UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

For the quarterly period ended September 30, ~~2014~~2015

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

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

For the transition period from __________ to __________

DECISIONPOINT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

8697 Research Drive Irvine CA, 92618-4204

(Address of principal executive offices) (Zip code)

(949) 465-0065

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes þ No o☐

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

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

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

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

The number of shares of common stock, par value $0.001 per share of DecisionPoint Systems, Inc. outstanding as of the close of business on ~~October 31, 2014,~~November 11, 2015, were 12,729,563.

DECISIONPOINT SYSTEMS, INC.

TABLE OF CONTENTS

Page

~~DECISIONPOINT SYSTEMS, INC.~~

~~TABLE OF CONTENTS~~

~~Item 1.~~PART I. FINANCIAL INFORMATION	~~Condensed Consolidated Financial Statements (unaudited)~~

Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, ~~2014~~2015 and December 31, ~~2013~~		2014	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the			2
	Three and Nine Months Ended September 30, ~~2014~~2015 and ~~2013~~2014			2
	Condensed Consolidated Statements of Cash Flows for the Nine Months ~~Ended~~		EndedSeptember 30, 2015 and 2014	3
	~~September 30, 2014 and 2013~~
	Notes to Unaudited Condensed Consolidated Financial Statements			4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			2326
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			3139
Item 4.	Controls and Procedures			3239

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	40
~~PART II. OTHER INFORMATION~~Item 1a.	Risk Factors	40
Item 2.
~~Item 1.~~	~~Legal Proceedings~~			33
~~Item 1a.~~	~~Risk Factors~~			33
~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds			3341
Item 3.	Defaults Upon Senior Securities			3341
Item 4.	Mine Safety Disclosures			3341
Item 5.	Other Information			3341
Item 6.	Exhibits			3442

Signatures				3543

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

~~PART I. FINANCIAL INFORMATION~~

~~ITEM 1. FINANCIAL STATEMENTS~~

DECISIONPOINT SYSTEMS, INC.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

September 30, December 31,
2014 2013

ASSETS
Current assets
Cash $ 1,471 $ 641
Accounts receivable, net 6,860 10,504
Due from related party - 188
Inventory, net 642 1,533
Deferred costs 3,667 3,809
Deferred tax assets 47 49
Prepaid expenses and other current assets 463 188
Total current assets 13,150 16,912

Property and equipment, net 137 136
Other assets, net 131 165
Deferred costs, net of current portion 1,406 1,807
Goodwill 8,295 8,395
Intangible assets, net 2,523 3,907
Total assets $ 25,642 $ 31,322

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 7,910 $ 9,774
Accrued expenses and other current liabilities 3,658 2,976
Lines of credit 4,046 3,883
Current portion of debt 878 1,474
Due to related parties 152 77
Accrued earn out consideration 90 319
Warrant liability 549 803
Unearned revenue 5,824 7,481
Total current liabilities 23,107 26,787

Long term liabilities
Unearned revenue, net of current portion 2,037 2,481
Debt, net of current portion and discount 1,655 1,961
Accrued earn out consideration, net of current portion - 149
Deferred tax liabilities 703 740
Other long term liabilities 66 77
Total liabilities 27,568 32,195

Commitments, contingencies, and subsequent events - -

STOCKHOLDERS' DEFICIT
Cumulative Convertible Preferred stock, $0.001 par value, 10,000,000 shares
authorized, 1,547,845 and 1,514,155 shares issued and outstanding, including
cumulative and imputed preferred dividends of $2,208 and $1,956, and
with a liquidation preference of $13,614 and $13,232 at September 30, 2014
and December 31, 2013, respectively 12,735 12,193
Common stock, $0.001 par value, 100,000,000 shares authorized,
12,883,446 issued and 12,729,563 outstanding as of September 30, 2014,
and as of December 31, 2013 13 13
Additional paid-in capital 17,248 17,231
Treasury stock, 153,883 shares of common stock (205 ) (205 )
Accumulated deficit (31,173 ) (29,475 )
Unearned ESOP shares (520 ) (629 )
Accumulated other comprehensive loss (24 ) (1 )
Total stockholders’ deficit (1,926 ) (873 )
Total liabilities and stockholders' deficit $ 25,642 $ 31,322

~~See accompanying notes to unaudited condensed consolidated financial statements~~

~~DECISIONPOINT SYSTEMS, INC.~~

~~Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss~~

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

Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013

Net sales $ 14,143 $ 17,575 $ 47,365 $ 46,067

Cost of sales 11,123 14,113 36,989 36,216

Gross profit 3,020 3,462 10,376 9,851

Selling, general and administrative expense 3,028 4,485 10,161 13,981
Adjustment to earn-out obligations - (820 ) - (820 )

Operating income (loss) (8 ) (203 ) 215 (3,310 )

Other (income) expense, net:
Interest expense 229 241 658 723
Fair market value adjustment of warrant liabilities (88 ) (166 ) (254 ) (166 )
Other (income) expense, net 17 (2 ) (12 ) (16 )
Total other expense, net 158 73 392 541

Net loss before income taxes (166 ) (276 ) (177 ) (3,851 )

Provision (benefit) for income taxes 397 (109 ) 519 (466 )

Net loss (563 ) (167 ) (696 ) (3,385 )

Cumulative and imputed dividends on Series A and B preferred stock (27 ) (27 ) (81 ) (81 )
Cash and imputed dividends on Series D and E preferred stock (307 ) (196 ) (921 ) (580 )

Net loss attributable to common shareholders $ (897 ) $ (390 ) $ (1,698 ) $ (4,046 )

Net loss per share -
Basic and diluted $ (0.07 ) $ (0.04 ) $ (0.14 ) $ (0.44 )

Weighted average shares outstanding -
Basic and diluted 12,369,840 10,019,109 12,342,371 9,117,969

Comprehensive loss $ (561 ) $ (166 ) $ (719 ) $ (3,383 )

~~See accompanying notes to unaudited condensed consolidated financial statements~~

