See accompanying notes to unaudited condensed consolidated financial statements

DECISIONPOINT SYSTEMS, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

Three Months ended March 31,
2014 2013
Cash flows from operating activities:
Net loss $ (113 ) $ (2,102 )
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
    Depreciation and amortization
451 502
    Amortization of deferred financing costs and note discount
65 54
    Employee and Director stock-based compensation
10 5
    Change in fair value of warrants
(251 ) -
    ESOP compensation expense
14 35
    Allowance for doubtful accounts
(6 ) 21
    Loss on disposal of property and equipment
- 4
    Changes in operating assets and liabilities:

       Accounts receivable
925 1,686
       Inventory, net
46 (647 )
       Deferred costs
(51 ) 70
       Prepaid expenses and other current assets
- (259 )
       Other assets, net
(25 ) -
       Accounts payable
(486 ) (1,056 )
       Accrued expenses and other current liabilities
(116 ) 763
       Due to related parties
89 -
       Unearned revenue
8 87
Net cash provided by (used in) operating activities 560 (837 )

Cash flows from investing activities
    Purchases of property and equipment
(19 ) (9 )
Net cash used in investing activities (19 ) (9 )

Cash flows from financing activities
    Repayments from lines of credit, net
(182 ) (320 )
    Proceeds from bank term loan
- 1,000
    Repayment of debt
(271 ) (483 )
    Paid financing costs
(100 ) (118 )
Net cash (used in) provided by financing activities (553 ) 79
    Effect on cash of foreign currency translation
(17 ) (1 )
Net decrease in cash (29 ) (768 )
Cash at beginning of period 641 1,103
Cash at end of period $ 612 $ 335

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

Supplemental disclosure of non-cash financing activities:
    Accrued and imputed dividends on preferred stock
$ 329 $ 220

	Six Months ended June 30,
	2014			2013
Cash flows from operating activities:
Net loss	$	(132	)	$	(3,218	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization		911			995
Amortization of deferred financing costs and note discount		79			106
Employee and Director stock-based compensation		50			9
Change in fair value of warrants		(166	)		-
ESOP compensation expense		26			69
Allowance for doubtful accounts		(36	)		42
Loss on disposal of property and equipment		-			4
Deferred taxes. net		(9	)		-
Changes in operating assets and liabilities:
Accounts receivable		892			2,850
Due from related party		188			-
Inventory, net		852			(40	)
Deferred costs		(55	)		71
Prepaid expenses and other current assets		188			(318	)
Other assets, net		10			4
Accounts payable		(1,331	)		(169	)
Accrued expenses and other current liabilities		(47	)		(19	)
Due to related parties		37			-
Unearned revenue		(388	)		(229	)
Net cash provided by operating activities		1,069			157

Cash flows from investing activities
Purchases of property and equipment		(37	)		(11	)
Net cash used in investing activities		(37	)		(11	)

Cash flows from financing activities
(Repayments) borrowings from lines of credit, net		758			(700	)
Proceeds from issuance of term debt		-			1,000
Repayment of debt		(546	)		(1,018	)
Paid financing costs		(100	)		(119	)
Dividends paid		(247	)		(154	)
Payments for contingent aquisition liability		(84	)		-
Net cash used in by financing activities		(219	)		(991	)
Effect on cash of foreign currency translation		(34	)		8
Net increase (decrease) in cash		779			(837	)
Cash at beginning of period		641			1,103
Cash at end of period	$	1,420		$	266

Supplemental disclosures of cash flow information:
Interest paid	$	456		$	502
Income taxes paid		31			33

Supplemental disclosure of non-cash financing activities:
Accrued and imputed dividends on preferred stock	$	663		$	438

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

NOTE 1 - DESCRIPTION OF BUSINESS

Description of Business

DecisionPoint Systems, Inc., (“DecisionPoint”, the “Company”, “we”, or “us”) through its subsidiaries is an enterprise mobility systems integrator that sells and installs mobile computing and wireless systems that are used both within a company’s facilities in conjunction with wireless networks and in the field using carrier-based wireless networks. These systems generally include mobile computers, mobile application software, and related data capture equipment including bar code scanners and 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 suite of software products utilizes late breaking technologies to empower the mobile worker in many areas including merchandising, sales and delivery; field service; logistics and 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 period ended ~~March 31,~~June 30, 2014, are not necessarily indicative of results for the full 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”). 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, 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 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 dodoes 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~~Company’s 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~~sustained positive operating results 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 to achieve sustainable ~~profitable operations~~positive operating results or cost reductions or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to management.

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If the Company ~~continues~~does not continue to ~~incur~~achieve positive operating ~~losses~~results and does not raise sufficient additional capital, material adverse events may occur including, but not limited to, 1)(1) a reduction in the nature and scope of the Company’s operations, 2)(2) the Company’s inability to fully implement its current business plan and 3)(3) continued defaults under the Company’s various loan ~~agreements. A covenant default would give~~agreements (for a description of past defaults, see 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.~~discussion below). 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.~~if our liquidity position does not improve.

In the quarter ended ~~March 31,~~June 30, 2014, the Company experienced an increase in revenue of ~~$2.9~~$1.8 million, or ~~21.3%~~12.2% compared to the quarter ended ~~March 31,~~June 30, 2013, and ana $4.7 million, or 16.6% increase in revenue for the six months ended June 30, 2014 over the comparable six months of ~~$2.1 million, or 14.2%~~2013. In the quarter ended June 30, 2014, the Company experienced a net loss of $19,000 compared to the ~~previous sequential~~net loss of $1.1 million for the quarter ended ~~December 31,~~June 30, 2013, and a $132,000 net loss for the six months ended June 30, 2014 compared to a net loss of $3.2 million for the comparable period in 2013. ~~In addition, we have~~At June 30, 2014, the Company had a substantial working capital deficit totaling ~~$9.8~~$9.5 million which improved by $0.4 million from the working capital deficit of $9.9 million at ~~March~~December 31, ~~2014.~~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)~~8), the ~~Company’s~~ liabilities of the Company that ~~are expected~~we expect will have to be satisfied in the foreseeable future in cash ~~far~~substantially exceed the operating assets that ~~are expected~~weexpected to ~~be satisfied~~have available in cash. As a result of our historical operations, the availability under ~~the Company’s~~our credit line has contracted and ~~the Company’s overall~~our liquidity has been constrained.

To address liquidity constraints, the Company has reduced non-essential expenses. Such expense reduction measures ~~include,~~have included, but ~~are~~have not been limited to, consolidation of information technology environments, consolidation of our East Coast depot facility ~~in to~~into our larger California depot 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 total staffing levels by 29% from April 2013 through February 2014, constituting annual savings of approximately $3 million. These ~~activities~~cost reduction measures have reduced the expense structure of the Company’s business significantly. The Company is focused on continuing to improve processes and reduce costs. ~~The~~Currently, the Company has no plans to seek additional ~~capital~~outside funding through the sale of our securities unless deemed necessary. Should additional outside funding be needed, there is no assurance 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 capital stock, or securities convertible into shares of our capital stock, the ownership interest of the Company’s existing common stock holders will be diluted.

During 2012, 2013 and the first ~~quarter~~six months of 2014, all principal and interest payments on the Company’s term debt were made within payment terms.. On August 22, 2013, the Company's loan agreement ("BDC 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 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") 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,~~These financial covenants required the Company ~~is required~~ to maintain aspecified ratios for 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,~~to be tested on a ~~rolling four quarter basis thereafter.~~quarterly basis. The Company was not in compliance with the reset covenants ~~at December 31,~~in 2013 ~~or March 31,~~and the first six months of 2014. Although management of the Company believes it is not likely that, as a result of this noncompliance, RBC will exercise ~~their~~its rights up to, and including, acceleration of the outstanding debt, there can be no assurance that RBC will not exercise ~~their~~its rights pursuant to the ~~provisions of the debt obligation.~~ RBC Credit Agreement. Accordingly, the ~~Company has~~term debt due to RBC is classified ~~this debt obligation~~ as current ~~at March 31, 2014 (see Note 8 – Term Debt).~~on the accompanying unaudited condensed consolidated balance sheets.

