SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended ~~September 30, 2013~~March 31, 2014

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

For the transition period from __________ to __________

(Exact name of registrant as specified in its charter)

Delaware	000-54200	37-1644635
(State of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

8697 Research Drive, Irvine CA, 92618-4204

(Address of principal executive offices) (Zip code)

(Registrant's telephone number, including area code)

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company 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 ~~October 31, 2013, were 12,144,096.~~May 2, 2014, was 12,729,563.

DECISIONPOINT SYSTEMS, INC.

(In thousands, except share and per share data)

and as of December 31, 2013

See accompanying notes to unaudited condensed consolidated financial statements

~~DECISIONPOINT SYSTEMS, INC.~~

~~(In thousands, except share and per share data)~~

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~~

DECISIONPOINT SYSTEMS, INC.

(In ~~thousands)~~thousands, except share and per share data)

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 )

	Three Months Ended March 31,
	2014			2013


Net sales	$	16,709		$	13,772

Cost of sales		13,135			10,948

Gross profit		3,574			2,824

Selling, general and administrative expense		3,717			5,033

Operating loss		(143	)		(2,209	)

Other expense:
Interest expense		207			226
Fair market value adjustment of warrant liability		(251	)		-
Other income, net		(8	)		(6	)
Total other expense		(52	)		220

Loss before income taxes		(91	)		(2,429	)

Provision (benefit) for income taxes		22			(327	)

Net loss		(113	)		(2,102	)

Cumulative and imputed dividends on Series A and B preferred stock		(27	)		(27	)
Cash and imputed dividends on Series D and E preferred stock		(302	)		(193	)

Net loss attributable to common shareholders	$	(442	)	$	(2,322	)

Net loss per common share:
Basic and diluted	$	(0.04	)	$	(0.27	)

Weighted average common shares outstanding:
Basic and diluted		12,314,498			8,620,807


Comprehensive loss	$	(138	)	$	(2,105	)

See accompanying notes to unaudited condensed consolidated financial statements

DECISIONPOINT SYSTEMS, INC.

	Nine Months ended September 30,						Three Months ended March 31,
	2013			2012			2014			2013
Cash flows from operating activities:
Net loss	$	(3,385	)	$	(2,535	)	$	(113	)	$	(2,102	)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
provided by (used in) operating activities:
Depreciation and amortization		1,497			992			451			502
Amortization of deferred financing costs and note discount		140			160			65			54
Employee stock-based compensation		6			50
Non-employee stock-based compensation		-			341
Non-cash interest income		-			(24	)
Acquisition earn-out adjustment		(820	)		-
Employee and Director stock-based compensation								10			5
Change in fair value of warrants		(166	)		-			(251	)		-
ESOP compensation expense		104			98			14			35
Deferred taxes, net		(5	)		28
Allowance for doubtful accounts		56			13			(6	)		21
Loss on disposal of property and equipment		13			-			-			4
Changes in operating assets and liabilities:
Accounts receivable		(468	)		3,899			925			1,686
Due from related party		-			(357	)
Inventory, net		(107	)		(184	)		46			(647	)
Deferred costs		496			(583	)		(51	)		70
Prepaid expenses and other current assets		(578	)		179			-			(259	)
Other assets, net		5			(11	)		(25	)		-
Accounts payable		1,961			(572	)		(486	)		(1,056	)
Accrued expenses and other current liabilities		106			178			(116	)		763
Due to related parties		158			(791	)		89			-
Unearned revenue		(1,163	)		(186	)		8			87
Net cash (used in) provided by operating activities		(2,150	)		695
Net cash provided by (used in) operating activities								560			(837	)

Cash flows from investing activities
Cash paid for acquisitions		-			(5,051	)
Purchases of property and equipment		(33	)		(50	)		(19	)		(9	)
Net cash used in investing activities		(33	)		(5,101	)		(19	)		(9	)

Cash flows from financing activities
(Repayments) borrowings from lines of credit, net		817			718
Proceeds from issuance of term debt		1,000			4,033
Cash received in reverse recapitalization, net of expenses		-			1,500
Repayments from lines of credit, net								(182	)		(320	)
Proceeds from bank term loan								-			1,000
Repayment of debt		(1,552	)		(962	)		(271	)		(483	)
Paid financing costs		(119	)		(296	)		(100	)		(118	)
Dividends paid		(296	)		(482	)
Common stock issued in private placement, net of costs		1,502			-
Net cash provided by financing activities		1,352			4,511
Net cash (used in) provided by financing activities								(553	)		79
Effect on cash of foreign currency translation		(2	)		(79	)		(17	)		(1	)
Net (decrease) increase in cash		(833	)		26
Net decrease in cash								(29	)		(768	)
Cash at beginning of period		1,103			366			641			1,103
Cash at end of period	$	270		$	392		$	612		$	335

Supplemental disclosures of cash flow information:
Interest paid	$	705		$	858		$	269		$	293
Income taxes paid		234			56			-			16

Supplemental disclosure of non-cash financing activities:
Accrued and imputed dividends on preferred stock	$	661		$	261		$	329		$	220
Warrants issued in connection with common stock private placement		1,099			-

See accompanying notes to unaudited condensed consolidated financial statements

~~DECISIONPOINT SYSTEMS, INC.~~

Description of Business

DecisionPoint Systems, Inc., (“DecisionPoint”, the “Company”, “we”, or “us”), through its subsidiaries is ~~a provider of Enterprise Mobility Systems. Enterprise Mobility Solutions are those computer~~an enterprise mobility systems integrator that sells and installs mobile computing and wireless systems that ~~give an enterprise~~are used both within a company’s facilities in conjunction with wireless networks and in the ~~ability to connect to people, control assets, and transact business from any location by~~field using carrier-based wireless networks. These systems generally include mobile computers, ~~tablet computers,~~mobile application software, 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, smartphonesrelated data capture equipment including bar code scanners and ~~tablets, mobile software applications, middleware and device security and management software.~~radio frequency identification (“RFID”) readers. 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~~late breaking 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.

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 ~~periods~~period ended ~~September 30, 2013,~~March 31, 2014, are not necessarily indicative of results for the full ~~2013~~2014 fiscal year or any other future interim periods.

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.

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, ~~2012,~~2013, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March ~~28, 2013.~~31, 2014.

Liquidity and Going Concern

The accompanying unaudited condensed consolidated financial statements were prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that the Company will continue in operation for the next twelve months and will able to realize its assets and discharge its liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the Company’s inability to continue as a going concern. The Company’s history of losses, working capital deficit, capital deficit, minimal liquidity and other factors raises substantial doubt about the Company ability to continue as a going concern. In order for the Company to continue operations beyond the next twelve months and be able to discharge its liabilities and commitments in the normal course of business, the Company must establish profitable operations through increased sales, successfully implement cost cutting measures, avoid further unforeseen expenses, potentially raise additional equity or debt capital, and successfully refinance its current debt obligations when they come due in February of 2015. There can be no assurance that the Company will be able achieve sustainable profitable operations or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to management.

~~Liquidity~~If the Company continues to incur operating losses and 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 3) continued defaults under the Company’s various loan agreements. A covenant default would give the relevant 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 can be no assurance that the Company will successfully improve its liquidity position. The accompanying unaudited condensed consolidated financial statements do not reflect any adjustments that might be required resulting from the adverse outcome relating to this uncertainty.

In the quarter ended ~~September 30, 2013,~~March 31, 2014, the Company experienced ~~a decrease~~an increase in revenue of ~~$1.0~~$2.9 million, or 21.3% compared to the quarter ended ~~September 30, 2012,~~March 31, 2013, and ~~a $2.9 million~~an increase in revenue of $2.1 million, or 14.2% 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 $3.4 million for the three and nine month periods ended September 30,31, 2013. In addition, ~~the Company has~~we have a substantial working capital deficit totaling ~~$(11.5)~~$9.8 million at ~~September 30, 2013.~~March 31, 2014. 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)8 - Term Debt), the Company’s liabilities ~~of the Company~~ 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 of historical operations, the availability under the Company’s credit line has contracted and the Company’s overall liquidity has been constrained.

To address ~~this,~~liquidity constraints, the Company has reduced non-essential expenses. Such expense reduction measures include, but are not limited to, consolidation of information technology environments, consolidation of our East Coast depot facility in to our larger California facility, the reduction of outsourced consulting expertise where unnecessary and the replacement of certain service providers with lower cost providers. The Company has also consolidated administrative personnel and reduced staffing levels by 29% from April 2013 through February 2014, constituting annual savings of approximately $3 million. These activities have reduced the expense structure of the Company’s business significantly. The Company is focused on continuing to improve processes and reduce costs. The Company has no plans to seek additional capital through ~~sales~~the sale of our ~~securities. There~~securities unless deemed necessary. Should additional funding be needed, there is no assurance ~~additional~~that such 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~~the Company’s existing ~~shareholders~~common stock holders 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 Securities Purchase Agreement (the “Purchase Agreement”) with multiple 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 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, 2013 and ~~2013,~~the first quarter of 2014, all principal and interest payments on the Company’s term debt were 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.terms. On August 22, 2013, the Company's loan agreement ("BDC ~~Credit Agreement~~Loan Agreement") with BDC, Inc. ("BDC") 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.~~December 31, 2013 and March 31, 2014. We currently expect to continue to meet the requirements of our BDC financial covenants over the short and long term. On August 16, 2013, the Company's credit agreement ("RBC Credit ~~Agreement~~Agreement") with the Royal Bank of Canada ("RBC") 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~~was not ~~believe that it will be~~ in compliance with the reset covenants at December 31, ~~2013.~~2013 or March 31, 2014. Although management of the Company believes it is ~~improbable~~not likely that 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, the Company has classified this debt obligation as current at ~~September 30, 2013~~March 31, 2014 (see Note 8 – Term Debt).

~~At October~~As of March 31, ~~2013,~~2014, the outstanding balance on the line of credit with Silicon Valley Bank (“SVB”) is $3.7 million, down from ~~$4.1~~$3.9 million at ~~September 30,~~December 31, 2013, and the availability under the line of credit has decreased to ~~$1.6~~$2.8 million (see Note 7 – Lines of Credit). The Company relies on the ~~line~~lines of credit to fund daily operating activities maintaining very little cash on hand. As of ~~December~~March 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, 2013,2014, the Company was in compliance with the Tangible Net Worth financial covenant and had available a ~~$0.3~~$0.5 million cushion over the requirement. ~~In November 2013, the~~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 Companycurrently 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.~~agreement. 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~~

Table 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 successfully implement its 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.Contents

Summary of Significant Accounting Policies

There have been no material changes to the Company's significant accounting policies during the ~~nine~~three months ended ~~September 30, 2013.~~March 31, 2014. See ~~Footnote~~Note 2 of the Company's consolidated financial statements included in the Company's ~~2012~~2013 Annual Report on Form 10-K filed with the SEC on March ~~28, 2013,~~31, 2014, for a comprehensive description of the Company's significant accounting policies.

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 exits; (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. The Company generates 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 as the Company maintains financial risk throughout the term of these contracts and may be liable to refund a customer for amounts paid in certain circumstances. Our policy is to classify shipping and handling costs billed to customers and the related expenses as cost of sales.