~~DECISIONPOINT SYSTEMS, INC.~~

~~Unaudited Condensed Consolidated Statements of Cash Flows~~

~~(In thousands)~~

Nine Months ended September 30,
2014 2013
Cash flows from operating activities:
Net loss
$ (696 ) $ (3,385 )
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,331 1,497
Amortization of deferred financing costs and note discount 117 140
Employee and Director stock-based compensation 89 31
Acquisition earn-out adjustment - (820 )
Change in fair value of warrants (254 ) (166 )
ESOP compensation expense 37 79
Allowance for doubtful accounts (30 ) 56
Loss on disposal of property and equipment 2 13
Deferred taxes. net (9 ) (5 )
Changes in operating assets and liabilities:
Accounts receivable 3,669 (468 )
Due from related party 184 -
Inventory, net 891 (107 )
Deferred costs 543 496
Prepaid expenses and other current assets (251 ) (578 )
Other assets, net 11 5
Accounts payable (1,854 ) 1,961
Accrued expenses and other current liabilities 447 106
Due to related parties 69 158
Unearned revenue (2,085 ) (1,163 )
Net cash provided by (used in) operating activities 2,211 (2,150 )

Cash flows from investing activities
Purchases of property and equipment (42 ) (33 )
Net cash used in investing activities (42 ) (33 )

Cash flows from financing activities
Borrowings from lines of credit, net 165 817
Proceeds from issuance of term debt - 1,000
Repayment of debt (819 ) (1,552 )
Paid financing costs (100 ) (119 )
Dividends paid (499 ) (296 )
Payments for contingent acquisition liability (84 ) -
Common stock issued in private placement, net of costs - 1,502
Net cash (used in) provided by financing activities (1,337 ) 1,352
Effect on cash of foreign currency translation (2 ) (2 )
Net increase (decrease) in cash 830 (833 )
Cash at beginning of period 641 1,103
Cash at end of period $ 1,471 $ 270

Supplemental disclosures of cash flow information:
Interest paid $ 634 $ 705
Income taxes paid 32 234

Supplemental disclosure of non-cash financing activities:
Accrued and imputed dividends on preferred stock $ 1,002 $ 661
Warrants issued in connection with common stock private placement - 1,099

	September 30,			December 31,
	2015			2014
ASSETS				(Restated)
Current assets
Cash	$	260		$	1,616
Accounts receivable, net		4,907			10,354
Inventory, net		208			1,998
Deferred costs		2,104			2,532
Deferred tax assets		-			19
Prepaid expenses and other current assets		148			79
Assets of discontinued operations		-			1,829
Total current assets		7,627			18,427

Property and equipment, net		189			145
Other assets, net		33			109
Deferred costs, net of current portion		951			1,004
Goodwill		5,304			7,524
Intangible assets, net		-			1,414
Assets of discontinued operations		-			1,634
Total assets	$	14,104		$	30,257

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable	$	7,018		$	9,736
Accrued expenses and other current liabilities		2,528			2,028
Lines of credit		3,329			5,811
Current portion of debt		1,626			813
Due to related parties		170			73
Unearned revenue		3,273			5,915
Liabilities related to discontinued operations		-			1,993
Total current liabilities		17,944			26,369

Long term liabilities
Unearned revenue, net of current portion		1,320			1,560
Debt, net of current portion and discount		-			1,580
Deferred tax liabilities		88			461
Warrant liability		82			519
Other long term liabilities		166			194
Liabilities related to discontinued operations		-			487
Total liabilities		19,600			31,170

Commitments and contingencies		-			-
STOCKHOLDERS' DEFICIT
Cumulative Convertible Preferred stock, $0.001 par value, 10,000,000 shares authorized, 1,547,845 shares issued and outstanding, including cumulative and imputed preferred dividends of $2,376 and $2,295, and with a liquidation preference of $14,663 and $13,640 at September 30, 2015 and December 31, 2014, respectively		12,903			12,822
Common stock, $0.001 par value, 100,000,000 shares authorized, 12,883,446 issued and 12,729,563 outstanding as of September 30, 2015, and as of December 31, 2014		13			13
Additional paid-in capital		17,257			17,252
Treasury stock, 153,883 shares of common stock		(205	)		(205	)
Accumulated deficit		(35,367	)		(30,292	)
Unearned ESOP shares		(369	)		(484	)
Accumulated other comprehensive income		272			(19	)
Total stockholders’ deficit		(5,496	)		(913	)
Total liabilities and stockholders' deficit	$	14,104		$	30,257

See accompanying notes to unaudited condensed consolidated financial statements

DECISIONPOINT SYSTEMS, INC.

~~Notes to the~~ Unaudited Condensed Consolidated ~~Financial~~ Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
				(Restated)						(Restated)

Net sales	$	8,240		$	11,608		$	27,410		$	37,809

Cost of sales		6,562			9,205			21,848			29,724

Gross profit		1,678			2,403			5,562			8,085

Selling, general and administrative expense		1,730			2,419			6,160			8,246
Goodwill and intangible asset impairment		-			-			3,047			-

Operating loss		(52	)		(16	)		(3,645	)		(161	)

Other expense:
Interest expense		178			229			580			658
Fair market value adjustment of warrant liabilities		(205	)		(88	)		(437	)		(254	)
Other (income) expense, net		58			17			106			(12	)
Total other (income) expense		31			158			249			392

Net loss from continuing operations, before income taxes		(83	)		(174	)		(3,894	)		(553	)

Benefit for income taxes from continuing operations		(312	)		(307	)		(277	)		(327	)

Net (loss) income from continuing operations		229			133			(3,617	)		(226	)

Discontinued operations:
Loss on sale of discontinued operations, net of tax		-			-			(89	)		-
Loss from discontinued operations, net of tax		-			(696	)		(94	)		(469	)
Net (loss) income		229			(563	)		(3,800	)		(695	)

Cumulative and imputed dividends on Series A and B preferred stock		(27	)		(27	)		(81	)		(81	)
Cash and imputed dividends on Series D and E preferred stock		-			(307	)		-			(921	)
Accrued paid-in-kind dividends on Series D and Series E preferred stock		(454	)		-			(1,194	)		-

Net loss attributable to common shareholders	$	(252	)	$	(897	)	$	(5,075	)	$	(1,697	)

Basic and diluted net loss per common share:
Continuing operations	$	(0.02	)	$	(0.02	)	$	(0.39	)	$	(0.10	)
Discontinued operations		-			(0.05	)		(0.02	)		(0.04	)
Net loss per share	$	(0.02	)	$	(0.07	)	$	(0.41	)	$	(0.14	)

Weighted average shares outstanding - Basic and diluted		12,480,524			12,369,840			12,453,055			12,342,371

Other comprehensive (loss) income, net of tax
Net (loss) income	$	229		$	(563	)	$	(3,800	)	$	(695	)
Foreign currency translation adjustment		272			-			291			(24	)

