agreement between the Company and the sellers under the stock purchase agreement regarding the financial institution that will escrow the funds, the amount of funds that are to be placed in escrow and the escrow agreement itself.
In connection with the Series D First Closing, on December 20, 2012, we filed a Certificate of Designation of Series D Preferred Stock (the “Series D Certificate of Designation”) with the Secretary of State of Delaware. Pursuant to the Series D Certificate of Designation, we designated 4,000,000 shares of our preferred stock as Series D Preferred Stock. The Series D Preferred Stock has a Stated Value of $10.00 per share, votes on an as-converted basis with the common stock, and is convertible, at the option of the holder, into such number of shares of our common stock equal to the number of shares of Series D Preferred Stock to be converted, multiplied by the Stated Value, divided by the Conversion Price in effect at the time of the conversion.  The initial Conversion Price is $1.00, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions.  As a result of the private placement closed on August 15, 2013 and August 21, 2013 (see Note 9(b)), the Conversion Price of the Series D Preferred Stock was reduced to $0.90.  The Series D Preferred Stock entitles the holder to cumulative dividends, payable quarterly, at an annual rate of (i) 8% of the Stated Value during the three year period commencing on the date of issue, and (ii) 12% of the Stated Value commencing three years after the date of issue. We may, at our option, pay dividends in PIK Shares, in which event the applicable dividend rate will be 12% and the number of such PIK Shares issuable will be equal to the aggregate dividend payable divided by the lesser of (x) the then effective Conversion Price or (y) the average volume weighted average price of the Company’s common stock for the five prior consecutive trading days.

Upon any liquidation, dissolution or winding-up of our Company, holders of Series D Preferred Stock will be entitled to receive, for each share of Series D Preferred Stock, an amount equal to the Stated Value of $10.00 per share plus any accrued but unpaid dividends thereon before any distribution or payment may be made to the holders of any common stock, Series A Preferred Stock, Series B Preferred Stock, or subsequently issued preferred stock.

In addition, commencing on the trading day on which the closing price of the common stock is greater than $2.00 for thirty consecutive trading days with a minimum average daily trading volume of at least 5,000 shares for such period, and at any time thereafter, we may, in our sole discretion, effect the conversion of all of the outstanding shares of Series D Preferred Stock to common stock (subject to the condition that, all of the shares issuable upon such conversion may be re-sold without limitation under an effective registration statement or pursuant to Rule 144 under the Securities Act).

The Series D Preferred Stock holders also were granted registration rights which required the Company to file a registration statement with the SEC within 60 days of the final closing date (December 31, 2012), and to have the registration statement declared effective within 90 days thereafter.  The initial registration statement was filed on February 12, 2013.  Failure of the registration statement to be declared effective by May 12, 2013, resulted in a partial liquidated damage equal to 0.1% of the purchase price paid by each investor to become payable on each monthly anniversary until the registration statement was declared effective.  On July 30, 2013, the registration statement was declared effective by the U.S. Securities and Exchange Commission.  On October 15, 2013, the Company paid liquidated damages of $18,000.

Cash Flows from Operating, Investing and Financing Activities

Information about our cash flows, by category, is presented in the accompanying unaudited condensedCondensed Consolidated Statements of Cash Flows. The following table summarizes our cash inflows (outflows) for the nine months ended September 30, 2013 and 2012 (in millions):

  Nine Months Ended       
  September 30,       
  2013  2012  Increase/(Decrease) 
             
Operating activities $(2.2) $0.7  $(2.8)  (409.4%)
Investing activities  (0.0)  (5.1)  (5.1)  (99.4%)
Financing activities  1.4   4.5   (3.2)  (70.0%)
                 
Cash provided by operating activities during the first nine months of 2013 decreased by $2.8 million over the prior year.  The decrease in cash from operations was primarily driven by a decrease in gross profit of $1.7 million resulting in an increase in net loss in the first nine months of 2013 of $0.9 million.  Additionally, the changes in net working capital and other balance sheet changes contributed to a $2.5 million increase in cash used in operating activities, offset from a $4.4 million decrease in accounts receivable due to timing of receivable collections.

During the nine months ended September 30, 2013, net cash used in operating activities was $2.2 million.  Our net loss was $3.5 million in the first nine months of 2013, a portion of which was the result of non-cash transactions during the year.  Specifically, we had a $0.8 million of other non-cash transactions including, but not limited to depreciation and amortization, employee stock-based compensation and ESOP compensation expense.