As of ~~March 31,~~June 30, 2014, the outstanding balance on ~~the~~our line of credit with Silicon Valley Bank (“SVB”) ~~is $3.7~~was $4.6 million, ~~down~~up from $3.9 million at December 31, 2013, and the availability under the line of credit has decreased to ~~$2.8~~$1.7 million (see Note 7 – Lines of Credit). The Company relies on the SVB and RBC lines of credit to fund daily operating activities, ~~maintaining~~and the Company maintains very little cash on hand. As of ~~March 31,~~June 30, 2014, the Company was in compliance with the Tangible Net Worth financial covenant under the SVB line of credit and had available a ~~$0.5~~$1.0 million cushion over the covenant requirement. The Company currently believes that at the time of this filing it is compliant with all the terms and provisions of ~~its~~the SVB lending agreement. Should the ~~Company continue~~Company’s results fail to ~~incur losses~~improve further or once more deteriorate in a manner consistent with its recent historical financial performance, the Company will violate ~~this~~the Tangible Net Worth financial covenant ~~without~~unless it can raise additional ~~net capital raises~~outside funding in amounts that are approximately twice the amount of the losses incurred.

~~Table of Contents~~

Summary of Significant Accounting Policies

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

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;~~exists; (2) delivery has occurred and title has passed to the customer which generally happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured. 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.

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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~~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~~affect 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~~based 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 uses Silicon Valley Bank, which is an FDIC insured institution. Based on these facts, collectability of bank balances appears to be adequate.

~~Table of Contents~~

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~~12% and 11% of ~~its total~~the Company’s revenue for the ~~three~~six months ended ~~March 31,~~June 30, 2014 and ~~2013.~~2013, respectively. The Company had three customers, two of which were not the same, who represented 25% and ~~23%~~22% of its revenue for the ~~three~~six months ended ~~March 31,~~June 30, 2014 and 2013, respectively. The Company’s accounts receivable was concentrated with one customer at ~~March 31,~~June 30, 2014, representing ~~16%~~18% of gross accounts receivable and with one customer at ~~March 31,~~June 30, 2013, representing ~~11%~~13% 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~~that has been a significant ~~factor~~source of revenue in one financial reporting period ~~gives significantly~~is a less ~~business~~significant source of revenue in the following period. The loss of a significant customer could have a material adverse impact on the Company.

The Company has the same four primary vendors for the ~~three~~six months ended ~~March 31,~~June 30, 2014 ~~one of which is not the same when~~ compared to the similar period in 2013. For the ~~three~~six months ended ~~March 31,~~June 30, 2014, the Company had purchases from these four vendors that collectively represented ~~59%~~58% of total purchases and 65% of the total outstanding accounts payable at ~~March 31,~~June 30, 2014. For the ~~three~~six months ended ~~March 31,~~June 30, 2013, the Company had purchases from these four vendors that collectively represented 55% of total purchases and ~~68%~~67% of the total outstanding accounts payable at ~~March 31,~~June 30, 2013. The same single vendor represented ~~28%~~21% and ~~21%~~18% of the total purchases for the ~~three~~six months ended ~~March 31,~~June 30, 2014 and 2013, respectively. Loss of this certain vendor could have a material adverse effect on our operations.

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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.

Fair Value Measurement - Fair value is the price that would be received 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 as of the measurement date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:

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

	●	Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market 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 Company.

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~~six months ended ~~March 31,~~June 30, 2014.

The Company has classified its contingent consideration related to the ~~acquisitions~~Apex acquisition as a Level 3 ~~liability (see Note 5 – Business Combinations).~~liability. 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 it incurred in connection with its Apex acquisition during the ~~three~~six months ended ~~March 31,~~June 30, 2013. On June 9, 2014, the accounting expert issued its final report and ~~2013.~~the fair value of the earn-out was calculated to be CDN$400,000 of which CDN$89,000 (US$84,000) (22.22%) was paid in cash and CDN$311,000 (US$291,000) (77.78%) payable in the form of a convertible promissory note (see Note 5 – Business Combinations). The convertible promissory note is expected to be executed in the third quarter of 2014.

~~Table~~As part of ~~Contents~~

the Apex acquisition in 2012, 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 June 30, 2014 there is CDN$101,000 (US$94,000) recorded in earn out consideration in the Company’s unaudited condensed consolidated financial statements.

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~~$166,000 reduction to the fair value of the warrant liability ~~during~~for the ~~three~~six months ended ~~March 31,~~June 30, 2014.

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The following table summarizes the financial liabilities measured at fair value on a recurring basis as of ~~March 31,~~June 30, 2014 and December 31, 2013 (in thousands):

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

Liabilities
Contingent consideration liability
recorded for business combinations	$	452	$	-	$	-	$	452	$	385	$	-	$	-	$	385

Fair value of warrants issued in connection
with share purchase agreement		552		-		-		552		637		-		-		637

Balance at March 31, 2014	$	1,004	$	-	$	-	$	1,004
Balance at June 30, 2014									$	1,022	$	-	$	-	$	1,022

			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

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 private placement closed on August 15, 2013 and August 21, 2013, 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 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 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. In April 2014, the Company issued 26,157 Series D Preferred Stock PIK dividend shares, for previously accrued dividends. On ~~April 25,~~July 22, 2014, the Company paid a cash dividend of ~~$144,000~~$146,000 on the Series D Preferred Stock for the period from ~~January~~April 1, 2014 to ~~March 31,~~June 30, 2014.Such amount is accrued for in Current Liabilities at June 30, 2014 in the accompanying unaudited condensed consolidated balance sheet.

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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.

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 of 1933, as amended).

The Series D 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 (December 31, 2012), and requires the registration statement to become effective within 90 days thereafter. The initial registration statement was filed on February 12, 2013. If the registration statement is not declared effective by May 12, 2013, 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 July 30, 2013, the registration statement was declared effective by the SEC. On October 15, 2013, the Company paid liquidated damages of $18,000.

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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. In April 2014, the Company issued 7,533 Series E Preferred Stock PIK dividend shares, for previously accrued dividends. On ~~April 25,~~July 22, 2014, the Company paid a cash dividend of ~~$103,000~~$104,000 on the Series E Preferred Stock for the period from ~~January~~April 1, 2014 to ~~March 31,~~June 30, 2014.

Such amount is accrued for in Current Liabilities at June 30, 2014 in the accompanying unaudited condensed consolidated balance sheet.

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.

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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 ~~three~~six months ended ~~March 31,~~June 30, 2014

There were no common stock issuances for the ~~three~~six months ended ~~March 31,~~June 30, 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~~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,~~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 common stock issued to investors at 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 ~~Purchase Agreement,~~purchase agreement, we agreed to, within 30 days of August 21, 2013, file a registration statement (the “Common Stock Registration Statement”) with the 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 become effective as soon as possible after filing (and in any event within 120 days of the filing of such Common Stock Registration Statement). If the Common Stock Registration Statement is not declared effective within the requisite period of time, a partial liquidated damage equal to 0.2% of the purchase price paid by each investor shall be payable on each monthly anniversary until it becomes effective. In no event shall the partial liquidated damage exceed 10% of the purchase price paid by each investor. On October 4, 2013, the Common Stock Registration Statement was declared effective by the SEC.

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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)~~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.

The Company recorded the Investor Warrants and Placement Agent Warrants as a liability (see further disclosure at Note 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).

For the ~~three~~six months ended ~~March 31,~~June 30, 2014

There were no warrant issuances for the ~~three~~six months ended ~~March 31,~~June 30, 2014.

For the year ended December 31, 2013

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 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 December 31, 2013, the warrants were re-valued with a fair value of $803,000. At ~~March 31,~~June 30, 2014, the warrants were revalued with a fair value of ~~$552,000~~$637,000 with the difference of ~~$251,000~~$166,000 recorded in the Company’s Unaudited Condensed Consolidated Statement of Operations and Comprehensive ~~Loss.~~Loss for the six months ended June 30, 2014

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.