Comprehensive (loss) income	$	501		$	(563	)	$	(3,509	)	$	(719	)

See accompanying notes to unaudited condensed consolidated financial statements

DECISIONPOINT SYSTEMS, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities:				(Restated)
Net loss from continuing operations	$	(3,617	)	$	(226	)
Net loss from discontinued operations		(183	)		(469	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss on sale of discontinued operations, net of tax		89			-
Depreciation and amortization		404			996
Amortization of deferred financing costs and note discount		46			117
Employee and Director stock-based compensation		101			89
Change in fair value of warrants		(437	)		(254	)
ESOP compensation expense		20			37
Gain/loss on disposal		(2	)		2
Goodwill and intangible asset impairment charges		3,047			-
Allowance for doubtful accounts		1			(42	)
Deferred taxes, net		(306	)		(9	)
Changes in operating assets and liabilities:
Accounts receivable		5,408			2,925
Due from related party		-			184
Inventory, net		1,790			581
Deferred costs		479			710
Prepaid expenses and other current assets		6			(308	)
Other assets, net		62			10
Accounts payable		(2,701	)		(1,314	)
Accrued expenses and other current liabilities		(417	)		164
Due to related parties		97			69
Unearned revenue		(2,826	)		(2,177	)
Operating activities from discontinued operations		616			1,126
Net cash provided by operating activities		1,677			2,211

Cash flows from investing activities
Purchases of property and equipment		(78	)		(42	)
Proceeds from the sale of CMAC		302			-
Net cash provided by (used in) investing activities		224			(42	)

Cash flows from financing activities
(Repayments) borrowings from lines of credit, net		(2,467	)		165
Repayment of debt		(527	)		(819	)
Paid financing costs		(100	)		(100	)
Dividends paid		(252	)		(499	)
Payments for contingent acquisition liability		-			(83	)
Net cash used in financing activities		(3,346	)		(1,336	)
Effect on cash of foreign currency translation		89			(3	)
Net (decrease) increase in cash		(1,356	)		830
Cash at beginning of period		1,616			641
Cash at end of period	$	260		$	1,471

Supplemental disclosures of cash flow information:
Interest paid	$	451		$	634
Income taxes paid		67			32

Supplemental disclosure of non-cash financing activities:
Accrued and imputed dividends on preferred stock	$	81		$	1,002
Accrued PIK dividends on Series D and Series E preferred stock		1,194			-
Liabilities forgiven by CMAC purchaser		348			-

See accompanying notes to unaudited condensed consolidated financial statements

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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~~the latest technologies to empower the mobile worker in many areas including merchandising, sales and delivery; field service; logistics and transportation; and warehouse management.

On June 30, 2015, the Company completed the sale of 100% of the issued and outstanding share capital of CMAC, Inc. (“CMAC”) and recorded a loss on sale of $89,000, which is classified as loss on sale of discontinued operations in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. The Company’s unaudited condensed consolidated financial statements and accompanying notes for current and prior periods have been restated to present the results of operations of CMAC as discontinued operations. In addition, the assets and liabilities have been treated and classified as discontinued operations in the accompanying condensed consolidated balance sheets as of September 30, 2015 and have been restated at December 31, 2014 to provide a comparable presentation, see Note 3.

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 September 30, ~~2014,~~2015, are not necessarily indicative of results for the full ~~2014~~2015 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”~~“Apex”). DecisionPoint Systems International has ~~two~~one wholly-owned ~~subsidiaries,~~subsidiary, DecisionPoint Systems Group, Inc. (“DPS Group”). All significant intercompany accounts and ~~CMAC, Inc. (“CMAC”).~~transactions have been eliminated in consolidation. 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 accompanying 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,~~2014, 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.~~18, 2015.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 does 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~~raise substantial doubt about the 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 do some or all of the followings: establish sustained positive operating results through increased sales, ~~successfully implement cost cutting measures,~~ avoid further unforeseen expenses, improve liquidity and working capital, and potentially raise additional equity or debt ~~capital, and successfully refinance its current debt obligations when they come due in February of 2015.~~capital. There can be no assurance that the Company will be able to achieve sustainable 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.

In the quarter ended September 30, 2015, the Company experienced a decrease in revenue from continuing operations of $3.4 million, or 29.3% compared to the quarter ended September 30, 2014, and a $10.4 million, or 27.5% decrease in revenue for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. In the quarter ended September 30, 2015, the Company experienced an operating loss from continuing operations of $52,000 compared to the operating loss from continuing operations of $16,000 for the quarter ended September 30, 2014, and excluding the impact of a goodwill and intangible asset impairment charge of $3.047 million, a $598,000 operating loss from continuing operations for the nine months September 30, 2015, compared to an operating loss from continuing operations of $161,000 for the comparable period in 2014. At September 30, 2015 and December 31, 2014, the Company had a substantial working capital deficit, excluding discontinued operations and classified assets and liabilities held for sale, totaling $10.3 million and $7.8 million, respectively. Although a portion of this deficit is associated with deferred costs and unearned revenues, the liabilities of the Company that are expected to be satisfied in the foreseeable future in cash far exceed our receivables and other assets that are expected to be satisfied in cash. In addition, as a consequence of our recent historical results of operations, availability under our credit line with Silicon Valley Bank (“SVB”) has contracted and our overall liquidity has become further constrained. The Company is dependent upon future growth in net sales to meet our liquidity needs and our debt covenants for the next twelve months.

The Company is currently in default on certain obligations as of September 30, 2015. The Company has not made the final payment on the Royal Bank of Canada (“RBC”) Term Loan that was originally scheduled to be paid in June 2015. The payment had been rescheduled with RBC for September 2015, and continues to be negotiated with RBC. Such rescheduling has not been documented in writing and is based on an oral agreement with RBC. The Company also has not paid interest due on the BDC, Inc. (“BDC”) Term Loan due since June 2015. BDC advised the Company on July 30, 2015 that the financing is in arrears on interest. The failure to pay interest due is a violation of the terms of the financing agreement. The Company is in negotiations to secure acceptable refinancing terms.

The Company is currently in default on the Apex seller note as of the date of this filing. The seller of Apex has demanded payment in full including certain monitoring and administrative fees. The Company has accrued $69,000 as of September 30, 2015 for certain fees related to the demand payment. Between April 2015 and September 2015, Apex had been delinquent on its Canadian premises lease obligations to Harvester Properties of Burlington, Inc. In June 2015, Harvester Properties gave notice of termination of the lease agreement. Since that time, Apex has relocated its operations. At September 30, 2015, there was $125,000 relating to these lease obligations including interest and other fees included in account payable and accrued expenses on the accompanying condensed consolidated balance sheets.