The Company also generates revenue from professional services and customer specified software customization on either a fee-for-service or fixed fee basis. Revenue from software customization and professional services that is contracted as fee-for-service 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. The Company records sales net of sales tax.

The Company enters 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. In an arrangement with multiple deliverables, the delivered item or items shall be considered a separate unit of accounting if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis; (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered item(s) within the arrangement and the allocation of arrangement consideration and the recognition of revenue then shall be determined for those combined deliverables as a single unit of accounting.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 the Company enters into an arrangement that includes multiple elements, we allocate revenue base on their relative selling prices. We use the a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor specific objective evidence of fair value (“VSOE”), (ii) third party evidence of selling prices (“TPE”) and (iii) best estimate of selling price (“ESP”) as a proxy for VSOE. When both VSOE and TPE are unavailable, we use ESP. We determine ESP by considering all relevant factors in establishing the price, which is demonstrated in a gross margin model used.

Revenue from software licenses may contain arrangements with multiple deliverables, including post-contract customer support, that are subject to software revenue recognition guidance. The revenue for these arrangements is allocated to the software and non-software deliverable based on the relative selling prices of all components in the arrangement using the criteria above. 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.

Concentration of ~~Credit~~ Risk -– Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable, and accounts payable. Beginning January 1, 2013, all of our cash balances were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per depositor at each financial institution. This coverage is available at all FDIC member institutions. The Company ~~derived approximately 9.8% and 13.3%~~uses Silicon Valley Bank, which is an FDIC insured institution. Based on these facts, collectability of ~~revenues from~~bank balances appears to be adequate.

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Historically, a relatively small number of customers have accounted for a significant portion of the Company’s revenue. The Company had one customer who represented greater than 10% of its revenue with 11% of its total for the three months ended March 31, 2014 and ~~21.1% and 26.2% of revenues from the top~~2013. The Company had three customers inwho represented 25% and 23% of its revenue for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ respectively. ~~Additionally there~~The Company’s accounts receivable was concentrated with one customer ~~which comprised 15.5%~~at March 31, 2014, representing 16% of gross accounts receivable and with one customer at ~~September 30, 2013.~~March 31, 2013, representing 11% of gross accounts receivable. 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 loss of a significant customer could have a material adverse impact on the Company.

The Company has four primary vendors for the three months ended March 31, 2014, one of which is not the same when compared to the similar period in 2013. For the three months ended March 31, 2014, the Company had purchases from four vendors that collectively represented 59% of total purchases and 65% of the total outstanding accounts payable at March 31, 2014. For the three months ended March 31, 2013, the Company had purchases from four vendors that collectively represented 55% of total purchases and 68% of the total outstanding accounts payable at March 31, 2013. The same single vendor represented 28% and 21% of the total purchases for the three months ended March 31, 2014 and 2013, respectively. Loss of this certain vendor could have a material adverse effect on our operations.

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.

~~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, which were nominal in amount. There was no tax effect allocated to any component of other comprehensive loss during the periods presented.

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Fair Value Measurement - ~~Financial assets and liabilities are measured at fair~~Fair value ~~which~~ is ~~defined as~~ the ~~exchange~~ price that would be received ~~for~~from selling 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 onas of the measurement date. ~~Valuation techniques~~Applicable accounting guidance provides a hierarchy for inputs used ~~to measure~~in measuring fair value ~~must maximize~~that prioritize the use of observable inputs ~~and minimize~~over the use of unobservable ~~inputs.~~inputs, when such observable inputs are available. 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:~~value are as follows:

•

●

Level 1 —- Quoted prices in active markets for identical assets or liabilities.

•
	●	Level 2 ~~— Inputs~~- Observable inputs other than Level 1 ~~that are observable, either directly or indirectly,~~prices, such as quoted prices for similar assets or ~~liabilities;~~liabilities, quoted prices in markets ~~that are not active;~~with insufficient volume or ~~other~~infrequent transactions (less active markets), or model-driven valuations in which all significant inputs ~~that~~ are observable or can be derived principally from, or corroborated bywith, observable market ~~data for substantially~~data.

	●	Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the ~~full term of the assets or liabilities.~~Company.

•	~~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.~~

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification of assets and liabilities within the three levels of the hierarchy outlined above.

Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The Company measures certain liabilities at fair value on a recurring basis such as our contingent consideration related to business combinations and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the three months ended March 31, 2014.

The Company has classified its contingent consideration related to the acquisitions as a Level 3 liability (see Note 5 – Business Combinations). Revenue and other assumptions used in the calculation require significant management judgment. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis. Based on that assessment, the Company recognized an adjustment of $0 to the actual calculation of the earn-out obligations during the three months ended March 31, 2014 and 2013.

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The Company has classified certain warrants related to the August 2013 issuance and sale of Common Stock in a private offering as a Level 3 Liability. Assumptions used in the calculation require significant judgment. The Company reassesses the fair value of the warrant liabilities on a quarterly basis. Based on that assessment, the Company recognized a $251,000 reduction to the fair value of the warrant liability during the three months ended March 31, 2014.

The following table ~~presents~~summarizes the ~~Company’s warrant liability~~financial liabilities measured at fair value on a recurring basis as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012, aggregated by the level in the fair-value hierarchy within which those measurements fall~~2013 (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

			Quoted prices in		Significant other		Significant other
			active markets		observable inputs		unobservable inputs
	Total		Level 1		Level 2		Level 3

Liabilities
Contingent consideration liability
recorded for business combinations	$	452	$	-	$	-	$	452

Fair value of warrants issued in connection
with share purchase agreement		552		-		-		552

Balance at March 31, 2014	$	1,004	$	-	$	-	$	1,004

			Quoted prices in		Significant other		Significant other
			active markets		observable inputs		unobservable inputs
	Total		Level 1		Level 2		Level 3

Liabilities
Contingent consideration liability
recorded for business combinations	$	468	$	-	$	-	$	468

Fair value of warrants issued in connection
with share purchase agreement		803		-		-		803

Balance at December 31, 2013	$	1,271	$	-	$	-	$	1,271

The following table ~~presents~~summarizes changes to the ~~activity for liabilities measured at estimated~~ fair value ~~using unobservable inputs (Level 3) from December 31, 2012 through September 30, 2013~~of the contingent consideration and derivative warrants, which are Level 3 liabilities (in thousands):

	Level 3
	Contingent			Derivative
	consideration			warrants

Balance at December 31, 2013	$	468		$	803
Adjustments to fair value of warrants (reflected in other income)		-			(251	)
Effect of currency translation		(16	)		-
Balance at March 31, 2014	$	452		$	552

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

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 reclassifications have been made to prior years to conform to current period financial statement presentation with no effect on our previously reported consolidated financial position, results of operations, or cash flows.

~~NOTE 3 – WARRANT LIABILITY~~

The ~~Company has determined that certain warrants the Company has issued contain provisions that protect the holders~~Company's non-financial assets and liabilities, such as goodwill, intangible assets, and other long lived assets resulting 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 provide for price protection in the event of a future issuance. ~~The Company recognized these Warrants as liabilities at their fair value and re-measures them at fair value on each reporting date. ASC 820~~ ~~Fair Value Measurement~~ ~~provides requirements for disclosure of liabilities that~~business combinations are measured at fair value ~~on a recurring basis in periods subsequent to~~using income and market comparable valuation methodologies at the ~~initial recognition (see Note 2).~~

date of acquisition and subsequently re-measured if there are indicators of impairment. There were no indicators of impairment identified during the three months ended March 31, 2014.

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NOTE 3 – 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 ~~Company uses Level 3 inputs~~weighted-average basic and diluted shares for ~~its valuation methodology for~~each of the ~~warrant derivative liabilities. The estimated fair values were determined using~~three months ended March 31, 2014 and 2013, exclude approximately 0.4 million and 0.6 million, respectively, of ESOP shares that have not been committed to be released.

For periods presented in which there is a ~~Monte Carlo option pricing model based on various assumptions. The Company’s derivative liabilities~~net loss, potentially dilutive securities are ~~adjusted~~excluded from the computation of fully diluted net loss per share as their effect is anti-dilutive. All potentially dilutive securities are anti-dilutive due to ~~reflect estimated fair value at each period end, with any decrease or increase~~the net loss incurred by the Company in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities. Various factors are considered in the pricing models the Company uses to value 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 dates, management assessed the probabilities of future financing assumptions in the Monte Carlo valuation models. Future changes in these factors will have a significant impact on the computed fair value of the warrant liability. As such, the Company expects future changes in the fair value of the warrants to continue to vary from quarter to quarter.periods presented.

~~The Company revalues the warrants as~~Potential dilutive securities consist 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 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
(in thousands):

	Three Months Ended March 31,
	2014		2013

Convertible preferred stock - Series A		270		270
Convertible preferred stock - Series B		131		131
Convertible preferred stock - Series D		9,918		7,042
Convertible preferred stock - Series E		8,180		-
Warrants to purchase common stock		3,555		981
Options to purchase common stock		592		544

Total potentially dilutive securities		22,646		8,968

NOTE 4 – ~~LOSS PER COMMON SHARE~~WARRANT LIABILITY

~~Basic loss per share is computed by dividing~~

The Company has determined that certain warrants the ~~loss available to common shareholders by~~Company has issued contain provisions that protect 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 eachholders from future issuances of the ~~nine~~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 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 that 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 provide for price protection in the event of a future issuance. The Company recognized these warrants as liabilities at their fair value and re-measures 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).

The Company uses Level 3 inputs for its valuation methodology for the warrant 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 adjusted 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 derivative liabilities. Various factors are considered in the pricing models the Company uses to value the warrants, including the Company’s current common stock price, the remaining life of the warrants, the volatility of the Company’s common stock price, and the risk-free interest rate. In addition, as of the valuation dates, management assessed the probabilities of future financing assumptions in the Monte Carlo valuation models. Future changes in these factors will have a significant impact on the computed fair value of the warrant liability. Accordingly, the Company expects future changes in the fair value of the warrants to continue to vary from quarter to quarter.

The Company revalues the warrants as of the end of each reporting period. The estimated fair value of the outstanding warrant liabilities was approximately $552,000 and $803,000, as of March 31, 2014 and December 31, 2013, respectively. The decrease in fair value of the warrant liabilities for the three months ended ~~September 30, 2013~~March 31, 2014 was $251,000 and ~~2012 exclude approximately 0.5 million of ESOP shares that have not been committed to be released.~~

~~For periods presented~~is included 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. All potentially dilutive securities are anti-dilutive due to the net loss incurred by the Companyother income in the ~~periods presented.~~Company’sconsolidated statement of operations.

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~~Potential dilutive securities consist~~The warrant liabilities were valued at the closing dates of ~~(in thousands):~~the Purchase Agreement (see Note 9 (c)) and the end of each reporting period using a Monte Carlo valuation model with the following assumptions:

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

	Placement Agent Warrants						Investor Warrants
Warrants	March 31, 2014			December 31, 2013			March 31, 2014			December 31, 2013

Closing price per share of common stock	$	0.41		$	0.53		$	0.41		$	0.53
Exercise price per share (range)		0.50			0.50			0.50			0.50
Expected volatility		122.3	%		123.5	%		119.8%-122.3	%		123.5	%
Risk-free interest rate		1.5	%		1.6	%		1.5	%		1.6	%
Dividend yield		-			-			-			-
Remaining expected term of underlying securities (years)		4.4			4.6			4.3			4.6

NOTE 5 – BUSINESS 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. 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 Company valued the shares issued in conjunction with the acquisition at $697,531.