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

					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	$	3,202,721	$	0.90
* warrants classified as liabilities

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 ~~three~~six months ended ~~March 31,~~June 30, 2014, was ~~$45,000~~$89,000 representing approximately ~~$36,000~~$73,000 for the ESOP principal payment and ~~$9,000~~$16,000 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 ~~three~~six months ended ~~March 31,~~June 30, 2014 was approximately ~~$14,000.~~$46,000. The fair value of the shares was ~~$0.50~~$0.47 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,~~August 16, 2010 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 ~~March 31,~~June 30, 2014, and information with respect to the changes in options outstanding is as follows:

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

December 31, 2013		195,495			804,505		$	1.39	$	-
Granted		(183,648	)		183,648			0.50		-
Exercised		-			-			-		-
Forfeited		251,471			(251,471	)		2.05		-
June 30, 2014		263,318			736,682		$	1.11	$	-

Exercisable options at June 30, 2014					570,921		$	1.14	$	-

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

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

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

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The following table summarizes information about stock options outstanding as of ~~March 31,~~June 30, 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

$	0.46 - 0.53		443,648		2.52	$	0.50		330,440		2.53	$	0.49
$	1.33 - 2.03		136,272		2.51		1.90		130,176		2.51		1.90
$	2.06 - 4.34		156,762		6.84		2.16		110,305		6.78		2.16

Total			736,682		3.44	$	1.11		570,921		3.35	$	1.14

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 ~~three~~six months ended ~~March 31,~~June 30, 2014 and 2013, respectively. The total fair value of awards vested for the ~~three~~six months ended ~~March 31,~~June 30, 2014 and 2013 was ~~$1,261.~~$52,000 and $40,000, respectively.

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period, which is generally equal to the vesting period. The fair value of options granted to directors during the six months ended June 30, 2014, was $58,000 (no options were granted during the six months ended June 30, 2013). The fair values were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

~~Due to the limited time that the Company’s common stock has been publicly traded, management~~

	For the Six Months Ended
	June 30,
	2014			2013
Expected term	1.50 years				N/A
Expected volatility		143.49	%		N/A
Dividend yield		0	%		N/A
Risk-free interest rate		0.27	%		N/A

The Company estimates expected volatility ~~based on the average expected volatilities~~using historical volatility of its common stock over a ~~sampling of five companies with similar attributes~~period equal to the ~~Company, including: industry, size and financial leverage.~~expected life of the options. 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 common stock 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 and director stock-based compensation costs for the ~~three~~six months ended ~~March 31,~~June 30, 2014 and 2013, was ~~$10,000, which~~$50,000 and $21,000, respectively, and is included in selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations. As of ~~March 31,~~June 30, 2014, total unrecognized estimated employee compensation cost related to stock options granted prior to that date was ~~$88,000~~$83,000 which is expected to be recognized over a weighted-average vesting period of ~~2.21~~1.62 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 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 ~~three~~six months ended ~~March 31,~~June 30, 2014. Please refer to Note 15 to the audited consolidated financial statements for the year ended December 31, 2013, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2014.

Rent expense for the ~~three~~six months ended ~~March 31,~~June 30, 2014 and 2013, was ~~$132,000~~$263,000 and ~~$185,000,~~$348,000, respectively.

Apex Earn Out Obligations - If EBITDA (as uniquely defined in the Apex 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”~~“Apex Note”).

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Under the terms of the Note, Apex will pay the principal sum due on the Note in eight quarterly payments (“Installment Dates”). Interest from and after ~~August 1, 2013,~~June 18, 2014, shall be paid in arrears on the last day of each calendar quarter commencing on ~~January 31,~~September 30, 2014. ~~The note terms assumes~~On June 9, 2014, the ~~2013 Basic EBITDA~~accounting expert issued their final report and the fair value of the Earn-Out ~~Amount would~~was calculated to be ~~finalized by October 31, 2013. As~~CDN$400,000 of ~~April~~which CDN$89,000 (US$84,000) (22.22%) was paid in cash and CDN$311,000 (77.78%) payable in the form of a convertible promissory note. At June 30, 2014, there is CDN$311,000 (US$291,000) recorded in accrued earn out consideration in the ~~2013 EBITA Basic Earn-Out Amount has not been finalized.~~ unaudited condensed consolidated financial statements. The convertible promissory note is expected to be executed in the third quarter of 2014. The interest rate shall be determined as follows:

(i)	9% per annum, calculated and compounded quarterly before ~~November~~July 1, ~~2014;~~2015; and

(ii)	11% per annum, calculated and compounded quarterly after ~~October 31, 2014;~~June 30, 2015;

(iii)

except, however, that, if, during the term of the Apex 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 Apex 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 Canadian Dollar equivalent of the market price of our common stock on the day prior to the conversion using a fixed rate of US$1.00=CDN$1.04, or ~~$1.00.~~the Canadian Dollar equivalent of US$1.00 = CDN$1.04. The shares issuable under the Note will be restricted but will have certain piggy back registration rights as set forth in the Apex Purchase Agreement.

The fair value of the earn-out was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the Closing Date). At September 30, 2013, the calculated earn-out payment due under the Purchase Agreement was reduced to CDN$341,000 (US$331,000). The adjustment of CDN$735,000 (US$713,000) was recorded as a separate component of operating expenses in the Company’s Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2013. On October 31, 2013 the Sellers disputed the Company’s calculation of the Earn-Out Payment due and has stated the payment should be $1.6 million. Per the terms of the agreement, both parties have agreed on an accounting expert to issue a report on the earn-out calculation. The accounting expert has not completed their analysis as of the 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 unaudited condensed consolidated financial statements.

The Company entered into an employment agreement with Donald Dalicandro, the Former Chief Executive Officer of Apex, as a result of the Apex acquisition. 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. The fair value of the bonus was calculated to be approximately CDN$160,000 (US$153,000 at the Apex Closing Date). At ~~March 31,~~June 30, 2014, there is CDN$~~160,000~~101,000 (US$~~144,000)~~94,000) recorded in accrued earn out consideration in the unaudited condensed consolidated financial statements.

Apex Escrow Obligation - As part of the Apex Purchase Agreement, from the Apex 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 escrow agreement itself.

Contingencies -– ~~The Company is not a party to any material pending legal proceedings other than ordinary routine litigation incidental~~In addition to the ~~business;~~matter discussed below, from time to time 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~~involvement in litigation incidental to the conduct of our business. When applicable, we record accruals for 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~~will be incurred and the amount of loss can be reasonably estimated. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material effect on our financial position or results of operations.

Wells Notice - On July 2, 2014, the Company received a written “Wells Notice” from the staff of the SEC indicating that the staff has made a preliminary determination to recommend that the SEC bring an administrative proceeding against the Company. On the same day Nicholas R. Toms, the Company’s President and Chief Executive Officer and a member of the Board of Directors, also received a Wells Notice. The SEC staff has informed the Company that both Wells Notices relate to allegations that, from late 2009 to early 2011, Mr. Toms was the beneficial owner of shares of common stock of the Company that were held and traded by a Delaware corporation in which Mr. Toms was a 10% owner; that Mr. Toms exercised control over the corporation’s securities account; and that the corporation’s shareholding and trades should have been reflected at the relevant times in public disclosures of Mr. Toms’ other holdings of the Company’s common stock.

A Wells Notice is neither a formal allegation of wrongdoing nor a finding that any violations of law have occurred. Rather, it provides the recipient with an opportunity to respond to issues raised by the SEC staff and offer its perspective to the SEC staff prior to any decision to institute proceedings. The Company ~~regularly evaluates current information available~~intends to itmake a submission to ~~determine whether such accruals~~the SEC staff in response to the Wells Notice setting forth why no action should be ~~adjusted~~commenced against it. The submission is due on August 8, 2014.

In addition, the Company’s Audit Committee is conducting an internal review, assisted by new outside counsel, and ~~whether new accruals are required.~~the Company’s independent directors have placed Mr. Toms on leave from his duties as an officer of the Company, pending further inquiries and determinations. Mr. Toms remains a director of the Company and retains his duties as a director. Mr. Dan Romanello, who has served since August 2013 as the Executive Advisor to the CEO, is undertaking Mr. Toms’ duties as an officer on an interim basis.