Due to the failure to pay interest on the BDC term loan discussed above, the Company is in covenant default under the subordinated debt provisions of the applicable SVB loan agreement (the “SVB Loan Agreement”). The Company has had discussions with SVB regarding this default and is working with SVB to cure. A SVB lending officer has orally indicated that SVB does not intend exercising legal rights under the SVB Loan Agreement for this default, however, this is not evidenced in writing and is not enforceable.

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

DECISIONPOINT SYSTEMS, INC.

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

If the Company does not ~~continue to~~ achieve sustained positive operating results and does not raise sufficient additional capital, material adverse events may occur including, but not limited to, (1) a reduction in the nature and scope of the Company’s operations, (2) the Company’s inability to fully implement its current business plan and (3) ~~continued defaults~~as discussed above, enforcement actions taken under the Company’s various loan ~~agreements (for a description of past defaults, see~~agreements. If such events were to occur, they would have material adverse effects on the ~~discussion below).~~Company. 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 ~~if our liquidity position does not improve.~~

Inin the ~~quarter ended September 30, 2014, the Company experienced a decrease in revenue~~event of $3.4 million, or 19.5% compared to the quarter ended September 30, 2013, and a $1.3 million, or 2.8% increase in revenue for the nine months ended September 30, 2014 over the comparable nine months of 2013. In the quarter ended September 30, 2014, the Company experienced a net loss of $563,000 compared to the net loss of $167,000 for the quarter ended September 30, 2013, and a $696,000 net loss for the nine months ended September 30, 2014 compared to a net loss of $3.4 million for the comparable period in 2013. At September 30, 2014 and December 31, 2013, the Company had a substantial working capital deficit totaling $9.9 million. Although a portion of this deficit is associated with deferred costs, unearned revenues and term debt that has been classified current due to expected future covenant violations (see further discussion at Note 8), the liabilitiesany of the ~~Company that we expect will have~~adverse outcomes discussed above relating to be satisfied in the foreseeable future in cash substantially exceed the operating assets that we expected to have available in cash. As a result of our historical operations, the availability under our credit line has contracted and our liquidity has been constrained.

To address liquidity constraints, the Company has reduced non-essential expenses. Such expense reduction measures have included, but have not been limited to, consolidation of information technology environments, consolidation of our East Coast depot facility 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 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. Currently, the Company has no plans to seek additional 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. this uncertainty.

~~During 2012, 2013 and the first nine months of 2014, all principal and interest payments on the Company’s term debt were made within payment terms~~. 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. These financial covenants required the Company to maintain specified ratios for fixed coverage and a ratio of funded debt to EBITDA to be tested on a quarterly basis. The Company was not in compliance with the reset covenants in 2013 and the first nine months of 2014. Although management of the Company believes it is not likely that, as a result of this noncompliance, RBC will exercise its rights up to, and including, acceleration of the outstanding debt, there can be no assurance that RBC will not exercise its rights pursuant to the RBC Credit Agreement. Accordingly, the term debt due to RBC is classified as current on the accompanying unaudited condensed consolidated balance sheets.

As of September 30, 2014, the outstanding balance on our line of credit with Silicon Valley Bank (“SVB”) was $3.8 million, down from $3.9 million at December 31, 2013, and the availability under the line of credit has decreased to $0.7 million (see Note 7 – Lines of Credit). The Company relies on the SVB and RBC lines of credit to fund daily operating activities, and the Company maintains very little cash on hand. As of September 30, 2014, the Company was in compliance with the Tangible Net Worth financial covenant under the SVB line of credit and had available a $0.6 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 the SVB lending agreement. Should the Company’s results fail to improve further or once more deteriorate in a manner consistent with its recent historical financial performance, the Company will violate the Tangible Net Worth financial covenant unless it can raise additional outside funding in amounts that are approximately twice the amount of the losses incurred.

Summary of Significant Accounting Policies

There have been no material changes to the Company's significant accounting policies during the nine months ended September 30, ~~2014. For a comprehensive description of the Company's significant accounting policies, see Footnote~~2015. See Note 2 of the Company's consolidated financial statements included in the Company's ~~2013~~2014 Annual Report on Form 10-K filed with the SEC on March ~~31, 2014 with~~18, 2015, for a comprehensive description of the ~~SEC.~~Company's significant accounting policies. See Note 3 for the impact on the financial statements of the discontinued operation presentation.

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

Revenue Recognition - Revenues are generated through product sales, warranty and maintenance agreements, software customization, and professional services. Product sales are recognized when the following criteria are met (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred and title has passed to the customer which generally happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured. The Company generates revenues from the sale of extended warranties on wireless and mobile hardware and systems. Revenue related to extended warranty and service contracts is recorded as unearned revenue and is recognized over the life of the contract as the Company maintains financial risk throughout the term of these contracts and may be liable to refund a customer for amounts paid in certain circumstances. Our policy is to classify shipping and handling costs billed to customers and the related expenses as cost of sales.

The Company also generates revenue from professional services and customer specified software customization on either a fee-for-service or fixed fee basis. Revenue from software customization and professional services that is contracted as fee-for-service is recognized in the period in which the services are performed or delivered. Adjustments to contract price and estimated labor costs are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The Company records sales net of sales tax.

The Company enters into revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. In an arrangement with multiple deliverables, the delivered item or items shall be considered a separate unit of accounting if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis; and (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 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 based on their relative selling prices. We use 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.~~price.

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.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Concentration of Credit Risk -Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, 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,~~SVB, which is an FDIC insured ~~institution.~~institution, for its deposits. Based on these facts, collectability of bank balances appears to be adequate.

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 ~~11%~~13% and ~~10%~~11% of the Company’s revenue for the nine months ended September 30, ~~2014~~2015 and ~~2013,~~2014, respectively. The Company had three customers ~~one of which was not the same,~~ who represented ~~23%~~in the aggregate 31% and ~~21%~~23% of its revenue for the nine months ended September 30, ~~2014~~2015 and ~~2013,~~2014, respectively. The Company’s accounts receivable was concentrated with ~~one customer at September 30, 2014,~~the same three customers representing ~~13%~~in the aggregate 44% and 35% of gross accounts receivable at September 30, 2015 and ~~with one customer at December 31, 2013, representing 16% of gross accounts receivable.~~2014, respectively. Customer mix can shift significantly from year to year, but a concentration of the business with a few large customers is typical in any given year. A decline in revenues could occur if a customer that has been a significant source of revenue in one financial reporting period is a less significant source of revenue in the following period. The loss of a significant customer could have a material adverse impact on the Company.