Pursuant to the Asset Purchase Agreement, the Company ~~was~~could have been required to make an additional payment (“Earn-Out Payment”) to the seller of up to $500,000 of which 50% ~~will~~would be ~~paid~~payable in cash, and 50% ~~will~~would be paid in shares of the common stock of the Company. The value of the shares ~~will~~would 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, if any, would have been payable within 30 days of the one year anniversary of the Illume Closing Date, July 31, 2013. The fair value of the ~~Earn Out~~Earn-Out Payment was calculated to be approximately $107,000 at the Illume Closing Date. At September 30, 2013, the calculated ~~Earn Out~~Earn-Out Payment due under the Asset Purchase Agreement was determined to be zero. ~~Accordingly, there is $0 accrued for the Earn Out Payment included in accrued earn out consideration in the unaudited condensed consolidated financial 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, 2013. At March 31, 2014 there is $0 accrued for the Earn-Out Payment included in accrued earn out consideration in the unaudited condensed consolidated financial statements.

Apex

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~~. 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.The Company 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.

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 ~~was~~may be 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~~earn-out (“Apex Earn-Out Payment”) 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~~Apex 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 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. ~~The Company accounted for~~As of March 31, 2014, there is CDN$341,000 (US$308,000) recorded as potential additional purchase consideration in the ~~transaction using the purchase method of accounting and the operating results for Apex have been~~unaudited condensed 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.~~financial statements.

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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 ~~September 30, 2013~~March 31, 2014 there is CDN$160,000 (US$~~154,000)~~144,000) recorded in accrued earn out consideration in the Company’s unaudited condensed consolidated balance sheets.

~~Pro Forma Financial Information (unaudited):~~

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

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 and nine months ended September 30, 2012 of $0 and $572,000, respectively (ii) a net increase in interest expense for the three and nine months ended September 30, 2012 of $0 and $291,000, 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 and nine months ended September 30, 2012 of $18,000 and $125,000, 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 the period presented.

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’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 ~~transaction affecting~~transactions effecting goodwill through ~~September 30, 2013~~March 31, 2014 (in thousands):

Balance at December 31, 2012 $ 8,571

Effect of currency translation on Apex (86 )
Balance at September 30, 2013 $ 8,485

Balance at December 31, 2013	$	8,395

Effect of currency translation on Apex		(80	)
Balance at March 31, 2014	$	8,315

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As of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012,~~2013, the Company’s intangible assets and accumulated amortization consist of the following (in thousands):

	September 30, 2013							December 31, 2012							March 31, 2014							December 31, 2013
			Accumulated							Accumulated							Accumulated							Accumulated
	Gross		Amortization			Net		Gross		Amortization			Net		Gross		Amortization			Net		Gross		Amortization			Net

Customer relationships	$	3,319	$	(1,498	)	$	1,821	$	3,373	$	(966	)	$	2,407	$	3,214	$	(1,759	)	$	1,455	$	3,264	$	(1,654	)	$	1,610
Contractor and resume databases		675		(371	)		304		675		(270	)		405		675		(439	)		236		675		(405	)		270
Tradename		878		(324	)		554		893		(193	)		700		849		(410	)		439		862		(364	)		498
Internal use software		2,892		(1,137	)		1,755		2,978		(545	)		2,433		2,721		(1,474	)		1,247		2,802		(1,299	)		1,503
Covenant not to compete		105		(67	)		38		105		(27	)		78		104		(90	)		14		104		(78	)		26

	$	7,869	$	(3,397	)	$	4,472	$	8,024	$	(2,001	)	$	6,023	$	7,563	$	(4,172	)	$	3,391	$	7,707	$	(3,800	)	$	3,907

The effect of foreign currency translation on the goodwill and intangible assets for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 is approximately ($~~86,000)~~80,000) and ($~~120,000), respectively.~~

84,000).

NOTE 7 – LINES OF CREDIT

SVB Line 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~~loans as discussed at Note 8. The SVB Loan Agreement is secured by substantially all the assets of the Company and matures in February 2015. As of ~~September 30,~~March 31, 2014 and December 31, 2013, the outstanding balance on the line of credit iswass approximately ~~$4.1~~$3.7 and $3.9 million, respectively, and the interest rate was 7.0%. The line of credit is ~~7.0%.~~due February 2015. The line of credit has a certain financial covenant and other non-financial covenants. As of December 31, 2012, the Company was in compliance with all of its financial covenants with SVB. As of May 31, 2013 and June 30, 2013, the Company was not incompliance with the Tangible Net Worth covenant as defined in the amended SVB Loan Agreement. On August 16, 2013, the Company and SVB signed an agreement (“Forbearance Agreement”) where SVB agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and agreed to waive the existing covenant violations, subject to the Company’s completion of a capital raise. The ~~Company completed the capital raise and was able to achieve compliance with the forbearance agreement prior to August 28, 2013. Except for any capital raises through August 28, 2013, the~~ minimum Tangible Net Worth requirement of a ~~$(9.7)~~$8.7 million deficit ~~will~~is to 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,~~March 31, 2014 and December 31, 2013, the Company was in compliance with the ~~Tangible~~tangible Net Worth financial covenant and had available a ~~$0.3~~$0.5 million and $0.8 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, therequirement, respectively. 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.~~agreement. 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.

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Availability under the line of credit was approximately ~~$4.3~~$2.8 million as of ~~September 30, 2013 and $1.6 million as of October~~March 31, ~~2013.~~2014. 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, 2013~~March 31, 2014 or December 31, ~~2012.~~2013.

~~On February 27, 2013, the SVB Loan Agreement was amended to provide for 1) an extension~~RBC Line 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.

Credit - 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,~~March 31, 2014 and December 31, 2013, the outstanding balance on the line of credit was ~~$180,000~~$0 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 June 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 at December 31, 2012, March 31, 2013 and June 30, 2013. The covenants were reset by RBC on August 16, 2013. The Company ~~does~~was not ~~believe that it will be~~ in compliance with the reset covenants at March 31, 2014 and December 31, 2013. See further discussion regarding this condition at Note 8.

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For the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ the Company’s interest expense for the lines of credit, including amortization of deferred financing costs, was approximately ~~$262,000~~$97,000 and ~~$251,000,~~$73,000, respectively.

RBC and SVB are 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, 2013,~~March 31, 2014, consists of the following (in thousands):

Balance
December 31, 2012
Additions Payments Amortization of Note Discount
Effect of
Currency
Translation

Balance
September 30,
2013

RBC term loan $ 2,090 $ - $ (608 ) $ - $ (68 ) $ 1,414
Note discount (38 ) - 18 $ 1 (19 )
BDC term loan 1,705 - - - (56 ) 1,649
Note discount (31 ) - 5 1 (25 )
SVB term loan 1,000 - (750 ) - - 250
Note discount (4 ) - - 4 - -
SVB term loan-2 - 1,000 (194 ) - - 806
Note discount - (19 ) - 6 - (13 )

Total debt $ 4,722 $ 981 $ (1,552 ) $ 33 $ (122 ) 4,062

Less contractual current portion (1,377 )
Less RBC debt long term classified as current (586 )

Debt, net of current portion $ 2,099

	Balance December 31, 2013			Additions		Payments			Amortization of Note Discount		Effect of Currency Translation			Balance March 31, 2014
RBC term loan	$	1,169		$	-	$	(187	)	$	-	$	(40	)	$	942

BDC term loan		1,589			-		-			-		(52	)		1,537

SVB term loan-2		722			-		(83	)		-		-			639

Total note discounts		(45	)		-		-			8		-			(37	)

Total debt	$	3,435		$	-	$	(270	)	$	8	$	(92	)	$	3,081

less current portion															(1,064	)
less RBC debt long term classified as current															(188	)

Debt, net of current portion														$	1,829

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The Company’s debt is recorded at par value adjusted for any unamortized discounts. Discounts and costs directly related to the issuance of debt are capitalized and amortized over the life of the debt using the effective interest rate method and is recorded in interest expense in the accompanying unaudited condensed consolidated statements of operations. Unamortized deferred financing costs of approximately $40,000 and $48,000 are included in other assets in the accompanying unaudited consolidated balance sheets as of March 31, 2014 and December 31, 2013, respectively.

RBC Term Loan -- On June 4, 2012, Apex entered into the RBC Credit Agreement with RBC described in Note 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$2,401,000 at the Closing Date). The RBC Term Loan accrues interest at ~~Royal Bank Prime (“RBP”)~~RBP plus 4% (7% at ~~December~~March 31, ~~2012)~~2014). Principal and interest is payable over a three year period at a fixed principal amount of CDN $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,~~March 31, 2014 and December 31, 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 $0 at ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012.~~2013.

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 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 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, 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~~was not ~~believe that it will be~~ in compliance with the reset covenants at March 31, 2014 and December 31, 2013. Although the Company believes it is ~~improbable~~not likely that 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, the Company has classified the term debt obligation as current at ~~September 30,~~March 31, 2014 and December 31, 2013.

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BDC Term Loan -- On June 4, 2012, Apex also entered into ~~a loan agreement (the “BDC~~the BDC Loan ~~Agreement”) with BDC Capital, Inc. (“BDC”),~~Agreement as described in 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 $1,632,000 at the Closing Date). The BDC Term Loan ~~initially accrued~~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 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~~March 31, ~~2012 and at September 30, 2013,~~2014, the Company estimates that 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 $35,000 has been recorded as deferred financing costs and $35,000 recorded as a note discount in the accompanying ~~unaudited~~ consolidated balance sheet as of ~~September 30, 2013,~~March 31, 2014, and is being amortized to interest expense over the term of the loan. As of March 31, 2014, there was approximately $19,000 in unamortized deferred financing costs and $19,000 in unamortized note discount.

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 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.

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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~~The Company was in compliance with all of our BDC financial covenants as of ~~September 30,~~December 31, 2013. We expect to continue to meet the requirements of our BDC financial covenants over the short and long term.

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, as the Company 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. On 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~~was amortized to interest expense through December 2013, using the effective interest method.

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The Amended SVB Loan Agreement includes various customary covenants, limitations and events of default. Financial covenants, among others, include liquidity and fixed charge coverage ratios, minimum tangible net worth requirements and limitations on indebtedness. As of ~~December~~March 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 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, 2013,2014, the Company was in compliance with the ~~Tangible~~tangible Net Worth financial covenant and had available a ~~$0.3~~$0.5 million cushion over the requirement. ~~In November 2013, the~~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 Companycurrently 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~~term (unaudited). Should the Company iscontinue to incur losses in ~~currently discussions~~a manner consistent with ~~SVB regarding~~its recent historical financial performance, the ~~Tangible Net Worth~~Company will violate this covenant ~~and a reduction~~without additional net capital raises in amounts that are approximately twice the amount of the ~~50% of additional capital raised to 25% of capital raised in November 2013.~~ ~~See further discussion regarding this matter at Note 7.~~

~~On September 27, 2011, pursuant to a Limited Waiver and Amendment to Loan and Security Agreement, the Loan Agreement was amended.~~losses incurred.