Settlement of Taglich Action – In July 2014, the Company settled an action brought against it by stockholder Michael N. Taglich, in the Delaware Chancery Court, seeking to compel the Company to hold an annual meeting of stockholders. Pursuant to the settlement, the parties agreed that the Company shall hold an annual meeting of stockholders on or before October 15, 2014.

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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 March 31, 2014.

The Company has an employment agreement with one of our executive officers as of March 31, 2014. The agreement does not provide for any material, out of ordinary course of business provisions or benefits.

The Company had an employment agreement with Donald Dalicandro, the former Chief Executive Officer of Apex, as a result of the Apex acquisition. As of July 31, 2013, the Company and Mr. Dalicandro agreed to separation terms. Per the 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 the severance period, November 1, 2013 through April 30, 2014.

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ITEM 2.

M~~ITEM 2~~ANAGEMENT.

~~MANAGEMENT’S~~’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 forward-looking statements. Such statements 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 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, 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~~conditions; and,

●

Our ability to attract and retain management, and to integrate and maintain technical and management information systems.

All forward-looking statements made in connection with this Quarterly Report on Form 10-Q 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 its clients to “move decisions closer to the customer” by “empowering the mobile worker”. We define mobile workers as those individuals 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 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 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 customers in the retail, manufacturing, transportation, warehousing, distribution, logistics and 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 substantially increased our software products expertise with the acquisition in June 2012 of Apex in Canada. The APEXWare™ software suite significantly expanded our field sales/service software offerings. APEXWare™ is a purpose-built mobile application suite 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~~our 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. We are continuing to extend our mobile device management (“MDM”) offering from our historically ruggedized mobile computer customer base to address the growing use of consumer devices by clients and others and to support the Bring Your Own Device (“BYOD”) and Bring Your Own Application (“BYOA”) movements affecting commerce and our industry in general.

Recognizing that we cannot build every business application, we have developed an ‘ecosystem’ of partners 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) and a large number of specialized independent software vendors such as AirWatch, VeriFone GlobalBay, XRS and Wavelink.

We have several offices throughout North America allowing us to serve multi-location clients and their mobile workforces. Additionally, we keep aware of potential acquisition candidates that could provide us with complementary products and service offerings, and make acquisitions when we identify sufficiently valuable opportunities.

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Results of Operations

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

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								Six Months Ended
	June 30,					Increase			June 30,						Increase
	2014		2013			(Decrease)			2014			2013			(Decrease)

Net sales	$	16,514	$	14,721			12.2	%	$	33,222		$	28,493			16.6	%
Gross profit		3,783		3,566			6.1	%		7,356			6,390			15.1	%
Total operating expenses		3,417		4,464			(23.5	%)		7,134			9,496			(24.9	%)
Operating income (loss)		366		(898	)		(140.8	%)		222			(3,106	)		(107.2	%)
Net income (loss) before income taxes		81		(1,146	)		(107.1	%)		(10	)		(3,575	)		(99.7	%)

Net Sales

Net sales for the three ~~month periods~~and six months ended ~~March 31,~~June 30, 2014 and 2013 ~~are~~is summarized below:

	Three Months Ended							Six Months Ended
	June 30,				Increase			June 30,				Increase
	2014		2013		(Decrease)			2014		2013		(Decrease)

Hardware	$	10,308	$	8,541		20.7	%	$	21,854	$	16,901		29.3	%
Professional services		4,824		4,411		9.4	%		8,645		8,344		3.6	%
Software		961		1,461		(34.2	%)		1,945		2,536		(23.3	%)
Other		420		308		36.2	%		778		712		9.3	%
	$	16,514	$	14,721		12.2	%	$	33,222	$	28,493		16.6	%

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

Hardware $ 11.5 $ 8.4 $ 3.2 38.1 %
Professional services 3.8 3.9 (0.1 ) (2.8 %)
Software 1.0 1.1 (0.1 ) (8.5 %)
Other 0.4 0.4 (0.0 ) (8.3 %)
$ 16.7 $ 13.8 $ 3.0 21.3 %

Net sales were ~~$16.7~~$16.5 million for the three months ended ~~March 31,~~June 30, 2014, compared to ~~$13.8~~$14.7 million for the ~~three months~~same period ended ~~March 31,~~June 30, 2013, an increase of ~~$2.9~~$1.8 million or ~~21.3%~~12.2%. The increase was driven principally by our hardware category, which grew by ~~$3.2~~$1.8 million, or ~~38.1%~~20.7% over the comparable period. The increase in hardware revenue was partially due to significant orders by several large retail customers in the ~~first~~second quarter of 2014. We also recognized higher revenues through the expansion of our customer base and continued ordering from customers acquired after the first quarter of 2013.

Net sales were $33.2 million for the six months ended June 30, 2014, compared to $28.5 million for the same period ended June 30, 2013, an increase of $4.7 million or 16.6%. The ~~improved~~increase was driven principally by our hardware category, which grew by $4.9 million, or 29.3% over the comparable period. The increase in hardware revenue was partially due to significant orders by several large retail customers in the first quarter and second of 2014. The increase in revenue was also due to the increased field mobility solution sales and increased professional services revenue from our CMAC subsidiary for the six months ended June 30, 2014, compared to the period ended June 30, 2013. We also recognized higher revenues through the expansion of our customer base and continued ordering from customers acquired after the first quarter of 2013. The decrease in software revenue of $0.6 million, or 23.3% for the six months ended June 30, 2014 was primarily attributable to the decrease of $0.5 million in the second quarter ended June 30, 2014 associated with the Apex business. Software revenue for Apex in the second quarter of 2013 received the benefit of a new customer and additional business opportunities not recognized at the same level in the second quarter of 2014.

Improved economic conditions in the U.S. ~~which had begun in the first half of 2010, and continued improvement throughout 2011 and 2012~~have had a positive effect on our ~~sales in those years. Prior to 2010,~~sales. In 2013, 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. ~~During 2013,~~While the slowly improving economic conditions in the U.S. have had a positive effect generally, we ~~experienced decreases~~have continued to experience greater competitive forces in ~~hardware sales revenue as~~the market place within our core traditional solutions business. The current economic environment in 2014 has continued to improve whereupon we ~~did not experience~~are continuing to see an increased volume of requests for implementation of new cost saving technology which will enable our customers to compete for the ~~same level~~ultimate consumer spending in their retail stores.

Table of ~~customer with new technology and system’ refresh.~~Contents

Cost of Sales

Cost of sales for the three and six months ~~periods~~ ended ~~March 31,~~June 30, 2014 and 2013 is summarized below:

										Three Months Ended								Six Months Ended
	Three Months Ended March 31,									June 30,				Increase			June 30,					Increase
	2014		2013		Increase(Decrease)					2014		2013		(Decrease)				2014		2013		(Decrease)

Hardware	$	9.3	$	6.8	$	2.6		38.1	%	$	8,415	$	6,851		22.8	%		$	17,752	$	13,613		30.4	%
Professional services		2.6		2.8		(0.2	)	(7.7	%)		3,039		2,865		6.1	%			5,617		5,658		(0.7	%)
Software		0.9		1.1		(0.1	)	(13.4	%)		954		1,206		(20.9	%)			1,889		2,286		(17.4	%)
Other		0.3		0.3		(0.0	)	(9.0	%)		323		233		38.3	%			607		546		11.3	%
	$	13.1	$	11.0	$	2.2		19.7	%	$	12,731	$	11,155		14.1	%		$	25,866	$	22,103		17.0	%

The cost of sales line 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 $13.1~~was $12.7 million for the three months ended ~~March 31,~~June 30, 2014, compared to ~~$11~~$11.2 million for the ~~three months~~same period ended ~~March 31,~~June 30, 2013, an increase of ~~$2.2~~$1.5 million or ~~19.7%~~14.1%. The increase in cost of sales for hardware of ~~38.1%~~22.8% for the three months ended ~~March 31,~~June 30, 2014 compared to the ~~similar~~same period in 2013 was ~~consistent with~~slightly higher than the hardware revenue ~~increase.~~increase due to fewer large orders which usually have reduced pricing and product mix. The ~~decrease~~increase in cost of sales for professional services from the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was ~~7.7%~~6.1%, ~~much steeper~~less than the ~~revenue decline for~~ professional services revenue growth rate of ~~2.8%~~9.4% for the same period, 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%~~20.9% for the three months ended ~~March 31,~~June 30, 2014 compared to the similar period in 2013 was ~~also steeper~~less than the decrease in software revenues for the same period and related to professional service personnel reductions. The increase in other cost of sales was approximately in proportion to the increase in the other revenues.