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

The Company ~~has the same four~~had three primary vendors for the nine months ended September 30, ~~2014 compared to~~2015, and the same three primary vendors in the similar period in ~~2013.~~2014. For the nine months ended September 30, 2015, the Company had purchases from these three vendors that collectively represented 61% of total purchases and 69% of the total outstanding accounts payable at September 30, 2015. For the nine months ended September 30, 2014, the Company had purchases from these ~~four~~same three vendors that collectively represented ~~59%~~63% of total purchases and ~~69%~~68% of the total outstanding accounts payable at September 30, 2014. ~~For~~In addition, the ~~nine months ended September 30, 2013, the Company had purchases from~~same two of these ~~four~~three vendors ~~that collectively~~ represented ~~58% of total purchases~~55% and ~~79% of the total outstanding accounts payable at September 30, 2013. The same single vendor represented 21% and 26%~~53% of the total purchases for the nine months ended September 30, ~~2014~~2015 and ~~2013,~~2014, respectively. Loss of ~~this certain vendor~~any of these vendors could have a material adverse effect on our operations.

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

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

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.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

●

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 fiscal nine months ended September 30, ~~2014.~~2015.

The Company has classified its contingent consideration related to the Apex acquisition as a Level 3 liability. Revenue and other assumptions used in the calculation require significant management judgment. The unobservable inputs in our valuation model includes estimates by management of Apex achieving specified targets. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis. The Company is obligated to pay bonus consideration to the former 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~~153,000) at the ~~Closing Date). At September 30,~~closing date of the Apex transaction, which was June 4, 2012. The Company reassessed the fair value of the contingent consideration liability at December 31, 2014 ~~there is CDN$101,000 (US$90,000) recorded~~and determined the amount to be $0. The Company continues to recognize no bonus consideration obligation in ~~earn out consideration in the Company’s unaudited condensed consolidated financial statements.~~

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

2015.

The Company has classified certain warrants related to the August 2013 issuance and sale of ~~Common Stock~~common stock in a private offering as a Level 3 Liability.�� Assumptions used in the calculation require significant judgment. ~~The unobservable inputs in our valuation model includes~~For prior periods, the ~~probability of additional equity financing and whether the additional equity financing would trigger a reset on the down round protection. The~~ Company ~~reassesses~~reassessed the fair value of the warrant liabilities on a quarterly ~~basis.~~basis using a Monte Carlo option pricing model. For September 30, 2015, the Company assessed the fair value of the warrants using a linear regression model based on observable prices of the known components and their relationship to historical prices. Based on that assessment, the Company recognized a ~~$254,000 reduction~~$205,000 and $88,000 decrease to the fair value of the ~~warrant liability for~~warrants during the three months ended September 30, 2015 and 2014, respectively. The Company recognized a $437,000 and $254,000 decrease to the fair value of the warrants during the nine months ended September 30, ~~2014.~~2015 and 2014, respectively.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of September 30, ~~2014~~2015 and December 31, ~~2013~~2014 (in thousands):

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

Liabilities
Fair value of warrants issued in connectionwith share purchase agreement	$	82	$	-	$	-	$	82

Balance at September 30, 2015	$	82	$	-	$	-	$	82

Quoted prices inactive markets Significant other observable inputs Significant other
unobservable inputs
Total Level 1 Level 2 Level 3
Liabilities
Contingent consideration liability
recorded for business combinations $ 90 $ - $ - $ 90

Fair value of warrants issued in connection
with share purchase agreement 549 - - 549

Balance at September 30, 2014 $ 639 $ - $ - $ 639

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Quoted prices inactive markets Significant other
observable inputs Significant other
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

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

Liabilities
Fair value of warrants issued in connection with share purchase agreement	$	519	$	-	$	-	$	519

Balance at December 31, 2014	$	519	$	-	$	-	$	519

The following table summarizes changes to the fair value of the contingent consideration and derivative warrants, which are Level 3 liabilities (in thousands):

Level 3
Contingent Derivative
consideration warrants

Balance at December 31, 2013 $ 468 $ 803
Adjustments to fair value of warrants (reflected in other income) - (254 )
Cash paid for contingent acquisition liability (84 ) -
Settlement of earn-out obligation reflected in accrued liabilities (279 ) -
Effect of currency translation (15 ) -
Balance at September 30, 2014 $ 90 $ 549

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

	Level 3
	Derivative
	warrants

Balance at December 31, 2014	$	519
Adjustments to fair value of warrants (reflected in other income)		(437	)
Balance at September 30, 2015	$	82

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company's non-financial assets and liabilities, such as goodwill, intangible assets, and other long lived assets resulting from business combinations are measured at fair value using income and market comparable valuation methodologies at the date of acquisition and subsequently re-measured if there are indicators of impairment.

The Company evaluates goodwill, at a minimum, on an annual basis on December 31 and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. There was no impairment of goodwill as a result of the annual impairment review performed during December 31, 2014. The Company's goodwill impairment analysis is sensitive to changes in key assumptions used in its analysis, such as expected future cash flows, the degree of volatility in equity and debt markets, and its stock price.

For the quarter ended June 30, 2015, the Company concluded there were noindicators of potential goodwill impairment for the Company’s Apex business based on changes in the Company’s long-term strategy and outlook for Apex. As a result of identifying indicators of impairment, ~~identified during~~the Company performed an impairment review of goodwill and intangible assets as of June 30, 2015.

Based on the analysis, the Company recorded an impairment charge to goodwill of $2.1 million and intangible assets of $0.9 million in the second quarter of 2015. This impairment was reported as part of the continuing operations results for the nine months ended September 30, ~~2014.~~2015. As a result, the Company has no goodwill or intangible assets remaining related to the Apex business (see Note 6).

For the quarter ended September 30, 2015, the Company reviewed for potential goodwill impairment and concluded that no additional impairment is required.