On February 27, 2013, the Company ~~entered into an~~ amended the Loan and Security Agreement which provided an additional term loan (the “SVB Term Loan 2”) of $1,000,000. The new term loan is due in 36 monthly installments of principal plus accrued interest beginning on April 1, 2013. The additional term loan accrues interest at 7.5% per annum.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ the Company’s interest expense on the term debt, including amortization of deferred financing costs, was approximately ~~$439,000~~$109,000 and ~~$331,000,~~$153,000, 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, 2013,~~March 31, 2014, the Company is authorized to issue 110,000,000 total shares of stock. Of that amount, 100,000,000 shares are common stock, each having a par value of $0.001. The remaining 10,000,000 shares are preferred stock, each having a par value of $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, and 2,000,000 are designated as Series E Preferred Stock, of which 409,000 shares are issued and outstanding.

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(a) Cumulative Convertible Preferred Stock

A summary of preferred stock outstanding as of ~~September 30, 2013~~March 31, 2014 is as follows (in thousands, except share data):

Description

Series A Preferred, $0.001 par value per share, 500,000 shares designated,	Series A Preferred, $0.001 par value per share, 500,000 shares designated,
269,608 shares issued and outstanding, liquidation preference of $975	269,608 shares issued and outstanding, liquidation preference of $975
plus cumulative dividends of $344		$	1,319
plus cumulative dividends of $383				$	1,358
Series B Preferred, $0.001 par value per share, 500,000 shares designated,	Series B Preferred, $0.001 par value per share, 500,000 shares designated,
131,347 shares issued and outstanding, liquidation preference of $380	131,347 shares issued and outstanding, liquidation preference of $380
plus cumulative dividends of $85			465
plus cumulative dividends of $100					480
Series D Preferred, $0.001 par value per share, 4,000,000 shares designated,	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
704,200 shares issued and outstanding (net of $1,374 in issuance costs),
liquidation preference of $7,042 plus accrued PIK dividends of $213; cumulative
imputed dividends and beneficial conversion feature of $1,528					7,196
Series E Preferred, $0.001 par value per share, 2,000,000 shares designated,
409,000 shares issued and outstanding (net of $875 in issuance costs),
liquidation preference of $4,090 plus acrued PIK dividends of $76; cumulative
imputed dividends of $27					3,242

Total convertible preferred stock	Total convertible preferred stock	$	7,609	$	12,276

Series A Preferred Stock and Series B Preferred Stock

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 stock from the date of its issue.

The holders of the Series A and Series B Preferred Stock have no voting rights except on matters affecting their rights or preferences. Subject to the rights of the Series D 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.

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

Series C Preferred Stock

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

In connection with the sale of Series E Preferred Stock, on November 12, 2013, the Company filed a Certificate of Elimination of Series C Preferred Stock (the “Series C Certificate of Elimination”), pursuant to which, the 5,000,000 shares of the Company’s preferred stock that had been designated as Series C Preferred Stock were returned to the status of blank check preferred stock.

Series D Preferred Stock

On December 20, 2012, we filed a Certificate of Designation of Series D Preferred Shares (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 ~~subsequent sales of common stock~~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. As a result of the private placement closed on November 12, 2013 and November 22, 2013, the Conversion Price of the Series D Preferred Stock was reduced to $0.71. As a result of the reduction in conversion price, the Company recorded a contingent beneficial conversion feature of $1.3 million. 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~~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 as a dividend 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. On January 1, 2014, the Board of Directors declared a PIK dividend payable in the form of 26,157 shares of Series D Preferred Stock. The dividends were payable to holders of record as of December 31, 2013 for accrued dividends for the period of October ~~15,~~1, 2013 to December 31, 2013. As those shares were not issued until April 2014, they have not been included in the Series D Preferred Stock balance at March 31, 2014 and December 31, 2013. As such, the Company recorded a dividend payable in Current Liabilities in the in the Condensed Consolidated Balance Sheet at December 31, 2013 and March 31, 2014 at an estimated fair value of $213,000. Additionally, on December 31, 2013, cash dividends of $351 were accrued for fractional share dividends not paid-in-kind.On April 25, 2014, the Company paid a cash dividend of ~~$142,000~~$144,000 on the Series D ~~preferred~~Preferred Stock for the period from ~~July~~January 1, ~~2013~~2014 to ~~September 30, 2013.~~March 31, 2014.

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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.

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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)~~Act of 1933, as amended).

The Series D Preferred Stock ~~holders~~ also ~~were granted~~contains registration rights which ~~required~~compel the Company to file a registration statement with the SEC within 60 days of the final closing date (December 31, 2012), and ~~to have~~requires the registration statement ~~declared~~to become effective within 90 days thereafter. The initial registration statement was filed on February 12, 2013. ~~Failure of~~If the registration statement ~~to be~~is not 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~~shall be payable on each monthly anniversary until the registration statement ~~was declared~~becomes effective. In no event shall the partial liquidated damage exceed 0.6% of the purchase price paid by each investor. On July 30, 2013, the registration statement was declared effective by the ~~U.S. Securities and Exchange Commission.~~SEC. 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.

Series E Preferred Stock

In November 2013, the Company issued 409,000 shares of Series E Preferred for cash consideration totaling $4,090,000. In conjunction with the issuance, the Company incurred issuance costs totaling $875,000, consisting of placement fees of $327,000, legal and other expenses of $270,000, and issued 818,000 warrants to purchase shares of common stock with an exercise price of $0.55 per share to the placement agent with an estimated fair value of $278,000 determined using the Black Scholes option valuation pricing model. The fair value calculation was prepared using the following assumptions: Stock price: $0.47; expected term: 2.5 years; risk free rate of interest of 0.44%; volatility of 143%; and dividend yield of $0.

On November 12, 2013, the Company filed a Certificate of Designation of Series E Preferred Stock (the “Series E Certificate of Designation”) with the Secretary of State of Delaware. Pursuant to the Series E Certificate of Designation, we designated 2,000,000 shares of the Company’s preferred stock as Series E Preferred Stock. The Series E Preferred Stock has a Stated Value of $10.00 per share, does not have voting rights, and is convertible, at the option of the holder, into such number of shares of common stock equal to the number of shares of Series E 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 $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 Series E Preferred Stock entitles the holder to cumulative dividends (subject to the prior dividend rights of the Company’s Series D Preferred Stock), payable quarterly, at an annual rate of (i) 10% of the Stated Value during the three year period commencing on the date of issue, and (ii) 14% of the Stated Value commencing three years after the date of issue. We may, at our option (subject to certain conditions), pay dividends in PIK shares, in which event the applicable dividend rate will be 14% and the number of shares issuable as a dividend 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 our common stock for the five prior consecutive trading days. On January 1, 2014, the Board of Directors declared a PIK dividend payable in the form of 7,533 shares of Series E Preferred Stock. The dividends were payable to holders of record as of December 31, 2013 for accrued dividends for the period of October 1, 2013 to December 31, 2013. As those shares were not issued until April 2014, they have not been included in the Series E Preferred Stock balance at March 31, 2014 and December 31, 2013. As such, the Company recorded a dividend payable in Current Liabilities in the in the Condensed Consolidated Balance Sheet at December 31, 2013 and March 31, 2014 at an estimated fair value of $75,000. Additionally, on December 31, 2013, cash dividends of $561 were accrued for fractional share dividends not paid-in-kind. On April 25, 2014, the Company paid a cash dividend of $103,000 on the Series E Preferred Stock for the period from January 1, 2014 to March 31, 2014.

Upon any liquidation, dissolution or winding-up of our Company, holders of Series E Preferred Stock will be entitled to receive (following payment in full of amounts owed to in respect of the Company’s Series D Preferred Stock), for each share of Series E 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.

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In addition, commencing on the trading day on which the closing price of the common stock is greater than $1.35 for thirty consecutive trading days with a minimum average daily trading volume of at least 10,000 shares for such period, and at any time thereafter, the Company may, in our sole discretion, effect the conversion of all of the outstanding shares of Series E 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 of 1933, as amended).

The Series E Preferred Stock also contains registration rights which compel the Company to file a registration statement with the SEC within 60 days of the final closing date (November 22, 2013), and requires the registration statement to become effective within 90 days thereafter. The initial registration statement was filed on January 10, 2014. If the registration statement is not declared effective by January 21, 2014, a partial liquidated damage equal to 0.1% of the purchase price paid by each investor shall be payable on each monthly anniversary until the registration statement becomes effective. In no event shall the partial liquidated damage exceed 0.6% of the purchase price paid by each investor. On January 22, 2014, the registration statement was declared effective by the SEC.

On November 12, 2013, we filed Amendment No. 2 to our Certificate of Designation of Series A Preferred Stock (the “Series A Amendment”), and Amendment No. 2 to our Certificate of Designation of Series B Preferred Stock (the “Series B Amendment”). Pursuant to the Series A Amendment and the Series B Amendment, the Series A Preferred Stock and the Series B Preferred Stock will be subordinate to the Series E Preferred Stock with respect to any distributions upon any liquidation, dissolution or winding-up of our Company, respectively.

(b) Common Stock

For the ~~nine~~three months ended ~~September 30,~~March 31, 2014

There were no common stock issuances for the three months ended March 31, 2014.

For the year ended December 31, 2013

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. The shares were valued at $83,000 and were recorded as part of selling, general and administrative expenses in the consolidated statement of operations and comprehensive loss as of December 31, 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.

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On December 10, 2013, the Company issued 585,467 shares of its common stock as a result of the anti-dilution adjustment triggered by the sale of Series E Preferred Shares. The closings on August 15, 2013 and August 21, 2013, common stock issued to investors contained certain price protection provisions. These price protections are considered embedded options to contingently acquire common stock that are clearly and closely related to the host common stock and are therefore not bifurcated. The shares issued were valued at $263,000 and were recorded as deemed dividend as of December 31, 2013.

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.

Pursuant to the ~~terms in the~~ Purchase Agreement, ~~on September 23,~~we agreed to, within 30 days of August 21, 2013, file a registration statement (the “Common Stock Registration Statement”) with the ~~Company filed a~~SEC covering the re-sale of the Common Shares and the shares of common stock underlying the Investor Warrants. We also agreed to use its best efforts to have the Common Stock Registration Statement ~~on Form S-1 (the “Form S-1”) for the registration~~become effective as soon as possible after filing (and in any event within 120 days of the ~~2,927,333 shares~~filing of such Common Stock ~~and~~Registration Statement). If the ~~1,463,667 shares issuable upon exercise~~Common Stock Registration Statement is not declared effective within the requisite period of time, a partial liquidated damage equal to 0.2% of the ~~Investor Warrants sold under~~purchase price paid by each investor shall be payable on each monthly anniversary until it becomes effective. In no event shall the ~~Purchase Agreement.~~partial liquidated damage exceed 10% of the purchase price paid by each investor. On October 4, 2013, the ~~Form S-1~~Common Stock Registration Statement 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. 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.