For the nine months ended September 30, 2012, net cash provided by operating activities was $0.7million.  Our net loss was $2.5 million during the first nine months of 2012, most of which was the result of non-cash transactions during the quarter.  Specifically, we had a $1.2 million non-cash expense such as depreciation and amortization, employee and non-employee stock-based compensation, and deferred taxes.
Net cash used in investing activities was negligible during the nine months ended September 30, 2013. Net cash used in investing activities was $5.1 million for the nine months ended September 30, 2012 and primarily related to the cash payment for the acquisition of Apex System Integrators, Inc. in June 2012.
During the nine months ended September 30, 2013, net cash provided by financing activities was $1.4 million, primarily due to $1.0 million in proceeds from the bank term loan, net of $1.6 million in payments for term loans, a net $0.8 million in borrowings under our lines of credit, payment of $0.3 million for the Series D Preferred Stock dividend and $1.5 million in net proceeds from a common stock private placement.
During the nine months ended September 30, 2012, net cash provided by financing activities was $4.5 million, primarily due to the $4.0 million due to the issuance of term loan, $0.7 million in borrowings under our line of credit, $1.0 million in debt repayments, payment of $0.5 million for the Series C Preferred Stock dividend, $0.3 million of financing costs and $1.5 million received in reverse recapitalization.
Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.  In preparing the consolidated financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality.  Actual results may differ from these estimates.  In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses.  We believe that the following critical accounting policies involve a high degree of judgment and estimation:

Accounts Receivable and Allowance for Doubtful Accounts

We have policies and procedures for reviewing and granting credit to all customer accounts, including:
 
 Credit reviews of all new customer accounts,
 Ongoing credit evaluations of current customers,
 Credit limits and payment terms based on available credit information,
 Adjustments to credit limits based upon payment history and the customer’s current credit worthiness, and
 An active collection effort by regional credit functions, reporting directly to the corporate financial officers.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are highly judgmental and require assumptions based on both recent trends of certain customers estimated to be a greater credit risk, as well as historical trends of the entire customer pool.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  To mitigate this credit risk we perform periodic credit evaluations of our customers.

Accounts receivable allowance as of September 30, 2012, were approximately $232,000, or 2.1% of the balance due.  Accounts receivable allowance as of December 31, 2011, were approximately $245,500 or 1.7% of the balance due.  We believe our reserve level is appropriate considering the quality of the portfolio as of September 30, 2012, based on the lack of any material write-offs of bad debt.  While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience due to the current economic recession.Inventory
 
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Inventory

Inventory is stated at the lower of cost or market.  Cost is determined under the first-in, first-out (FIFO) method.  We periodically review our inventory and make provisions as necessary for estimated obsolete and slow-moving goods.  We mark down inventory by an amount equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demands, selling prices and market conditions.  The creation of such provisions results in a write-down of inventory to net realizable value and a charge to cost of sales.

Goodwill and Long-Lived Assets  

Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies.  Goodwill is subject to impairment testing as necessary, (at least once annually at December 31) if changes in circumstances or the occurrence of certain events indicate potential impairment.  In assessing the recoverability of our goodwill, identified intangibles, and other long-lived assets, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets must be made, as well as the related estimated useful lives.  The fair value of goodwill and long-lived assets is estimated using a discounted cash flow valuation model and observed earnings and revenue trading multiples of identified peer companies.  If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for these assets in the period such determination was made.
 
Intangible Assets

We make judgments about the recoverability of purchased finite-lived intangible assets whenever events or changes in circumstances indicate that impairment may exist.  Recoverability of finite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate.  If it is determined that an individual asset is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

The assumptions and estimates used to determine future values and remaining useful lives of our intangible are complex and subjective.  They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts.

Comprehensive Loss
Comprehensive loss consists of net loss and accumulated other comprehensive loss, which includes certain changes in equity that are excluded from net income.  Comprehensive loss for the nine months ended September 30, 2013 is equal to the net loss plus other comprehensive loss totaling $23,000 (relating to exchange translation adjustments arising from the consolidation of our Canadian Apex subsidiary).  Comprehensive loss for the comparable nine months ended September 30, 2012 is $5,000.
Fair Value Measurement
Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
•  Level 1 — Quoted prices in active markets for identical assets or liabilities.
•  Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•  Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Income Taxes

We account for income taxes usingin accordance with the asset and liability method.  Deferred taxes are provided on an asset and liability method wherebyFinancial Accounting Standards Board (“FASB”) guidance, which requires deferred tax assets areand liabilities, be recognized as deductibleusing enacted tax rates to measure the effect of temporary differences and operating lossbetween book and tax credit carry-forwardsbases on recorded assets and liabilities. FASB guidance also requires that deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.  Deferred tax assets arebe reduced by a valuation allowance, when, in the opinion of management,if it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferredrecognized.

We evaluate on an annual basis its ability to realize deferred tax assets by assessing its valuation allowance and liabilitiesby adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are adjusted forforecasts of future taxable income and available tax planning strategies that could be implemented to realize the effects of changes innet deferred tax laws and rates on the date of enactment.assets.

Under theIn accordance with FASB guidance on accounting for uncertainuncertainty in income taxes, we evaluate tax positions to determine whether the Company has clarified the recognition threshold and measurement attributes for financial statement disclosurebenefits of tax positions taken, or expected to be taken, on a tax return.  The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that isare more likely than not to beof being sustained upon audit bybased on the relevant taxing authority.  An uncertaintechnical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit. If the more likely than not threshold is not met in the period for which a tax position willis taken, we may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not be recognized if it hasthreshold is met in a less than fifty percent likelihoodsubsequent period.
Translation of being sustained.Foreign Currencies

The Company's functional currency is the U.S. dollar. The financial statements of the Company's foreign subsidiary is measured using the local currency, in this case the Canadian dollar (CDN$), as its functional currency and is translated to U.S. dollars for reporting purposes. Assets and liabilities of the subsidiary are translated at exchange rates as of the balance sheet dates. Revenues and expenses of the subsidiary are translated at the rates of exchange in effect during the year.