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

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the nine months ended September 30, 2015, the Company recorded a tax benefit of $277,000 on pre-tax loss of $3.9 million from continuing operations, compared to an income tax benefit of $327,000 on pre-tax loss of $553,000 from continuing operations for the nine months ended September 30, 2014. For the three months ended September 30, ~~2014,~~2015, the Company recorded a tax ~~expense~~benefit of ~~$0.4 million~~$312,000 on pre-tax loss of ~~$0.2 million,~~$83,000 from continuing operations, compared to an income tax benefit of ~~$0.1 million~~$307,000 on pre-tax loss of ~~$0.3 million~~$174,000 from continuing operations for the three months ended September 30, 2013. For the nine months ended September 30, 2014, the Company recorded a tax expense of $0.5 million on pre-tax loss of $0.2 million, compared to an income tax benefit of $0.5 million on pre-tax loss of $3.9 million for the nine months ended September 30, 2013. As of September 30, 2014, the tax provision was calculated on an annualized method as described in FIN18 with an annual effective tax rate of negative 302.81%. The difference in the annual effective tax rate in fiscal 2014 as compared to the U.S. federal statutory rate of 34% was primarily driven by the establishment of a valuation allowance related to our deferred tax assets. If forecast is achieved, management of the Company expects a material tax provision benefit to be recorded in the fourth quarter. This is a result of the application of FIN 18. Actual annual effective tax rate and tax expense (benefit) for the year may vary significantly from quarterly estimates as a result of the mechanics of applying FIN 18 for the interim quarter tax provision calculations.

2014.

Recently Issued Accounting Pronouncements– In May 2014, the FASB issued Accounting Standards Update (“ASU”) ~~No.~~ASU 2014-09, ~~“Revenue~~“Revenue from Contracts with ~~Customers”~~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~~2014-09 states that ~~requires a company to~~an entity should recognize revenue to depict the transfer of promised goods or services to ~~a customer at~~customers in an amount that reflects the consideration itto which the entity expects to ~~receive~~be entitled in exchange for those goods or services. On July 9, 2015, the FASB voted to delay the effective date of the new revenue standard by one year but to permit entities to choose to adopt the standard as of the original effective date. The new standard will be effective for the Company on January 1, 2018. Management is currently evaluating the method of adoption and the potential impact the update may have on its financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability instead of being presented as an asset. This guidance is effective for public companies for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. For all other entities, this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The new guidance is to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance and represents a change in accounting principle. Management is currently evaluating the impact of the adoption of this accounting standard update on its financial statements.

In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at 18 June 2015 EITF Meeting, on 18 August 2015.” The ASU amends subtopic 835-30 of previously issued ASU 2015-03 to include that the SEC would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Management is currently evaluating the impact of the adoption of this accounting standard update on its financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles–Goodwill and Other–Internal Use Software (Subtopic 350-40): Customer’s accounting for Fees Paid in a Cloud Computing Arrangement.” This update provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. This guidance is effective for public companies for fiscal years and interim periods beginning after December 15, 2015. For all other entities, this guidance is effective for annual ~~reporting~~ periods beginning after December 15, ~~2016~~2015, and ~~early~~interim periods within fiscal years beginning after December 15, 2016. Early adoption is ~~not permitted. Accordingly, the Company will adopt this~~permitted for all entities. The new guidance ~~beginning in fiscal 2017. Companies may use~~is to be applied either ~~a full retrospective~~prospectively to new cloud computing arrangements or ~~a modified retrospective approach to adopt this new guidance and management~~retrospectively. Management is currently evaluating ~~which transition approach to use and~~ the impact of ~~this new guidance on our consolidated financial position or results of operations.~~

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (Subtopic 205-40), which defines management's responsibility to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide related disclosures. Currently, this evaluation has only been an auditor requirement. Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of the consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that financial statements are issued. This amended guidance will be effective for us beginning January 1, 2016. The Company does not expect the adoption of this ~~amended guidance~~accounting standard update on its financial statements.

NOTE 3 – DISCONTINUED OPERATIONS

As part of the Company’s efforts to ~~have~~evaluate its liquidity and capital resource needs for 2015 and focus on core value-added segments of its business, the Company decided in the second quarter to consider discontinuing the CMAC, Inc. (“CMAC”) business after the recent loss of a significant ~~impact~~customer of the business unit. Thereafter, the opportunity arose to sell the business to its former owner, the Company’s former Senior Vice President. On June 30, 2015, the Company completed the sale of 100% of the issued and outstanding share capital of CMAC, Inc. (“CMAC”) and recorded a loss on ~~its Consolidated Financial Statements.~~sale of $89,000, which is classified as loss on sale of discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive loss. The agreement provided for the sale of substantially all of the assets and liabilities of CMAC for $302,000 in cash consideration and $348,000 in liabilities forgiven by the CMAC purchaser. The Company has accounted for this business as discontinued operations and accordingly, the Company’s unaudited condensed consolidated financial statements and accompanying notes for current and prior periods have been restated to present the results of operations of CMAC as discontinued operations. In addition, the assets and liabilities have been treated and classified as discontinued operations in the accompanying condensed consolidated balance sheets as of September 30, 2015 and have been restated at December 31, 2014 to provide a comparable presentation.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The loss on sale of CMAC was determined as follows (in thousands):

Assets sold
Deferred costs	$	506
Other current assets		81
Intangible assets		459
Goodwill		678
Other long term assets		208
Total assets		1,932

Liabilities assumed by purchaser
Unearned revenue - current		782
Other current liabilities		19
Unearned revenue - long term		296
Other long term liabilities		28
Total liabilities		1,125
Net assets sold		807
Cash received		(302	)
Non-cash consideration-liabilities forgiven by CMAC purchaser		(348	)
Net loss on sale of discontinued operations, before income tax		157
Income tax benefit on loss on sale		(68	)
Net loss on sale of discontinued operations, net of tax	$	89

The carrying amounts of the major classes of CMAC assets and liabilities that are classified as discontinued operations on the accompanying condensed consolidated balance sheets are as follows (in thousands):

	September 30,		December 31,
	2015		2014
ASSETS
Current assets
Accounts receivable, net	$	-	$	1,144
Inventory, net				37
Deferred costs		-		645
Deferred tax asset		-		2
Prepaid expenses and other current assets		-		1
Total current assets of discontinued operations		-		1,829