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The Company recorded the Investor Warrants and Placement Agent Warrants as a liability (see further disclosure at Note 3)4). 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 $698,000 and were recorded as part of the purchase price. (Note 5)

On November 15, 2012, the Company entered into an agreement (the “Sigma Agreement”) with Sigma Opportunity Fund II, LLC (“Sigma Opportunity Fund”) and Sigma Capital Advisors, LLC (“Sigma Advisors”). Pursuant to the Sigma Agreement, the Company issued to the holders of the Series C Preferred Stock an aggregate of 175,364 shares of common stock as an anti-dilution adjustment.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2014

There were no warrant issuances for the three months ended March 31, 2014.

For the year ended December 31, 2013

~~During the nine months ended September 30,~~On August 15, 2013 and August 21, 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.

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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,~~December 31, 2013, the warrants were re-valued with a fair value of ~~$933,000~~$803,000. At March 31, 2014, the warrants were revalued with a fair value of $552,000 with the difference of ~~$166,000~~$251,000 recorded ~~to other income~~ in the ~~unaudited condensed consolidated statement~~Company’s Unaudited Condensed Consolidated Statement of ~~operations~~Operations and ~~comprehensive loss.~~Comprehensive Loss.

On November 12, 2013 and November 22, 2013 in connection with the sale of Series E Preferred Stock, the Company issued 818,000 warrants to purchase shares of common stock with an exercise price of $0.55 per share provided to the placement agent with an estimated fair value of $278,000 determined using the Black Scholes option valuation pricing model. The fair value calculation was prepared using the following assumptions: stock price: $0.47; expected term: 2.5 years; risk free rate of interest of 0.44%; volatility of 143%; and dividend yield of $0.

The following table summarizes information about the Company’s outstanding common stock warrants as of ~~September 30, 2013:~~March 31, 2014:

Total Weighted
Warrants Total Average
Date Strike Outstanding Exercise Exercise
Issued Expiration Price and Exercisable Price Price

Senior Subordinated Notes Dec-09 Dec-14 $ 3.62 138,260 $ 500,000
Senior Subordinated Notes Dec-09 Dec-14 4.34 138,260 600,000
Placement Agent Preferred Stock - Class D Dec-12 Dec-17 1.10 704,200 774,620
Common Stock Investor Warrants Aug-13 Aug-18 1.00 1,297,000 1,297,000
Common Stock Investor Warrants Aug-13 Aug-18 1.00 166,667 166,667
Placement Agent Warrants - Common Stock Aug-13 Aug-18 0.60 292,733 175,640
2,737,120 $ 3,513,927 $ 1.28

					Total				Weighted
					Warrants		Total		Average
	Date		Strike		Outstanding		Exercise		Exercise
	Issued	Expiration	Price		and Exercisable		Price		Price

Senior Subordinated Notes	Dec-09	Dec-14	$	3.62		138,260	$	500,000
Senior Subordinated Notes	Dec-09	Dec-14		4.34		138,260		600,000
Placement Agent Preferred Stock - Class D	Dec-12	Dec-17		1.10		704,200		774,620
Common Stock Investor Warrants *	Aug-13	Aug-18		0.50		1,463,667		731,834
Placement Agent Warrants - Common Stock *	Aug-13	Aug-18		0.50		292,733		146,367
Placement Agent Preferred Stock - Class E	Nov-13	Nov-18		0.55		818,000		449,900

						3,555,120	$	3,202,720	$ 0.90
* warrants classified as liabilities

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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~~three months ended ~~September 30, 2013,~~March 31, 2014, was ~~$134,000~~$45,000 representing approximately ~~$104,000~~$36,000 for the ESOP principal payment and ~~$30,000~~$9,000 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~~three months ended ~~September 30, 2013~~March 31, 2014 was approximately ~~$78,000.~~$14,000. The fair value of the shares was ~~$0.94~~$0.50 per share, based on the average of the daily market closing share price.

NOTE 11 - 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.

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.

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A summary of the status of the Plans as of ~~September 30, 2013,~~March 31, 2014, and information with respect to the changes in options outstanding is as follows:

					Weighted -									Weighted -
	Options				Average		Aggregate		Options					Average		Aggregate
	Available		Options		Exercise		Intrinsic		Available		Options			Exercise		Intrinsic
	for Grant		Outstanding		Price		Value		for Grant		Outstanding			Price		Value

December 31, 2012		455,495		544,505	$	1.82	$	-
December 31, 2013										195,495		804,505		$	1.39	$	-
Granted		-		-		-		-		-		-			-		-
Exercised		-		-		-		-		-		-			-		-
Forfeited		-		-		-		-		212,420		(212,420	)		1.46		-
September 30, 2013		455,495		544,505	$	1.82	$	-
March 31, 2014										407,915		592,085		$	1.37	$	-

Exercisable options at September 30, 2013				446,374	$	1.75	$	-

Exercisable options at March 31, 2014												499,710		$	1.22	$	-

The following table summarizes information about stock options outstanding as of ~~September 30, 2013:~~March 31, 2014:

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

		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

$	0.50		260,000		2.65	$	0.50		260,000		2.65	$	0.50
$	1.33 - 2.03		153,200		2.76		1.90		147,104		2.76	$	1.90
$	2.06 - 4.34		178,885		7.10		2.16		92,606		7.00		2.16

Total			592,085		4.02	$	1.37		499,710		3.49	$	1.22

No awards were exercised during the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013, ~~and 2012,~~ respectively. The total fair value of awards vested for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~ was ~~$40,000 and $73,000, respectively.~~

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$1,261.

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. ~~There were no stock option 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.

Employee stock-based compensation costs for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012,~~ was ~~$31,000 and $50,000, respectively, and~~$10,000, which is included in selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations. As of ~~September 30, 2013,~~March 31, 2014, total unrecognized estimated employee compensation cost related to stock options granted prior to that date was ~~$109,000~~$88,000 which is expected to be recognized over a weighted-average vesting period of ~~2.69~~2.21 years.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Leases - The Company leases its facilities and certain equipment under various operating leases which expire at various dates through fiscal ~~2018~~2020 and require us to pay a portion of the related operating expenses such as maintenance, property taxes, and insurance. There have been no material changes to our lease arrangements during the ~~nine~~three months ended ~~September 30, 2013.~~March 31, 2014. Please refer to Note 1415 to the audited consolidated financial statements for the year ended December 31, ~~2012,~~2013, included in the Company’s Annual Report on Form 10-K filed with the ~~Securities and Exchange Commission~~SEC on March ~~28, 2013.~~31, 2014.

Rent expense for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013, was $132,000 and ~~2012, was $511,000 and $353,000,~~$185,000, respectively.

Apex Earn Out Obligations - If EBITDA (as uniquely defined in the ~~agreement)~~Purchase 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)~~.

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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 note terms assumes the 2013 Basic EBITDA Earn-Out Amount would be finalized by October 31, 2013. As of April 30, 2014, the 2013 EBITA Basic Earn-Out Amount has not been finalized. 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.

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The fair value of the ~~earn out~~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~~earn-out payment due under the Purchase Agreement was reduced to 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~~Company’s Consolidated Statement of ~~operations~~Operations and ~~comprehensive loss as of September 30,~~Comprehensive Loss for the year ended December 31, 2013. On October 31, 2013 the Sellers disputed the Company’s calculation of the ~~Earn Out~~Earn-Out Payment due and has stated the payment should be $1.6 million. Per the terms of the ~~Purchase Agreement,~~agreement, both parties have agreed on an accounting expert to issue a report on the ~~seller and~~earn-out calculation. The accounting expert has not completed their analysis as of the ~~Company have ten business days to reconcile any differences~~date of this filing. The current balance is reported at its estimated fair value. As of March 31, 2014, there is CDN$341,000 (US$308,000) recorded as potential additional purchase consideration 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.unaudited condensed consolidated financial statements.

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 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 calculated to be approximately CDN$160,000 (US$153,000 at the Closing Date). At ~~September 30, 2013~~March 31, 2014, there is CDN$160,000 (US$~~154,000)~~144,000) recorded in accrued earn out consideration in the ~~Company’s~~ unaudited condensed consolidated ~~balance sheets.~~financial statements.

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 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. In August 2013, the Company raised $1,756,000 as part of the Common Stock Purchase Agreement. In November 2013, the Company raised $4,090,000 as part of the Series E 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.

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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, 2013.~~March 31, 2014.

The Company ~~is party to~~has an employment ~~agreements~~agreement with ~~certain~~one of ~~its key~~our executive officers as of ~~September 30, 2013.~~March 31, 2014. The ~~agreements do~~agreement does not provide for any material, out of ordinary course of business provisions or benefits.

~~Included in the key executive officer agreements is~~The Company had an employment agreement with ~~its~~Donald Dalicandro, the former Chief Operating Officer. Pursuant to the agreement, the officer is entitled to an annual bonus calculated pursuant to terms set forth in the agreement. The agreement also contains a severance provision providing up to twelve monthsExecutive Officer of ~~salary in certain situations.~~

~~NOTE 13 – SUBSEQUENT EVENT~~

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.~~

The Series D Preferred Stock’s initial Conversion Price was $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. AsApex, as a result of the ~~issuance~~Apex acquisition. As of Common Stock in connection with the 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,~~July 31, 2013, the Company ~~entered into a Purchase Agreement with multiple accredited investors relating~~and Mr. Dalicandro agreed to separation terms. Per the ~~issuance~~separation agreement, it would provide for normal pro-rata salary payments twice monthly, including receiving various employee benefits, to cover the transition period August 1, 2013 through October 31, 2013 and ~~sale of Common Stock in a private offering (see Note 9(b)).~~ ~~For a~~the severance 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,~~November 1, 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.~~through April 30, 2014.

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~~ITEM 2.~~

~~MANAGEMENT~~ITEM 2’S.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of the business of DecisionPoint Systems, Inc. (“DecisionPoint”, the “Company”, “we” or “us”). Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q.

Forward Looking Statements

Some of the statements contained in this Quarterly Report on 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 of such terms, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of ~~the~~ forward-looking statements. Such 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 otherwise, and actual events may differ from the assumptions underlying the statements that have been made ~~regarding anticipated events.~~as a result of the risks we face and otherwise. 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:~~limitation, the risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on March 31, 2014 and the following:

●	●	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 Quarterly Report on Form 10-Q ~~are~~and 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.

Non-GAAP Financial Measures

In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under SEC rules. These rules require supplemental explanation and reconciliation, which is provided in this Quarterly Report on Form 10-Q as applicable.

DecisionPoint’s management uses the non-GAAP financial measure, “Adjusted Working Capital”; in their evaluation of business cash flow and financial condition. We consider this measure to reflect our ‘cash’ working capital position. It is the equivalent of our U.S. GAAP working capital position, after removing the accrual effect of current deferred assets and liabilities. We believe this non-GAAP financial measure provides us, and investors with a better understanding of the operating results and financial condition of our company.

Non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for measures of cash flow, operating earnings or financial condition determined in accordance with U.S. GAAP, and should not be considered in isolation from or as a substitute for analysis of our results as reported under U.S. GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Our supplemental presentation of Non-GAAP financial measures should not be construed as an inference that our future operating results or financial condition will be unaffected by any adjustments necessary to reconcile our Non-GAAP financial measures to measures determined in accordance with U.S. GAAP.

Overview

Business Overview

DecisionPoint enables ~~our~~its clients to “move decisions closer to the customer” by “empowering the mobile worker”. We define ~~the~~ mobile ~~worker~~workers as those individuals ~~that~~who 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 information and report ~~information~~it back to the organization.