Cost of sales was $25.9 million for the six months ended June 30, 2014, compared to $22.1 million for the same period ended June 30, 2013, an increase of $3.8 million or 17.0%. The increase in cost of sales for hardware of 30.4% for the six months ended June 30, 2014 compared to the same period in 2013 was slightly higher than the hardware revenue ~~decline~~increase due to fewer large orders which usually have reduced pricing and product mix. The decrease in cost of sales for professional services from the six months ended June 30, 2014 to the six months ended June 30, 2013 was 0.7% compared to the revenue growth rate of 3.6%, and 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 ~~8.5% and~~ 17.4% for the six months ended June 30, 2014 compared to the same period in 2013 was also related to professional service personnel reductions. The ~~decrease~~increase in other cost of sales was ~~negligible.~~approximately in proportion to the increase on other revenues.

Gross Profit

Gross profit for the three and six months ended June 30, 2014 and 2013 is summarized below:

	Three Months Ended									Six Months Ended
	June 30,						Increase			June 30,						Increase
	2014			2013			(Decrease)			2014			2013			(Decrease)

Hardware	$	1,893		$	1,690			12.1	%	$	4,102		$	3,288			24.8	%
Professional services		1,786			1,547			15.4	%		3,028			2,686			12.8	%
Software		7			255			(97.3	%)		56			250			(77.5	%)
Other		97			75			29.5	%		170			166			2.4	%
	$	3,783		$	3,566			6.1	%	$	7,356		$	6,390			15.1	%
As a percentage of sales		22.9	%		24.2	%		(1.3	%)		22.1	%		22.4	%		(0.3	%)

Our gross profit was $3.8 million for the three months ended June 30, 2014, compared to $3.6 million for the same period ended June 30, 2013, an increase of $0.2 million or 6.1%. Our gross margin decreased by 1,316 basis points to 22.9% in 2014, from 24.2% in the comparable period of 2013.

Our gross profit was $7.4 million for the six months ended June 30, 2014, compared to $6.4 million for the same period ended June 30, 2013, an increase of $1.0 million or 15.1%. Our gross margin decreased by 281 basis points to 22.1% in 2014, from 22.4% in the comparable period of 2013.

We believe that we would have realized even better gross margins had it not been for the very competitive environment for hardware sales across our entire customer base, hardware sales carry a lower gross margin. We realized higher gross margins on our professional services, due to our increased emphasis on cost control and reductions in professional services personnel.

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~~Gross Profit~~

~~Gross profit for the three month periods ended March 31, 2014 and 2013 is summarized below:~~

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 %

Our gross profit was $3.6 million for the three months ended March 31, 2014, compared to $2.8 million for the 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

												Three Months Ended									Six Months Ended
	Three Months Ended March 31,											June 30,						Increase			June 30,						Increase
	2014			2013			Increase/(Decrease)					2014			2013			(Decrease)			2014			2013			(Decrease)

Selling, general and administrative expenses	$	3.7		$	5.0		$	(1.3	)	(26.0	%)	$	3,417		$	4,464			(23.5	%)	$	7,134		$	9,496			(24.9	%)
As a percentage of sales		22.2	%		36.5	%				(14.2	%)		20.7	%		30.3	%		(9.6	%)		21.5	%		33.3	%		(11.9	%)

Selling, general and administrative expenses ~~was $3.7~~were $3.4 million for the three months ended ~~March 31,~~June 30, 2014, compared to ~~$5.0~~$4.5 million for the ~~similar~~same period in the prior year. This represents a decrease of ~~$1.3~~$1.2 million, or ~~26.0%~~23.5%.

Selling, general and administrative expenses were $7.1 million for the six months ended June 30, 2014, compared to $9.5 million for the same period in the prior year. This represents a decrease of $1.4 million, or 24.9%.

The decrease ~~was~~for the three and six months ended June 30, 2014 compared to the similar periods in the prior year were due to significant efforts to streamline our business model. These efforts included, consolidation of our East Coast depot facility in to our larger California depot 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 total staffing levels by 29% from April 2013 through February 2014, constituting annual savings of $3 million. These ~~activities~~cost reduction measures have reduced the expense structure of our business significantly. We are focused on continuing to improve processes and reduce costs.

Depreciation and Amortization

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~~three and six month periods ended ~~March 31,~~June 30, 2014 and 2013 is summarized below:

												Three Months Ended									Six Months Ended
												June 30,						Increase			June 30,						Increase
	2014			2013			Increase/(Decrease)					2014			2013			(Decrease)			2014			2013			(Decrease)
Depreciation and amortization
In cost of sales	$	0.2		$	0.2		$	0.0		4.9	%	$	0.2		$	0.2			5.7	%	$	0.4		$	0.4			4.3	%
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	%)
In operating expenses													0.2			0.3			(19.6	%)		0.5			0.6			(20.0	%)
Total depreciation and amortization												$	0.4		$	0.5			(9.4	%)	$	0.9		$	1.0			(10.1	%)
As a percentage of sales		2.8	%		3.5	%				(0.7	%)		2.7	%		3.4	%		(0.6	%)		2.7	%		3.5	%		(0.8	%)

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

Interest expense ~~which~~ arises from our outstanding balances under our lines of credit and from our outstanding subordinated ~~debt,~~debt.

Interest expense was ~~$207,000~~$222,000 for the three months ended ~~March 31,~~June 30, 2014, compared to ~~$226,000~~$256,000 for the ~~similar~~same period in the prior year. The ~~$19,000~~$34,000 decrease in interest expense reflected a decrease in our average outstanding general debt obligations during the three months ended ~~March 31,~~June 30, 2014 compared to the similar period in the prior year.

Interest expense was $429,000 for the six months ended June 30, 2014, compared to $483,000 for the same period in the prior year. The $54,000 decrease in interest expense reflected a decrease in our average outstanding general debt obligations during the six months ended June 30, 2014 compared to the similar period in the prior year.

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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 dodoes 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~~sustained positive operating results 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~~sustained positive operating results or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us.

If we do not continue to ~~incur~~achieve positive operating ~~losses~~results 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.~~if our liquidity position does not improve.

Cash and Capital Resources

Although we have historically experienced losses, a material part of those losses have been from non-cash transactions. In connection with these losses, we have accumulated substantial net operating loss carry-forwards to 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 lines of credit, ~~become profitable~~establish sustained positive operating results and access additional equity or debt capital. There can be no assurance that we will ~~become profitable~~be able to achieve sustainable positive operating results or cost reductions or that we can ~~continue to raise the~~obtain additional funds ~~required~~when needed to continue our normal operations.