Revenue recognition

Revenues are generated through product sales, warranty and maintenance agreements, software customization, and professional services.  Product sales are recognized when the following criteria are met (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred and title has passed to the customer, which generally happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured.  We generate revenues from the sale of extended warranties on wireless and mobile hardware and systems.  Revenue related to extended warranty and service contracts is recorded as unearned revenue and is recognized over the life of the contract and we may be liable to refund a customer for amounts paid in certain circumstances.  This has not been an issue for us historically.

We also generate revenue from software customization and professional services on either a fee-for-service or fixed fee basis.  Revenue from software customization and professional services that is contracted as fee-for-service, also referred to as per-diem billing, is recognized in the period in which the services are performed or delivered.  Adjustments to contract price and estimated labor costs are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined.

We enter into revenue arrangements that contain multiple deliverables.  Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect the Company’s results of operations. When a sale involveswe enter into an arrangement that includes multiple elements, revenue is allocatedthe allocation of value to each respective element at inceptionis derived based on management’s best estimate of an arrangement using the relative selling price method.  Selling price is determined based on a selling price hierarchy, consisting of sellerwhen vendor specific objective evidence (VSOE),or third party evidence or estimated selling price.
is unavailable.
 

Revenue from software licenses is recognized when all of the software revenue recognition criteria are met and, if applicable, when vendor specific objective evidence, or VSOE, exists to allocate the total license fee to each element of multiple-element software arrangements, including post-contract customer support. Post-contract support is recognized ratably over the support period. When a contract contains multiple elements wherein the only undelivered element is post-contract customer support and VSOE of the fair value of post-contract customer support does not exist, revenue from the entire arrangement is recognized ratably over the support period. Software royalty revenue is recognized in arrears on a quarterly basis, based upon reports received from licensees during the period, unless collectability is not reasonably assured, in which case revenue is recognized when payment is received from the licensee.
 
Stock-based compensation
 
We record the fair value of stock-based payments as an expense in our consolidated financial statements.  When more precise pricing data is unavailable, weWe determine the fair value of stock options using the Black-Scholes option-pricing model.  This valuation model requires us to make assumptions and judgments about the variables used in the calculation.  These variables and assumptions include the weighted-average period of time that the options granted are expected to be outstanding, the volatility of our common stock, the risk-free interest rate and the estimated rate of forfeitures of unvested stock options.  Additional information on the variables and assumptions used in our stock-based compensation are described in Note 10 of the accompanying notes to our unaudited condensed consolidated financial statements.

Off-Balance Sheet Arrangements
 
There were no off-balance sheet arrangements as of September 30, 2012.2013.

Inflation
 
We do not believe that inflation has had a material impact on our business or operating results during the periods presented.


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 4.CONTROLS AND PROCEDURES
 
Our independent accounting firm has not, nor is required, to perform any procedures to assess the effectiveness of management remediation efforts.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), concluded that, as of the end of the period covered by this report, due to material weaknesses in our internal controls as discussed below, our disclosure controls and procedures are notdesigned at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer, principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.

In the course of preparation of this report, management determined that we have material weaknesses in our internal controls over period end financial close and reporting processes and in our ability to account for complex transactions. Management believes that these material weaknesses are primarily due to the need to continue integrating our recent acquisitions.

We intend to devote resources to remediate any weaknesses we have discovered and improve our internal control over financial reporting and we believe that this will help mitigate and eventually remediate the material weaknesses described above.  Our management intends to develop a plan to correct the primary issues that led to this material weakness by implementing additional review and reconciliation procedures.  We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future.
In light of these material weaknesses, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the quarter ended September 30, 2012, included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the quarter ended September 30, 2012 are fairly stated, in all material respects, in accordance with US GAAP.

Changes in Internal Controls.

There were no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2012,2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II-OTHER INFORMATION



From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business.  However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. We are not currently party to any material legal proceedings.


There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Form 10K10-K as filed with the SEC on March 30, 2012.28, 2013.


None.None


Not applicable.



Not applicable.



Not applicable.


 

EX-101.INS XBRL INSTANCE DOCUMENT
   
EX-101.SCH XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
   
EX-101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
   
EX-101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
   
EX-101.LAB XBRL TAXONOMY EXTENSION LABELS LINKBASE
   
EX-101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE








In accordance withPursuant 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.

   
 DecisionPoint Systems, Inc.
   
Date: November 14, 20122013By:  /s/ Nicholas R. Toms
 Nicholas R. Toms
 
Chief Executive Officer (Principal Executive Officer)
 
 
 
 
Date: November 14, 20122013By:  /s/ Paul RossMichael Roe
 Paul RossMichael Roe
 
ChiefVP of Finance (Principal Financial Officer (Principal Accounting Officer)
 
 

 
 
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