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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.

At 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 mobile workers, inside and outside of the traditional workplace. It is these systems that provide the information necessary for businesses to improve hundreds of the individual decisions made each day. Historically, critical information has remained locked away in the organization’s enterprise computing systems, accessible only when employees are at their desks. Our solutions are designed to unlock this 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 customers which we believe in turn improves customer service levels, reduces cost and accelerates business growth.

Mobile computing capabilities and usage continue to grow. With choice comes complexity so helping our customers navigate the myriad of options is what we aim to 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 help our customers make the right choices, and then to deliver to those customers the hardware, software, connectivity and follow-up maintenance and other services that they need. We address the mobile application needs of ~~mobile applications~~customers in the retail, manufacturing, transportation, ~~field workforce sales/service~~warehousing, distribution, logistics and ~~the warehousing~~other 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~~substantially increased our software products expertise with the acquisition in June 2012 of ~~APEX~~Apex in Canada. The APEXWare™ software suite significantly expanded our field sales/service software offerings. APEXWare™ is a purpose-built mobile application suite ~~ideally~~well 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. In 2013 we consolidated out East Coast depot facility into our larger facility in Irvine, CA in order to provide our East Coast customers with later service hours and to gain some economies of scale. We also continue to invest in our “MobileCare EMM” enterprise mobility management offering. ~~In 2008, we recognized the need for customers~~We are continuing to ~~outsource their~~extend our 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~~growing use of consumer devices ~~in the enterprise~~by clients and others and to support the Bring Your Own Device ~~(BYOD)~~(“BYOD”) and Bring Your Own Application ~~(BYOA) movement.~~

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(“BYOA”) movements affecting commerce and our industry in general.

Recognizing that we cannot build every business application, we have developed an ‘ecosystem’ of partners ~~which~~to support the assembly and manufacturing provisions of our custom and off-the-shelf solutions. These partners include suppliers of mobile devices (Apple, Intermec and Motorola among others), wireless carriers (AT&T, Sprint, T-Mobile, Verizon), mobile peripheral manufactures (Zebra Technologies Corporation, Datamax - O’Neil)~~, in addition to~~ and a ~~host~~large number of specialized independent software vendors such as AirWatch, VeriFone GlobalBay, XRS and Wavelink.

We are focused on several commercial enterprise markets. These include retail, field sales/service, warehousing and distribution and 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 expect our customers to continue 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 our customers’ operations and business operations in general, coupled with our expertise and understanding of mobile technology equipment and software offerings enables us to identify new trends and opportunities and provide these new solutions to our existing and potential customers.

At 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 mobile workers, inside and outside of the traditional workplace. It is these systems that provide the information to improve the hundreds of individual business decisions made each day. Historically, critical information has remained locked away in the organization’s enterprise computing systems, accessible only when employees were at their desks. Our solutions unlock this 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 customers which we believe in turn improves customer service levels, reduces cost and accelerates business growth.

We have several offices throughout North America ~~which allows~~allowing us to serve ~~our~~ multi-location clients and their mobile workforces. ~~We provide depot services through our West and East coast facilities.~~ Additionally, we ~~are always keenly~~keep aware of potential acquisition candidates that ~~can~~could provide us with complementary products and service offerings, ~~to our customer base.~~and make acquisitions when we identify sufficiently valuable opportunities.

~~Business Combinations~~

~~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, we 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.

~~Apex Systems Integrators 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 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.

The operating results of Illume Mobile have been included in our results of operations beginning August 1, 2012 and operating results of Apex have been included in our results of operations beginning June 5, 2012.

~~Pro Forma Disclosure of Financial Information (unaudited)~~

The following table summarizes our unaudited consolidated results of operations for the nine months ended September 30, 2012 as if the Apex and Illume acquisitions had occurred on January 1, 2012 (in thousands except per share data):

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The unaudited pro forma financial information is not intended to represent or be indicative of our 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~~

During the third quarter of 2013, we focused on improving customer service levels and increasing our ability to leverage 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 paperwork and time associated with generating repetitive purchase orders. We also consolidated our east and west coast depot facilities into a single facility in our Irvine, CA location. This consolidation enables us to gain the economies of scale created by a single location while also allowing us to extend the service hours of our east coast customers. Lastly, we relocated our Oklahoma, software development center to a historic building that is located in the heart of downtown Tulsa. The space was designed by DecisionPoint to meet the needs of our customers and employees.

With the continued expansion of consumer class tablet computers and smart phones into the enterprise, 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 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 applications on AWS. Consulting Partners are given access to a range of resources and 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.

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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.

Results of Operations

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

	Three Months Ended March 31,
	2014			2013			Increase/(Decrease)

Net sales	$	16.7		$	13.8		$	2.9		21.3	%
Gross profit		3.6			2.8			0.7		26.6	%
Total operating expenses		3.7			5.0			(1.3	)	(26.0	%)
Operating loss		(0.1	)		(2.2	)		(2.1	)	(93.5	%)
Net loss before income taxes		(0.1	)		(2.4	)		(2.3	)	(96.3	%)

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 %

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~~Revenues~~Net sales for the three month periods ended March 31, 2014 and ~~nine months ended September 30,~~ 2013 ~~and 2012 is~~are summarized below:

~~Revenues~~Net sales were ~~$17.6~~$16.7 million for the three months ended ~~September 30, 2013,~~March 31, 2014, compared to $18.6 million for the same period ended September 30, 2012, a decrease of $1.0 million or 5.3%. The decrease in revenue was partially offset due to the inclusion of the operating results of our Apex and Illume Mobile acquisitions in mid-2012. Revenues for Apex were $0.5$13.8 million for the three months ended ~~September 30,~~March 31, 2013, compared to $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 impactan increase of ~~Apex and Illume Mobile acquisitions in mid-2012, revenues decreased by $1.2~~$2.9 million or ~~6.6%~~21.3%. The increase was driven principally by our hardware category, which grew by $3.2 million, or 38.1% over the ~~same quarter~~comparable period. The increase in ~~the 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 decrease inhardware revenue was partially ~~offset~~ due to significant orders by several large retail customers in the ~~inclusion~~first quarter of 2014. We also recognized higher revenues through the ~~operating results~~expansion of our ~~Apex~~customer base and ~~Illume Mobile acquisitions in mid-2012. Revenues for Apex were $1.9 million for~~continued ordering from customers acquired after the nine months ended September 30, 2013, compared to $0.5 million for the same period ended September 30, 2012. Revenues for Illume Mobile were $0.7 million in the nine months ended September 30, 2013, compared to $0.2 million for the same period ended September 30, 2012. Excluding the impactfirst quarter 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%.2013.

The improved economic conditions in the U.S. which had begun in the first half of 2010, and continued improvement throughout 2011 and 2012 had a positive effect on our sales in those years. Prior to 2010, major retail chains had deferred new technology implementation and delayed systems’ refresh. Conversely, the economic environment in 2012 stabilized whereupon we benefitted from renewed interest and more importantly, fundamental need to implement new cost saving technology. ~~In the first nine months of~~During 2013, we experienced decreases in hardware sales revenue as we did not ~~have~~experience the same level of ~~customers~~customer with new technology ~~implementation~~ and ~~systems’~~system’ refresh. As a result, the hardware revenues for the three and nine months ended September 30, 2013 declined by 2.3% and 21.9%, respectively, which was due to the decrease in system upgrades of mobile computing at the retail 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 for the three months periods ended March 31, 2014 and ~~nine months ended September 30,~~ 2013 ~~and 2012~~ is summarized below:

The ~~types of expenses included in the~~ cost of sales line ~~are~~includes hardware costs, third party licenses, costs associated with third party professional services, salaries and benefits for project managers and software engineers, freight, consumables and accessories.

Cost of sales were ~~$36.2~~$13.1 million for the ~~nine~~three months ended ~~September 30, 2013,~~March 31, 2014, compared to ~~$42.6~~$11 million for the ~~same period~~three months ended ~~September 30, 2012, a decrease~~March 31, 2013, an increase of ~~$6.4~~$2.2 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%19.7%. The increase in cost of sales for ~~software~~hardware of ~~27.0%~~38.1% for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 compared to the ~~same~~similar period in ~~2012~~2013 was ~~slightly higher~~consistent with the hardware revenue increase. The decrease in cost of sales for professional services was 7.7%, much steeper than the revenue decline for professional services of 2.8% which was due to reductions in professional service personnel that we achieved as a component of our operational improvement efforts. The decrease in cost of sales for software of 13.4% for the ~~impact~~three months ended March 31, 2014 compared to the similar period in 2013 was also steeper than the revenue decline for software of ~~software intangible asset amortization.~~8.5% and also related to professional service personnel reductions. 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, 2013, compared to $11.6 million for the same period ended September 30, 2012, a decrease of $1.7 million or 15.0%. Our gross margin percentage was 21.4% for the nine months ended September 30, 2013, compared to 21.4% 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, 2013, our gross margin was comparable with the same period ended September 30, 2012. We have continued implementation of increased cost control for the products and services which we resell, and our professional service 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 realized higher margins on those services. Additionally, 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 prior year. This represents a decrease of $0.2 million, or 5.4%. The decrease was primarily due to reduced legal and other professional fees.

Selling, general and administrative expenses were $14.0 million for the nine months ended September 30, 2013, compared to $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.negligible.

~~The adjustment recorded for the earn-out obligations were $0.8 million~~

Gross profit for the three month periods ended March 31, 2014 and ~~nine months ended September 30, 2013. The adjustment for Apex was $0.7 million and $0.1 million for Illume Mobile.~~2013 is summarized below:

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, 2013 due to amortization of intangible assets as a result of the Apex and Illume acquisitions in 2012.

~~Interest Expense~~

~~Interest expense, which is related to our line of credit, subordinated debt,~~Our gross profit was ~~$0.2~~$3.6 million for the three months ended ~~September 30, 2013,~~March 31, 2014, compared to ~~$0.3~~$2.8 million for the ~~same~~similar period ended March 31, 2013, an increase of $0.8 million or 26.6%. Our gross margin percent increased by 90 basis points to 21.4% in the first quarter of 2014, from 20.5% in the comparable period of 2013. The increase in gross profit percentage was due to the continued implementation of cost controls for the products and services that we resell. In particular, we realized higher margins on our professional services and software offerings, which were positively affected by cost reductions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses was $3.7 million for the three months ended March 31, 2014, compared to $5.0 million for the similar period in the prior year. This represents a decrease of $1.3 million, or 26.0%. The decrease was due to significant efforts to streamline our business model. These efforts included, consolidation of our East Coast depot facility in to our larger California facility, reduction of outsourced consulting expertise where unnecessary and the replacement of certain service providers with lower cost providers. We have also consolidated administrative personnel and reduced staffing levels by 29% from April 2013 through February 2014, constituting annual savings of $3 million. These activities have reduced the expense structure of our business significantly. We are focused on continuing to improve processes and reduce costs.