Funds generated by operating activities and our credit facilities continue to be our most significant sources of liquidity. 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 ~~March 31,~~June 30, 2014, we experienced an increase in ~~net sales~~revenue of ~~$2.9~~$1.8 million, or ~~21.3%~~12.2% compared to the quarter ended ~~March 31,~~June 30, 2013, and a ~~$2.1~~$4.7 million, or ~~14.2%~~16.6% increase in revenue for the six months ended June 30, 2014 over the comparable six months of 2013. In the quarter ended June 30, 2014, we experienced net loss of $19,000 compared to the ~~previous sequential~~net loss of $1.1 million for the quarter ended ~~December 31,~~June 30, 2013, and a $132,000 net loss for the six months ended June 30, 2014 compared to a net loss of $3.2 million for the comparable period in 2013. ~~Nevertheless,~~ At June 30, 2014, we had a substantial working capital deficit totaling ~~$9.8~~$9.5 million, which has improved by $0.4 million from the working capital deficit of $9.9 million at ~~March~~December 31, ~~2014.~~2013. 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 further discussion at Note 8, Term Debt of the Notes to the Unaudited Condensed Consolidated Financial Statements), our liabilities that ~~are expected to~~we expect will be satisfied in the foreseeable future in cash ~~far~~substantially exceed ~~our receivables and other~~the operating assets that are expected to be satisfied in cash. ~~In addition, as~~As a ~~consequence~~result of our ~~recent~~ historical ~~results of~~ operations, the availability under our credit line has contracted and our ~~overall~~ liquidity has ~~become~~been constrained.

To address liquidity constraints, we have reduced non-essential expenses. Such expense reductions ~~include,~~have included, but ~~are~~have not been limited to, the consolidation of information technology environments, the consolidation of our East Coast depot facility in to our larger California depot 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 total staffing levels by 29% from April 2013 through February 2014, constituting annual savings of approximately $3 million. These ~~activities~~cost reduction measures have reduced the expense structure of our business significantly. We are focused on continuing to improve processes and reduce costs. WeCurrently, we have no plans to seek additional ~~capital~~outside funding through the sale of our securities unless deemed necessary. Should additional outside financing be needed, there is no assurance 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 interests of our existing common stockholders will be diluted.

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During 2012, 2013 and the first ~~quarter~~six months of 2014, all principal and interest payments on our term debt were made within payment terms.

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As a matter of course, we do not maintain significant cash balances on hand because we 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 ~~March 31,~~June 30, 2014 and December 31, 2013, the outstanding balance on our SVB line of credit was approximately ~~$3.7~~$4.6 and $3.9 million, respectively, and the interest rate was 7.0%. As of ~~March 31,~~June 30, 2014, there was ~~$2.8~~$1.7 million available under the SVB line of credit. The line of credit has a certain financial covenant and other non-financial covenants. The minimum Tangible Net Worth requirement of $8.7 million deficit is to be 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 ~~March 31,~~June 30, 2014 and December 31, 2013, ~~the Company was~~we were in compliance with the ~~tangible~~Tangible Net Worth financial covenant and had available a ~~$0.5~~$1.0 million and $0.8 million cushion over the requirement, respectively. ~~The Company believes~~We believe that at the time of this filing ~~it is compliant~~we are in compliance with the terms and provisions of its SVB lending agreement. Should ~~the Company continue~~our results fail to ~~incur losses~~improve further or once more deteriorate in a manner consistent with its recent historical financial performance, ~~the Company~~we will violate ~~this~~the Tangible Net Worth financial covenant without additional net capital ~~raises~~outside funding in amounts that are approximately twice the amount of the losses incurred.

~~The Company has $0.9~~We have $0.8 million of term debt with the Royal Bank of Canada (the “RBC Term Loan”), ~~$1.5~~$1.6 million of term debt with the BDC (the “BDC Term Loan”) and $0.6 million of term debt with SVB (the ~~“SVB~~”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. We were~~The Company was~~ in compliance with the covenants of these Term Loans except for the RBC Term Loan, for which ~~it was~~we were not in compliance at ~~March 31,~~June 30, 2014 and December 31, 2013. Although the Company believes it is 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 ~~March 31,~~June 30, 2014 and December 31, 2013.

As part of the Apex Purchase Agreement, from the Apex Closing Date up until the expiry of the bonus period, under that agreement we are 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, the 2013 EBITDA Additional Earn-Out and the additional bonus consideration. In December 2012, the Company raised $7,042,000 as part of its Series D preferred stock offering. In August 2013, the Company raised $1,756,000 issuing common stock. In November 2013, the Company raised $4,090,000 as part of its Series E preferred stock offering. None of these funds have 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 into escrow and the escrow agreement itself.

In the last five complete years of operations from 2009 through 2013, we have not experienced any significant effects of inflation on our product and service pricing, revenues or our income (loss) from continuing operations.

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.

Adjusted Working Capital at ~~March 31,~~June 30, 2014 and December 31, 2013 are computed as follows (in thousands):

	June 30,			December 31,
	2014			2013

Current assets	$	15,906		$	16,912
Current liabilities		25,382			26,787

Working capital - U.S. GAAP		(9,476	)		(9,875	)
Deferred costs		(4,055	)		(3,809	)
Deferred revenue		7,263			7,481

Adjusted working capital - Non-GAAP measure	$	(6,268	)	$	(6,203	)

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 first ~~quarter~~six months of 2014.

2013 Financing and Common Stock Private Placement

For information concerning the financing we undertook in 2012 and 2013, please see our Annual Report on Form 10-K filed with the SEC on March, 31, 2014.

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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 flows ~~by category,~~ for the ~~three~~six months ended ~~March 31,~~June 30, 2014 and 2013 (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 %)

	Six Months Ended
	June 30,
	2014			2013			Increase/(Decrease)

Operating activities	$	1.1		$	0.2		$	0.9	(434.0	%)
Investing activities		(0.0	)		(0.0	)		0.0	234.3	%
Financing activities		(0.2	)		(1.0	)		0.8	(78.2	%)

~~Cash~~

Net cash provided by operating activities during the first ~~three~~six months of 2014 increased by ~~$1.4~~$0.9 million over the ~~similar~~same period in the prior year. The increase in cash from operations was primarily driven by a decrease in ~~our~~ net ~~loss. Additionally, changes~~loss in net working capital and other balance sheet changes contributed to a $0.5 million decrease in cash provided by operating activities, most notably from a $0.8 million decrease in accounts receivable due to timingthe first six months of ~~receivable collections and a $0.9 million decrease in accrued expenses offset by an increase in accounts payable~~2014 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 three months ended March 31, 2014, net cash provided by operating activities was $0.6~~$3.1 million. Our net loss was ~~$0.1 million~~$132,000 in the first ~~three~~six months of 2014, a portion of which was the result of non-cash transactions during the ~~period.~~year. Specifically, we had a $0.1 million non-cash expense related to employee and non-employee stock based compensation and ~~$0.5~~a net $0.8 million of other non-cash transactions such as depreciation and amortization.

~~During~~ Additionally, the ~~three months ended March 31, 2013,~~changes in net working capital and other balance sheet changes contributed to a $2.0 million decrease in cash used in operating activities, most notably from a $1.9 million decrease in accounts receivable due to timing of receivable collections and a $1.2 million decrease in accounts payable that was ~~$0.8 million.~~offset by a $0.9 million increase in inventory.

During the six months ended June 30, 2013, net cash provided by operating activities was $200,000. Our net loss was ~~$2.1~~$1.5 million induring the first ~~three~~six months of 2013, ~~a portion~~most of which was the result of non-cash transactions during the ~~period.~~quarter. Specifically, we had a ~~$0.6~~$1.0 million non-cash expense ~~related to~~including depreciation and amortization, employee and non-employee ~~stock based compensation and $1.5 million of other non-cash transactions such as depreciation and amortization.~~stock-based compensation.

Net cash (used in) or provided by investing activities was negligible during the ~~three~~six months ended ~~March 31,~~June 30, 2014 and ~~during~~ the comparable ~~three~~six months of 2013.

During the ~~three~~six months ended ~~March 31,~~June 30, 2014, net cash used in financing activities was ~~$0.6~~$0.2 million, due to $0.1 million in paid financing costs, ~~$0.3~~$0.5 million in repayments under our ~~for~~ term loans, ~~and a net $0.2~~$0.3 million in payments for the Series D and Series E Preferred Stock dividends and $0.1 million for payment on contingent acquisition liability, offset by cash provided by an $0.8 million in net amounts borrowed under our lines of credit.