Noncurrent assets
Other assets, net		-		15
Deferred costs, net of current portion		-		310
Goodwill		-		678
Intangible assets, net		-		631
Total noncurrent assets of discontinued operations		-		1,634
Total assets of discontinued operations	$	-	$	3,463
LIABILITIES
Current liabilities
Accounts payable	$	-	$	263
Accrued expenses and other current liabilities		-		727
Unearned revenue		-		1,003
Total current liabilities of discontinues operations		-		1,993

Noncurrent liabilities
Unearned revenue, net of current portion		-		455
Other long term liabilities		-		32
Total noncurrent liabilities of discontinued operations		-		487
Total liabilities of discontinued operations	$	-	$	2,480

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The reconciliation of the major classes of income and expense constituting income (loss) from discontinued operations on the Company’s unaudited condensed consolidated statements of operations and comprehensive loss are as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2015		2014			2015			2014

Net sales	$	-	$	2,535		$	3,156		$	9,557
Cost of sales		-		1,918			2,432			7,265
Selling, general & administrative expenses		-		609			812			1,915
Operating (loss) income from discontinued operations		-		8			(88	)		377
Other expense (income)
Interest expense		-		-			6			-
Other income		-		-			-			-
Total other expense from discontinued operations		-		-			6			-
Loss (income) from operations, before income tax		-		8			(94	)		377
Income tax provision on operations		-		704			-			846
Loss from discontinued operations, net of tax	$	-	$	(696	)	$	(94	)	$	(469	)

Net loss on sale of discontinued operations, before income tax	$	-	$	-		$	(157	)	$	-
Income tax benefit on loss on sale of discontinued operations		-		-			68			-
Loss on discontinued operations	$	-	$	-		$	(89	)	$	-

NOTE 34 – LOSS PER COMMON SHARE

Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The weighted-average basic and diluted shares for each of the nine months ended September 30, ~~2014~~2015 and ~~2013~~2014, exclude approximately ~~0.4~~0.3 million and ~~0.5~~0.4 million, respectively, of ESOP shares ~~related to the Employee Stock Ownership Plan~~ that have not been committed to be released.

For periods presented in which there is a net loss, potentially dilutive securities are excluded from the computation of fully diluted net loss per share as their effect is anti-dilutive. All potentially dilutive securities are anti-dilutive due to the net loss incurred by the Company in the periods presented.

Potential dilutive securities consist of (in thousands):

Nine Months Ended September 30,
2014 2013

Convertible preferred stock - Series A 270 270
Convertible preferred stock - Series B 131 131
Convertible preferred stock - Series D 10,287 7,824
Convertible preferred stock - Series E 8,331 -
Warrants to purchase common stock 3,555 2,737
Options to purchase common stock 766 544

Total potentially dilutive securities 23,340 11,506

	As of September 30,
	2015		2014

Convertible preferred stock - Series A		270		270
Convertible preferred stock - Series B		131		131
Convertible preferred stock - Series D *		10,287		10,287
Convertible preferred stock - Series E **		8,331		8,331
Warrants to purchase common stock		3,279		3,555
Options to purchase common stock		2,165		766

Total potentially dilutive securities		24,463		23,340

Excludes accrued paid-in-kind (“PIK”) dividends on Series D Preferred Stock of 34,318, 150,090 and 288,404 shares for the first, second and third quarter of 2015, respectively (see Note 9).

Excludes accrued PIK dividends on Series E Preferred Stock of 16,065, 69,738 and 130,111 shares for the first, second and third quarter of 2015, respectively (see Note 9).

DECISIONPOINT SYSTEMS, INC.

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 45 – WARRANT LIABILITY

The Company has determined that certain warrants the Company has issued contain provisions that protect the holders from future issuances of the Company’s Common Stock at prices below such warrants’ ~~then-in-effect~~then in effect respective exercise prices (see Note 9). These provisions could result in modification of the warrants ~~then-in-effect~~then in effect exercise price. The Company ~~has~~ evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity. Pursuant to this guidance, the Company’s management ~~has~~ concluded that these instruments do not meet the criteria for classification as equity treatment and must be recorded as a liability as a result of the terms in the warrants that provide for price protection in the event of a future issuance. The Company ~~recognizes~~recognized these warrants as liabilities at their fair value and re-measures them at fair value on each reporting date. ASC 820 Fair Value Measurementprovides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition (see Note 2).

The Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities. ~~The~~For December 31, 2014, the estimated fair values were determined using a Monte Carlo option pricing model based on various assumptions. For September 30, 2015, the Company assessed the fair value of the warrants using a linear regression model based on observable prices of the known components and their relationship to historical prices. The Company’s derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities. Various factors are considered in the pricing models the Company uses to value the warrants, including the Company’s current common stock price, the remaining life of the warrants, the volatility of the Company’s common stock price, and the risk-free interest rate. In addition, as of the valuation dates, management assessed the probabilities of future financing assumptions in the Monte Carlo valuation models. Future changes in these factors will have a significant impact on the computed fair value of the warrant liability. Accordingly, the Company expects future changes in the fair value of the warrants to continue to vary from quarter to quarter.

The Company revalues the warrants as of the end of each reporting period. The estimated fair value of the outstanding warrant liabilities was approximately ~~$549,000~~$82,000 and ~~$803,000,~~$519,000, as of September 30, ~~2014~~2015 and December 31, ~~2013,~~2014, respectively. The decrease in fair value of the warrant liabilities for the three months ended September 30, 2015 was $205,000 while the decrease in fair value of the warrant liabilities for the three months ended September 30, 2014 was ~~$88,000~~$88,000. The decrease in fair value of the warrant liabilities for the nine months ended September 30, 2015 was $437,000 while the decrease in the fair value of the warrant liabilities for the nine months ended September 30, 2014 was $254,000. The adjustments to the fair value of the warrant liabilities are included in other income in the Company’s unaudited condensed consolidated ~~statement~~statements of operations.