We account for a portion of our depreciation and amortization expense as cost of sales, and the remainder as selling, general and administrative expense. Depreciation and amortization for the three-month periods ended March 31, 2014 and 2013 is summarized below:

	2014			2013			Increase/(Decrease)
Depreciation and amortization
In cost of sales	$	0.2		$	0.2		$	0.0		4.9	%
In selling, general and administrative expense		0.3			0.3			(0.0	)	(9.3	%)
Total deprectiation and amortization	$	0.5		$	0.5		$	(0.0	)	(3.3	%)
As a percentage of sales		2.8	%		3.5	%				(0.7	%)

The reduction in depreciation and amortization accounted for as selling, general and administrative expense was principally as a result of a decrease in the amortization of intangible assets.

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Interest expense, which ~~is related to~~arises from our ~~line~~outstanding balances under our lines of credit and from our outstanding subordinated debt, was ~~$0.7 million~~$207,000 for the ~~nine~~three months ended ~~September 30, 2013,~~March 31, 2014, compared to ~~$0.7 million~~$226,000 for the ~~same~~similar period in the prior year.

The ~~$0.1 million~~$19,000 decrease in interest expense ~~for the three months ended September 30, 2013 compared to the same period~~reflected a decrease in ~~the prior year was the result of decreased~~our average outstanding general debt obligations offset by an amendment to BDC Loan Agreement on April 29, 2013 to accrue interest at the rate of 12.5% per annum and the amendment to the Loan and Security Agreement with SVB entered in to on February 27, 2013 which provided an additional term loan of $1 million at a rate of 7.5%. Due to these additional borrowings, interest expense was slightly less during the three months ended ~~September 30, 2013.~~March 31, 2014 compared to the similar period in the prior year.

Liquidity and Capital Resources

Going Concern Matters

Our consolidated financial statements were prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our history of losses, working capital deficit, capital deficit, minimal liquidity and other factors raises substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must do some or all of the following: establish profitable operations through increased sales, successfully implement cost cutting measures, avoid further unforeseen expenses, potentially raise additional equity or debt capital, and successfully refinance our current debt obligations when they come due in February of 2015. There can be no assurance that we will be able achieve sustainable profitable operations or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us.

If we continue to incur operating losses and 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 our operations, 2) our inability to fully implement our current business plan and 3) continued defaults under our 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 can be no assurances that we will be able to successfully improve our liquidity position. Our consolidated financial statements do not do not reflect any adjustments that might be required resulting from the adverse outcome relating to this uncertainty.

Cash and ~~Cash Flow~~Capital Resources

Although we have historically experienced losses, a material part of those losses ~~were~~have been from non-cash ~~transactions (refer to the accompanying unaudited Condensed Consolidated Statements of Cash Flows.)~~transactions. In connection with these losses, we have accumulated substantial net operating loss carry-forwards to ~~off-set~~set off against future taxable income. In order to maintain normal operations for the foreseeable future, generate taxable income and make use of our net operating loss carry-forwards, we must continue to have access to our ~~line~~lines of credit, become profitable ~~and/or~~and access additional equity or debt capital. There can be no assurance that we will become profitable or that we can continue to raise the additional funds required to continue our normal operations. ~~The accompanying 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 general economic conditions continue to improve.

In the quarter ended ~~September 30, 2013,~~March 31, 2014, we experienced ~~a decrease~~an increase in ~~revenue~~net sales of ~~$1.0~~$2.9 million, or 21.3% compared to the quarter ended ~~September 30, 2012,~~March 31, 2013, and a ~~$2.9~~$2.1 million, or 14.2% increase in revenue compared to the previous sequential quarter ended ~~June 30,~~December 31, 2013. ~~In the nine months ended September 30, 2013,~~ Nevertheless, 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 $3.4 million for the three and nine month periods ended September 30, 2013, which were far in excess of the internal forecast maintained by the management team. In addition, we havehad a substantial working capital deficit totaling ~~$(11.5)~~$9.8 million at ~~September 30, 2013.~~March 31, 2014. Although a portion of this deficit is associated with deferred costs and unearned revenues and with term debt that has been classified current due to expected future covenant violations (see Note 8, – “Term ~~Debt”~~ inDebt of 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~~our receivables and other assets that are expected to be satisfied in cash. AsIn addition, as a ~~result, the~~consequence of our recent historical results of operations, availability under our credit line has contracted ~~significantly~~ and our overall liquidity has become ~~significantly~~ constrained.

To address ~~this,~~liquidity constraints, we have reduced non-essential expenses. Such expense reductions include, but are not limited to, the consolidation of information technology environments, the consolidation of our East Coast depot facility in to our larger California facility, the reduction of outsourced consulting expertise where unnecessary and the replacement of certain service providers with lower cost providers. We have also consolidated administrative personnel and reduced staffing levels by 29% from April 2013 through February 2014, constituting annual savings of approximately $3 million. These activities have reduced the expense structure of our business significantly. We are focused on continuing to improve processes and reduce costs. We have no plans to seek additional capital through ~~sales~~the sale of our ~~securities. There~~securities unless deemed necessary. Should additional financing be needed, there is no assurance ~~additional funding~~that such amounts 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~~interests of our existing ~~shareholders may~~common stockholders will 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~~Table 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).~~Contents

During 2012, 2013 and ~~2013,~~the first quarter of 2014, all principal and interest 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.

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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~~because we ~~are financed by a line~~have availability under our lines 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 SVB line of credit to fund our normal working capital needs. Our line of credit has a borrowing capacity of up to $10 million and is due February 2015. As of ~~September 30,~~March 31, 2014 and December 31, 2013, the outstanding balance on our SVB line of credit was approximately ~~$4.1~~$3.7 and $3.9 million, respectively, and the interest rate iswas 7.0%. As of ~~September 30, 2013,~~March 31, 2014, there was ~~$4.3~~$2.8 million available under the SVB line of credit. ~~As of October 31, 2013, the outstanding balance under the~~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 experiencedhas 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~~

~~Silicon 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.

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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 Worthcertain 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, theother non-financial covenants. The minimum Tangible Net Worth requirement of ~~a $(9.7)~~$8.7 million deficit ~~will~~is to 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,~~March 31, 2014 and December 31, 2013, ~~we were~~the Company was in compliance with the ~~Tangible~~tangible Net Worth financial covenant and had available a ~~$0.3~~$0.5 million and $0.8 million cushion over the ~~requirement. In November 2013, the~~requirement, respectively. 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 believebelieves 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~~agreement. Should 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, wethe Company 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.

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.

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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~~has $0.9 million 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~~term debt 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”~~(the “RBC Term Loan”), ~~pursuant to which RBC made available certain credit facilities~~$1.5 million of term debt with the BDC (the “BDC Term Loan”) and $0.6 million of term debt with SVB (the “SVB Term Loan”). For more information regarding these Term Loans, please see our Annual Report on Form 10-K filed with the SEC on March, 31, 2014. All three Term Loans have financial covenants. The Company was in compliance with the ~~aggregate amount~~covenants 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~~these 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,~~Loans except for 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.

~~Table of Contents~~

~~The RBC Term Loan has certain financial covenants and other non-financial covenants. As of June 30, 2013 and December 31, 2012, Apex~~which it 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~~the Company believes it is ~~improbable~~not likely that 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~~the Company has classified the term debt obligation as current at ~~September 30,~~March 31, 2014 and December 31, 2013.

~~On June 4, 2012,~~As part of the Apex ~~also entered into~~Purchase Agreement, from the ~~BDC Loan Agreement with BDC~~Closing Date up until the expiry of the bonus period, under that agreement we are obligated to escrow 25% of any Equity Capital ~~Inc. (“BDC”), a wholly-owned subsidiary~~raised in excess of ~~Business Development Bank of Canada, pursuant to which BDC made available to Apex a term credit facility (“BDC Credit Facility”)~~$500,000. The funds in the ~~aggregate amount~~escrow are to be used to pay the 2013 EBITDA Basic Earn-Out, the 2013 EBITDA Additional Earn-Out and the additional bonus consideration. In December 2012, the Company raised $7,042,000 as part 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.its Series D preferred stock offering. 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,August 2013, the Company ~~estimated~~raised $1,756,000 issuing common stock. In November 2013, 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 daysCompany raised $4,090,000 as part 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-complianceSeries E preferred stock offering. None 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”).

~~Table of Contents~~

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~~of Apex regarding the financial institution that will escrow the funds, the amount of funds that are to be placed ininto escrow and the escrow agreement itself.

In ~~connection with~~ the ~~Series D First Closing,~~last five complete years of operations from 2009 through 2013, we have not experienced any significant effects of inflation 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,~~product and ~~is convertible, at the option of the holder, into such number of shares of~~service pricing, revenues or 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.income from continuing operations.

~~Upon any liquidation, dissolution or winding-up~~As referred to above under the heading “Non-GAAP Financial Measures,” we monitor our ‘cash’ working capital position after removing the accrual effect of current deferred assets and liabilities. We refer to this non-GAAP financial measure as our “Adjusted Working Capital”. We believe this non-GAAP financial measure provides us, and investors, with a better understanding of the operating results and financial condition 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.company.

~~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~~Adjusted Working Capital at ~~least 5,000 shares for such period,~~March 31, 2014 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).December 31, 2013 are computed as follows (in thousands):

~~The Series D Preferred Stock holders also were granted registration rights which required~~

	March 31,			December 31,
	2014			2013

Current assets	$	16,156		$	16,912
Current liabilities		25,973			26,788

Working capital - U.S. GAAP		(9,817	)		(9,876	)
Deferred costs		(3,984	)		(3,809	)
Deferred revenue		7,614			7,481

Adjusted working capital - Non-GAAP measure	$	(6,187	)	$	(6,204	)

2014 Financing

We have not engaged in any securities issuances or other material capital raising in the ~~Company to file a registration statement~~first quarter of 2014.

2013 Financing

For information concerning the financing we undertook in 2012 and 2013, please see our Annual Report on Form 10-K filed with the SEC ~~within 60 days of the final closing date (December~~on March 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 $18,000.2014.

Cash Flows from Operating, Investing and Financing Activities

~~Information about our cash flows, by category, is presented in the accompanying unaudited Condensed Consolidated Statements of Cash Flows.~~ The following table summarizes our cash ~~inflows (outflows)~~flows, by category, for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and 2013 ~~and 2012~~ (in millions):

	Three Months Ended March 31,
	2014			2013			Increase/(Decrease)

Operating activities	$	0.6		$	(0.8	)	$	1.4		175.0	%
Investing activities		-			-			-		N/A
Financing activities		(0.6	)		0.1			(0.7	)	(700.0	%)

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~~three months of ~~2013 decreased~~2014 increased by ~~$2.8~~$1.4 million over the similar period in the prior year. The ~~decrease in cash from operations~~increase was primarily driven by a decrease in ~~gross profit of $1.7 million resulting in an increase in~~our net ~~loss in the first nine months of 2013 of $0.9 million.~~loss. Additionally, ~~the~~ changes in net working capital and other balance sheet changes contributed to a ~~$2.5~~$0.5 million ~~increase~~decrease in cash ~~used in~~provided by operating activities, ~~offset~~most notably from a ~~$4.4~~$0.8 million decrease in accounts receivable due to timing of receivable ~~collections.~~collections and a $0.9 million decrease in accrued expenses offset by an increase in accounts payable of $0.6 million and inventory of $0.7 million. The changes in net working capital were offset by non-cash expenses as noted below.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2014, net cash provided by operating activities was $0.6 million. Our net loss was $0.1 million in the first three months of 2014, a portion of which was the result of non-cash transactions during the period. Specifically, we had a $0.1 million non-cash expense related to employee and non-employee stock based compensation and $0.5 million of other non-cash transactions such as depreciation and amortization.