During the ~~three~~six months ended ~~March 31,~~June 30, 2013, net cash ~~provided by~~used in financing activities was ~~$0.1~~$1.0 million, ~~principally~~primarily due to $1.0 million in proceeds from ~~one of our~~the SVB term ~~loans,~~loan, net of ~~$0.5~~$1.0 million in ~~repayments under our~~payments for term loans and a net ~~$0.4~~$0.7 million in ~~repayments and amounts borrowed~~net payments under our lines of credit.

~~Our cash on hand at the end of the first quarter of 2014 was approximately $0.6 million, compared to $0.3 million at the end of the first quarter of 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~~

There have been no material changes to the ~~following~~Company's critical accounting policies ~~involve~~during the six months ended June 30, 2014. See Footnote 2 of the Company's consolidated financial statements included in the Company's 2013 Annual Report on Form 10-K filed on March 31, 2014 with the SEC, for a ~~high degree~~description of ~~judgment and estimation:~~the Company's critical accounting policies.

~~Accounts Receivable and Allowance for Doubtful Accounts~~

~~We have policies and procedures for reviewing and granting credit to all customer accounts, including:~~

	●	~~Credit reviews of all new customer accounts,~~
	●	~~Ongoing credit evaluations of current customers,~~
	●	~~Credit limits and payment terms based on available credit information,~~
	●	~~Adjustments to credit limits based upon payment history and the customer’s current credit worthiness, and~~
	●	~~An active collection effort by regional credit functions, reporting directly to the corporate financial officers.~~

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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.Recently Issued Accounting Pronouncements

~~Inventory~~

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

~~Goodwill and Long-Lived Assets~~

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

~~Intangible Assets~~

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

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

~~Fair Value~~

Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

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

●		Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●		~~Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.~~

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

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~~Income Taxes~~

~~We account for income taxes in accordance with~~May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and most industry specific guidance. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, we will adopt this new guidance beginning in fiscal 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance and management is currently evaluating which ~~requires that deferred tax assets and liabilities, be recognized using enacted tax rates~~transition approach to ~~measure~~use and the ~~effect~~impact 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~~this new 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.

~~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.

We 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. 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 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 following 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.

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~~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~~position or results 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 11 of the accompanying notes to our unaudited condensed consolidated financial statements.operations.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements as of ~~March 31,~~June 30, 2014.

Inflation

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

~~ITEM 3.~~ ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

~~ITEM 4.~~ ~~CONTROLS~~

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Acting Chief Executive Officer (principal executive officer) (see Part II, Item 1, Legal Proceedings) and our Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in 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 Acting 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 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 SEC rules and forms, and that such information is accumulated and communicated to our management, including our Acting 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 ~~March 31,~~June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II-OTHER INFORMATION

~~ITEM 1.~~ ~~LEGAL PROCEEDINGS~~

ITEM 1.

LEGAL PROCEEDINGS

~~From~~

In addition to the matter described below, 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 our business.

We ~~are not currently aware~~may also become involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and other regulatory agencies regarding our business, and involving, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

Wells Notice - On July 2, 2014, the Company received a written “Wells Notice” from the staff of the SEC Commission (the “SEC”) indicating that the staff has made a preliminary determination to recommend that the SEC bring an administrative proceeding against the Company. On the same day Nicholas R. Toms, the Company’s President and Chief Executive Officer and a member of the Board of Directors, also received a Wells Notice. The SEC staff has informed the Company that both Wells Notices relate to allegations that, from late 2009 to early 2011, Mr. Toms was the beneficial owner of shares of common stock of the Company that were held and traded by a Delaware corporation in which Mr. Toms was a 10% owner; that Mr. Toms exercised control over the corporation’s securities account; and that the corporation’s shareholding and trades should have been reflected at the relevant times in public disclosures of Mr. Toms’ other holdings of the Company’s common stock.

A Wells Notice is neither a formal allegation of wrongdoing nor a finding that any ~~such legal proceedings or claims that we believe will~~violations of law have ~~individually or~~occurred. Rather, it provides the recipient with an opportunity to respond to issues raised by the SEC staff and offer its perspective to the SEC staff prior to any decision to institute proceedings. The Company intends to make a submission to the SEC staff in response to the Wells Notice setting forth why no action should be commenced against it. The submission is due on August 8, 2014.

In addition, the Company’s Audit Committee is conducting an internal review, assisted by new outside counsel, and the Company’s independent directors have placed Mr. Toms on leave from his duties as an officer of the Company, pending further inquiries and determinations. Mr. Toms remains a director of the Company and retains his duties as a director. Mr. Dan Romanello, who has served since August 2013 as the Executive Advisor to the CEO, is undertaking Mr. Toms’ duties as an officer on an interim basis.

Settlement of Taglich Action – In July 2014, the Company settled an action brought against it by stockholder Michael N. Taglich, in the ~~aggregate, a material adverse effect~~Delaware Chancery Court, seeking to compel the Company to hold an annual meeting of stockholders. Pursuant to the settlement, the parties agreed that the Company shall hold an annual meeting of stockholders on ~~our business, financial condition~~ or ~~operating results.~~before October 15, 2014.

ITEM 1A. ~~RISK FACTORS~~

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 filed with the SEC on March 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~~ITEM~~ 2. ~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

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

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

~~ITEM 4.~~ ~~MINE SAFETY DISCLOSURES~~

~~Not applicable.~~

~~ITEM 5.~~ ~~OTHER INFORMATION~~

~~Not applicable.~~

3331

Table of Contents

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM~~ITEM~~ 6. ~~EXHIBITS~~

EXHIBITS

Exhibit Number		Description of Exhibit

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

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

3432

Table of Contents

SI~~SIGNATURES~~GNATURES

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: August 7, 2014	By:	/s/ Dan Romanello
		Dan Romanello
		Acting Chief Executive Officer (Principal Executive Officer)


	~~DecisionPoint Systems, Inc.~~
Date: August 7, 2014	By:	/s/ Michael P. Roe
		Michael P. Roe
		Chief Financial Officer (Principal Financial and Accounting Officer)

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

~~Date: May 12, 2014~~	~~By:~~	~~/s/ Michael P. Roe~~
		~~Michael P. Roe~~
		~~Chief Financial Officer (Principal Financial and Accounting Officer)~~

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

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

PART I. FINANCIAL INFORMATION



			Page
Item 1.	Condensed Consolidated Financial Statements ~~(Unaudited):~~(unaudited)
	Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2014 and December 31, 2013			1
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three	2
	~~Month Periods~~and Six Months Ended ~~March 31,~~June 30, 2014 and 2013			2
	Condensed Consolidated Statements of Cash Flows for the ~~Three Month Periods~~Six Months Ended ~~March 31,~~ June 30, 2014 ~~and 2013~~	3
	3 and 2013
	Notes to Unaudited Condensed Consolidated Financial Statements			4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			23	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			32	30
Item 4.	Controls and Procedures			32	30


PART II. OTHER INFORMATION

Item 1.	Legal Proceedings			33	31
Item 1a.	Risk Factors			33	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			33	31
Item 3.	Defaults Upon Senior Securities			33	31
Item 4.	Mine Safety Disclosures			33	31
Item 5.	Other Information			33	32
Item 6.	Exhibits			34	32

Signatures		33
		35

	March 31,			December 31,			June 30,			December 31,
	2014			2013			2014			2013
ASSETS
Current assets
Cash	$	612		$	641		$	1,420		$	641
Accounts receivable, net		9,581			10,504			9,649			10,504
Due from related party		182			188			-			188
Inventory, net		1,487			1,533			681			1,533
Deferred costs		3,984			3,809			4,055			3,809
Deferred tax assets		47			49			49			49
Prepaid expenses and other current assets		263			188			52			188
Total current assets		16,156			16,912			15,906			16,912

Property and equipment, net		141			136			145			136
Other assets, net		156			165			141			165
Deferred costs, net of current portion		1,682			1,807			1,615			1,807
Goodwill		8,315			8,395			8,401			8,395
Intangible assets, net		3,391			3,907			3,029			3,907
Total assets	$	29,841		$	31,322		$	29,237		$	31,322