During the three months ended March 31, 2013, net cash used in operating activities was ~~$2.2~~$0.8 million. Our net loss was ~~$3.5~~$2.1 million in the first ~~nine~~three months of 2013, a portion of which was the result of non-cash transactions during the ~~year.~~period. Specifically, we had a ~~$0.8~~$0.6 million non-cash expense related to employee and non-employee stock based compensation and $1.5 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.~~amortization.

Net cash ~~used in~~(used in) or provided by investing activities was negligible during the ~~nine~~three months ended ~~September 30,~~March 31, 2014 and during the comparable three months of 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~~three months ended ~~September 30,~~March 31, 2014, net cash used in financing activities was $0.6 million, due to $0.1 million in paid financing costs, $0.3 million in repayments under our for term loans and a net $0.2 million in payments and amounts borrowed under our lines of credit.

During the three months ended March 31, 2013, net cash provided by financing activities was ~~$1.4~~$0.1 million, ~~primarily~~principally due to $1.0 million in proceeds from ~~the bank~~one of our term ~~loan,~~loans, net of ~~$1.6~~$0.5 million in ~~payments for~~repayments under our term loans and a net ~~$0.8~~$0.4 million in ~~borrowings~~repayments and amounts borrowed under our lines of ~~credit, payment~~credit.

Our cash on hand at the end of the first quarter of 2014 was approximately $0.6 million, compared to $0.3 million ~~for~~at the ~~Series D Preferred Stock dividend and $1.5 million in net proceeds from a common stock private placement.~~

~~During~~end of 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~~first quarter 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.2013.

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

	●	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.

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.

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:

~~Table of Contents~~

•●

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 Company's significant Level 3 inputs relate to warrant liabilities.

We account for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) guidance, which requires that deferred tax assets and liabilities, be recognized using enacted tax rates to measure the effect of temporary differences between book and tax bases on recorded assets and liabilities. FASB guidance also requires that deferred tax assets be reduced by a valuation allowance, if it is more likely than not some portion or all of the deferred tax assets will not be recognized.

We evaluate on an annual basis its ability to realize deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are forecasts of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.

In accordance with FASB guidance on accounting for uncertainty in income taxes, we evaluate tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical 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 is 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 threshold is met in a subsequent period.

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.

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;~~exits; (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~~The Company generates 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 as the Company maintains financial risk throughout the term of these contracts and we may be liable to refund a customer for amounts paid in certain circumstances. ~~This has not been an issue for us historically.~~Our policy is to classify shipping and handling costs billed to customers and the related expenses as cost of sales.

We also ~~generate~~generates revenue from professional services and customer specified 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 record sales net of sales tax.

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. In an arrangement with multiple deliverables, the delivered item or items shall be considered a separate unit of accounting if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis; (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered item(s) within the arrangement and the allocation of arrangement consideration and the recognition of revenue then shall be determined for those combined deliverables as a single unit of accounting. 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~~our results of operations. When we enter into an arrangement that includes multiple elements, we allocate revenue base on their relative selling prices. We use the ~~allocation~~following hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor specific objective evidence of fair value ~~to each element is derived based on management’s~~(“VSOE”), (ii) third party evidence of selling prices (“TPE”) and (iii) best estimate of selling price ~~when vendor specific objective evidence or third party evidence~~(“ESP”) as a proxy for VSOE. When both VSOE and TPE are unavailable, we use ESP. We determine ESP by considering all relevant factors in establishing the price, which is ~~unavailable.~~demonstrated in a gross margin model used.

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Table of Contents

Revenue from software licenses ~~is recognized when all of the~~may contain arrangements with multiple deliverables, including post-contract customer support, that are subject to software revenue recognition guidance. The revenue for these arrangements is allocated to the software and non-software deliverable based on the relative selling prices of all components in the arrangement using the 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.above. 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. We 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 1011 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, 2013.~~March 31, 2014.

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

~~ITEM 3.~~

~~QUANTITATIVE~~ ~~AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

Not required for smaller reporting companies.

~~ITEM 4.~~

~~CONTROLS~~ ~~AND PROCEDURES~~

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”~~Rules 13a-15(e) and 15d-15(e))) as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the effectiveness of our 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 and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures ~~are designed at a reasonable assurance level and are~~were 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~~SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls.

There were no changes in our internal controls over financial reporting during the fiscal quarter ended ~~September 30, 2013,~~March 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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~~our business. We are not currently ~~party to~~aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material ~~legal proceedings.~~adverse effect on our business, financial condition or operating results.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K as filed with the SEC on March ~~28, 2013.~~31, 2014. Please refer to that Risk Factors section for information concerning risks associated with the Company and an investment in the Company’s securities.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM ~~3.DEFAULTS~~3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. MINE SAFETY DISCLOSURES

ITEM 5. OTHER INFORMATION

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

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


	DecisionPoint Systems, Inc.


Date: ~~November 14, 2013~~May 12, 2014	By:	/s/ Nicholas R. Toms
		Nicholas R. Toms
		Chief Executive Officer (Principal Executive Officer)

Date: ~~November 14, 2013~~May 12, 2014	By:	/s/ Michael P. Roe
		Michael P. Roe
		~~VP of Finance~~Chief Financial Officer (Principal Financial and Accounting Officer)

PART I. FINANCIAL INFORMATION



			Page
Item 1.	Condensed Consolidated Financial Statements ~~(unaudited)~~(Unaudited):
	Condensed Consolidated Balance Sheets as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013	3		1
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three	4
	Month Periods Ended March 31, 2014 and ~~Nine Months Ended September 30,~~ 2013 ~~and 2012~~
	~~Condensed Consolidated Statement of Stockholders' Equity (Deficit) for the Nine Months~~	5
	~~Ended September 30, 2013~~ 2
	Condensed Consolidated Statements of Cash Flows for the ~~Nine Months~~Three Month Periods Ended March 31, 2014 and 2013	6
	~~September 30, 2013 and 2012~~ 3
	Notes to Unaudited Condensed Consolidated Financial Statements	7		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40		32
Item 4.	Controls and Procedures	40		32


PART II. OTHER INFORMATION

Item 1.	Legal Proceedings			33
Item 1a.	Risk Factors	41		33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41		33
Item 3.	Defaults Upon Senior Securities	41		33
Item 4.	Mine Safety Disclosures	41		33
Item 5.	Other Information	41		33
Item 6.	Exhibits	41		34

Signatures		42
		35

	September 30,			December 31,			March 31,			December 31,
	2013			2012			2014			2013
ASSETS
Current assets
Cash	$	270		$	1,103		$	612		$	641
Accounts receivable, net		12,685			12,287			9,581			10,504
Due from related party		195			202			182			188
Inventory, net		918			811			1,487			1,533
Deferred costs		3,773			3,955			3,984			3,809
Deferred tax assets		47			48			47			49
Prepaid expenses and other current assets		919			302			263			188
Total current assets		18,807			18,708			16,156			16,912

Property and equipment, net		139			179			141			136
Other assets, net		151			205			156			165
Deferred costs, net of current portion		1,810			2,124			1,682			1,807
Goodwill		8,485			8,571			8,315			8,395
Intangible assets, net		4,472			6,023			3,391			3,907
Total assets	$	33,864		$	35,810		$	29,841		$	31,322

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	13,036		$	11,080		$	9,285		$	9,774
Accrued expenses and other current liabilities		3,040			2,895			3,095			2,976
Lines of credit		4,247			3,430			3,701			3,883
Current portion of debt		1,963			1,800			1,252			1,474
Due to related parties		160			1			166			77
Accrued earn out consideration		331			1,186			308			319
Warrant liability		933			-			552			803
Unearned revenue		6,639			7,409			7,614			7,481
Total current liabilities		30,349			27,801			25,973			26,787

Long term liabilities
Unearned revenue, net of current portion		2,472			2,883			2,337			2,481
Debt, net of current portion and discount		2,099			2,922			1,829			1,961
Accrued earn out consideration, net of current portion		154			159			144			149
Deferred tax liabilities		1,038			1,078			718			740
Other long term liabilities		76			80			73			77
Total liabilities		36,188			34,923			31,074			32,195

Commitments and contingencies and subsequent event		-			-
Commitments and contingencies								-			-

STOCKHOLDERS' EQUITY
STOCKHOLDERS' DEFICIT
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
authorized, 1,514,155 and 1,514,155 shares issued and outstanding, including
cumulative and imputed preferred dividends of $2,037 and $1,956, and
with a liquidation preference of $14,813 and $14,731 at March 31, 2014
and December 31, 2013, respectively								12,276			12,193
Common stock, $0.001 par value, 100,000,000 shares authorized,
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
12,883,446 issued and 12,729,563 outstanding as of March 31, 2014,
and as of December 31, 2013								13			13
Additional paid-in capital		16,621			16,132			17,219			17,231
Treasury stock, 153,883 shares of common stock		(205	)		(205	)		(205	)		(205	)
Accumulated deficit		(25,720	)		(21,674	)		(29,918	)		(29,475	)
Unearned ESOP shares		(664	)		(767	)		(593	)		(629	)
Accumulated other comprehensive income		23			22			(25	)		(1	)
Total stockholders’ (deficit) equity		(2,324	)		887
Total stockholders’ deficit								(1,233	)		(873	)
Total liabilities and stockholders' equity	$	33,864		$	35,810		$	29,841		$	31,322

Exhibit Number		Description of Exhibit

~~10.1~~31.1		~~Loan Amendment with Business Development Bank of Canada~~

~~10.2~~		~~Loan Amendment with Royal Bank of Canada~~

~~31.1~~		Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)

31.2		Certification of the Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)

32.1		Certification of the Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

32.2		Certification of the Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

	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	)

																				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	)



	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

	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

	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	)


	Balance December 31, 2012			Additions			Payments			Amortization of Note Discount		Effect of Currency Translation			Balance September 30, 2013
RBC term loan	$	2,090		$	-		$	(608	)	$	-	$	(68	)	$	1,414
Note discount		(38	)		-						18	$	1			(19	)
BDC term loan		1,705			-			-			-		(56	)		1,649
Note discount		(31	)		-						5		1			(25	)
SVB term loan		1,000			-			(750	)		-		-			250
Note discount		(4	)		-			-			4		-			-
SVB term loan-2		-			1,000			(194	)		-		-			806
Note discount		-			(19	)		-			6		-			(13	)

Total debt	$	4,722		$	981		$	(1,552	)	$	33	$	(122	)		4,062

Less contractual current portion																(1,377	)
Less RBC debt long term classified as current																(586	)

Debt, net of current portion															$	2,099

	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	%

	Three Months Ended March 31,					Increase (Decrease)
	2014		2013

Hardware	$	2.2	$	1.6		$	0.6		38.2	%
Professional services		1.2		1.1			0.1		9.1	%
Software		0.0		(0.0	)		0.1		(1125.0	%)
Other		0.1		0.1			(0.0	)	(19.5	%)
	$	3.6	$	2.8		$	0.8		26.6	%

	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	%)