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable	$	9,285		$	9,774		$	8,443		$	9,774
Accrued expenses and other current liabilities		3,095			2,976			2,897			2,976
Lines of credit		3,701			3,883			4,642			3,883
Current portion of debt		1,252			1,474			1,095			1,474
Due to related parties		166			77			114			77
Accrued earn out consideration		308			319			291			319
Warrant liability		552			803			637			803
Unearned revenue		7,614			7,481			7,263			7,481
Total current liabilities		25,973			26,787			25,382			26,787

Long term liabilities
Unearned revenue, net of current portion		2,337			2,481			2,313			2,481
Debt, net of current portion and discount		1,829			1,961			1,805			1,961
Accrued earn out consideration, net of current portion		144			149			94			149
Deferred tax liabilities		718			740			732			740
Other long term liabilities		73			77			72			77
Total liabilities		31,074			32,195			30,398			32,195

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

STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFECIT
Cumulative Convertible Preferred stock, $0.001 par value, 10,000,000 shares
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
authorized, 1,547,845 and 1,514,155 shares issued and outstanding, including
cumulative and imputed preferred dividends of $2,122 and $1,956, and
with a liquidation preference of $13,584 and $13,232 at June 30, 2014
and December 31, 2013, respectively		12,276			12,193			12,649			12,193
Common stock, $0.001 par value, 100,000,000 shares authorized,
12,883,446 issued and 12,729,563 outstanding as of March 31, 2014,
12,883,446 issued and 12,729,563 outstanding as of June 30, 2014,
and as of December 31, 2013		13			13			13			13
Additional paid-in capital		17,219			17,231			17,235			17,231
Treasury stock, 153,883 shares of common stock		(205	)		(205	)		(205	)		(205	)
Accumulated deficit		(29,918	)		(29,475	)		(30,271	)		(29,475	)
Unearned ESOP shares		(593	)		(629	)		(557	)		(629	)
Accumulated other comprehensive income		(25	)		(1	)		(25	)		(1	)
Total stockholders’ deficit		(1,233	)		(873	)		(1,161	)		(873	)
Total liabilities and stockholders' equity	$	29,841		$	31,322
Total liabilities and stockholders' deficit							$	29,237		$	31,322

	Three Months Ended March 31,				Six Months Ended June 30,
	2014		2013		2014		2013

Convertible preferred stock - Series A		270		270		270		270
Convertible preferred stock - Series B		131		131		131		131
Convertible preferred stock - Series D		9,918		7,042		10,287		7,042
Convertible preferred stock - Series E		8,180		-		8,330		-
Warrants to purchase common stock		3,555		981		3,555		981
Options to purchase common stock		592		544		737		544

Total potentially dilutive securities		22,646		8,968		23,310		8,968

	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013			2014			2013


Net sales	$	16,709		$	13,772		$	16,514		$	14,721		$	33,222		$	28,493

Cost of sales		13,135			10,948			12,731			11,155			25,866			22,103

Gross profit		3,574			2,824			3,783			3,566			7,356			6,390

Selling, general and administrative expense		3,717			5,033			3,417			4,464			7,134			9,496

Operating loss		(143	)		(2,209	)
Operating income (loss)								366			(898	)		222			(3,106	)

Other expense:
Interest expense		207			226			222			256			429			483
Fair market value adjustment of warrant liability		(251	)		-
Fair market value adjustment of warrant liabilities								84			-			(166	)		-
Other income, net		(8	)		(6	)		(21	)		(8	)		(31	)		(14	)
Total other expense		(52	)		220			285			248			232			469

Loss before income taxes		(91	)		(2,429	)
Net income (loss) before income taxes								81			(1,146	)		(10	)		(3,575	)

Provision (benefit) for income taxes		22			(327	)		100			(30	)		122			(357	)

Net loss		(113	)		(2,102	)		(19	)		(1,116	)		(132	)		(3,218	)

Cumulative and imputed dividends on Series A and B preferred stock		(27	)		(27	)		(27	)		(27	)		(54	)		(54	)
Cash and imputed dividends on Series D and E preferred stock		(302	)		(193	)		(307	)		(191	)		(609	)		(384	)

Net loss attributable to common shareholders	$	(442	)	$	(2,322	)	$	(353	)	$	(1,334	)	$	(795	)	$	(3,656	)

Net loss per common share:
Net loss per share -
Basic and diluted	$	(0.04	)	$	(0.27	)	$	(0.03	)	$	(0.15	)	$	(0.06	)	$	(0.42	)

Weighted average common shares outstanding:
Weighted average shares outstanding -
Basic and diluted		12,314,498			8,620,807			12,342,169			8,698,626			12,328,410			8,659,931


Comprehensive loss	$	(138	)	$	(2,105	)	$	(19	)	$	(1,113	)	$	(156	)	$	(3,217	)

	Level 3						Level 3
	Contingent			Derivative			Contingent			Derivative
	consideration			warrants			consideration			warrants

Balance at December 31, 2013	$	468		$	803		$	468		$	803
Adjustments to fair value of warrants (reflected in other income)		-			(251	)		-			(166	)
Cash paid for contingent acqusition liability								(84	)		-
Effect of currency translation		(16	)		-			1			-
Balance at March 31, 2014	$	452		$	552
Balance at June 30, 2014							$	385		$	637

	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

Balance at December 31, 2013	$	8,395

Effect of currency translation on Apex		6
Balance at June 30, 2014	$	8,401

	March 31, 2014							December 31, 2013
			Accumulated							Accumulated
	Gross		Amortization			Net		Gross		Amortization			Net

Customer relationships	$	3,214	$	(1,759	)	$	1,455	$	3,264	$	(1,654	)	$	1,610
Contractor and resume databases		675		(439	)		236		675		(405	)		270
Tradename		849		(410	)		439		862		(364	)		498
Internal use software		2,721		(1,474	)		1,247		2,802		(1,299	)		1,503
Covenant not to compete		104		(90	)		14		104		(78	)		26

	$	7,563	$	(4,172	)	$	3,391	$	7,707	$	(3,800	)	$	3,907


		Balance December 31, 2013			Additions		Payments			Amortization of Note Discount		Effect of Currency Translation			Balance March 31, 2014				Balance December 31, 2013			Additions		Payments			Amortization of Note Discount		Effect of Currency Translation			Balance June 30, 2014
RBC term loan		$	1,169		$	-	$	(187	)	$	-	$	(40	)	$	942			$	1,169		$	-	$	(380	)	$	-	$	(8	)	$	781

BDC term loan			1,589			-		-			-		(52	)		1,537				1,589			-		-			-		4			1,593

SVB term loan-2			722			-		(83	)		-		-			639				722			-		(166	)		-		-			556

Total note discounts			(45	)		-		-			8		-			(37	)			(45	)		-		-			15		-			(30	)

Total debt		$	3,435		$	-	$	(270	)	$	8	$	(92	)	$	3,081			$	3,435		$	-	$	(546	)	$	15	$	(4	)		2,900

less current portion																(1,064	)																(1,095	)
less RBC debt long term classified as current																(188	)

Debt, net of current portion	Debt, net of current portion														$	1,829		Debt, net of current portion														$	1,805

Description			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 $383	$	1,358
plus cumulative dividends of $402			plus cumulative dividends of $402	$	1,377
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 $100		480
plus cumulative dividends of $108			plus cumulative dividends of $108		488
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 (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
730,357 shares issued and outstanding (net of $1,374 in issuance costs),			730,357 shares issued and outstanding (net of $1,374 in issuance costs),
liquidation preference of $7,449 plus cumulative imputed dividends and			liquidation preference of $7,449 plus cumulative imputed dividends and
beneficial conversion feature of $1,558			beneficial conversion feature of $1,558		7,439
Series E Preferred, $0.001 par value per share, 2,000,000 shares designated,			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
416,533 shares issued and outstanding (net of $875 in issuance costs),			416,533 shares issued and outstanding (net of $875 in issuance costs),
liquidation preference of $4,269 plus cumulative imputed dividends of $54			liquidation preference of $4,269 plus cumulative imputed dividends of $54		3,345

Total convertible preferred stock	$	12,276	Total convertible preferred stock	$	12,649

	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	%