The warrant liabilities were valued at the closing dates of the common stock purchase agreement ~~(see Note 9(c))~~ and ~~the end of each reporting period~~at December 31, 2014 using a Monte Carlo valuation model and at September 30, 2015 using a linear regression model based on observable prices of the known components and their relationship to historical prices, each with the following assumptions:

	Placement Agent Warrants						Investor Warrants
	September 30,			December 31,			September 30,			December 31,
Warrants	2015			2014			2015			2014

Closing price per share of common stock	$	0.06		$	0.38		$	0.06		$	0.38
Exercise price per share (range)		0.50			0.50			0.50			0.50
Expected volatility		199.7	%		138.3	%		199.7	%		138.6	%
Risk-free interest rate		0.9	%		1.3	%		0.9	%		1.3	%
Dividend yield		-			-			-			-
Remaining expected term of underlying securities (years)		2.9			3.6			2.9			3.6

Placement Agent Warrants Investor Warrants
Warrants September
30, 2014 December
31, 2013 September
30, 2014 December
31, 2013

Closing price per share of common stock $ 0.40 $ 0.53 $ 0.40 $ 0.53
Exercise price per share (range) 0.50 0.50 0.50 0.50
Expected volatility 132.4 % 123.5 % 132.7 % 123.5 %
Risk-free interest rate 1.4 % 1.6 % 1.4 % 1.6 %
Dividend yield - - - -
Remaining expected term of underlying securities (years) 3.9 4.6 3.9 4.6

~~NOTE 5 – BUSINESS COMBINATIONS~~

~~Illume Mobile~~

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

In consideration for the business of Illume Mobile, the Company paid $1,000,000, of which $250,000 was paid in cash and $750,000 was paid in the form of 617,284 shares of the Company’s common stock. The Company valued the shares issued in conjunction with the acquisition at $697,531.

Pursuant to the Asset Purchase Agreement, the Company could have been required to make an additional payment (“Earn-Out Payment”) to the seller of up to $500,000 of which 50% would be payable in cash, and 50% would be in shares of the common stock of the Company. In 2013, it was determined there was not an Earn-Out Payment obligation due under the Asset Purchase Agreement. The Company continues to recognize no Earn-Out Payment obligation in 2014.

DECISIONPOINT SYSTEMS, INC.

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

~~Apex~~

On June 4, 2012 (the “Apex Closing Date”), pursuant to a Stock Purchase Agreement (the “Apex Purchase Agreement”), the Company acquired all of the issued and outstanding shares of Apex, a corporation organized under the laws of the Province of Ontario, Canada. Apex is a provider of wireless mobile work force software solutions. Its suite of products utilizes the latest technologies to empower the mobile worker in many areas including merchandising, sales and delivery; field service; logistics and transportation; and, warehouse management. Its clients are North American companies that are household names whose products and services are used daily to feed, transport, entertain and care for people throughout the world.The Company accounted for the transaction using the purchase method of accounting and the operating results for Apex have been consolidated into the Company’s results of operations beginning on June 5, 2012.

In consideration for the shares of Apex, the Company paid CDN$5,000,000 (US$4,801,000 at the Closing Date) (the “Apex Closing Amount”) in cash. The Company may have been required to pay up to an undiscounted amount of CDN$3,500,000 (US$3,360,700 at the Closing Date) in consideration for Apex achieving certain levels of adjusted earnings before interest, depreciation, taxes and amortization (the “EBITDA”), as defined by the Apex Purchase Agreement, in the period ended July 2013. The initial fair value of the earn-out (the “Apex Earn-Out Payment”) was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the Closing Date).At September 30, 2013, the calculated Apex Earn-Out Payment due under the Apex Purchase Agreement was 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 unaudited condensed consolidated statement of operations and comprehensive loss as of September 30, 2013. On June 9, 2014, the accounting expert issued their final report and the fair value of the Apex Earn-Out Payment 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.As of September 30, 2014, there is CDN$311,000 (US$279,000) recorded in earn out consideration reflected in accrued liabilities in the unaudited condensed consolidated financial statements (see Note 12). The convertible promissory note is expected to be executed in the fourth quarter of 2014.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As part of the Apex Purchase Agreement, the Company is obligated to pay bonus consideration to the CEO of Apex. Such bonus is considered additional contingent purchase consideration as the Company is obligated to pay the bonus regardless of whether or not the CEO’s employment is retained. The initial fair value of the bonus was calculated to be approximately CDN$160,000 (US$153,000 at the Closing Date). At September 30, 2014 there is CDN$101,000 (US$90,000) recorded in earn out consideration reflected in accrued liabilities in the Company’s unaudited condensed consolidated financial statements.(Unaudited)

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

The following summarizes the transaction affecting goodwill through September 30, ~~2014~~2015 (in thousands):

Balance at December 31, 2013 $ 8,395

Effect of currency translation on Apex (100 )
Balance at September 30, 2014 $ 8,295

Balance at December 31, 2014	$	8,202

CMAC, Inc. divestiture		(678	)
Apex goodwill impairment charge		(2,089	)
Effect of currency translation on Apex		(131	)
Balance at September 30, 2015	$	5,304

The Company tests goodwill and amortizable intangible assets at least annually on December 31 of each fiscal year for possible impairment. In addition to its annual test, the Company regularly evaluates whether events or circumstances have occurred that may indicate a potential impairment of goodwill or amortizable intangible assets.

The process of testing goodwill for impairment involves the determination of the fair value of the applicable reporting units. The test consists of a two-step process. The first step is the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. The second step measures the amount of an impairment loss, and is only performed if the carrying value exceeds the fair value of the reporting unit. The Company performed its annual impairment testing for its reporting unit as of December 31, 2014, its annual impairment date for fiscal year 2014. On December 31, 2014, the Company concluded based on the first step of the process that there was no impairment of goodwill.

Subsequent to the 2014 annual impairment test, and during the second quarter ended June 30, 2015, the Company concluded there were indicators of potential goodwill impairment for the Company’s Apex business based on changes in the Company’s long-term strategy and outlook for Apex. As a result of identifying indicators of impairment, the Company performed a qualitative impairment review (a valuation was not prepared) of goodwill and intangible assets as of June 30, 2015.

Based on the analysis, the Company recorded an impairment charge to goodwill of $2.1 million and intangible assets of $0.9 million in the second quarter of 2015. This impairment was reported as part of the continuing operations results for the nine months ended September 30, 2015. As a result, the Company has no goodwill or intangible assets remaining related to the Apex business.

For the quarter ended September 30, 2015, the Company reviewed for potential goodwill impairment and concluded that no additional impairment is required.

With respect to the sale of CMAC, the goodwill that was specifically identified to the CMAC reporting unit was accounted for as part of the net assets sold.

As of September 30, ~~2014~~2015 and December 31, ~~2013,~~2014, the Company’s intangible assets and accumulated amortization consist of the following (in thousands):

	September 30, 2014							December 31, 2013							September 30, 2015							December 31, 2014
				Accumulated							Accumulated						Accumulated							Accumulated
		Gross		Amortization			Net		Gross		Amortization			Net	Gross		Amortization			Net		Gross		Amortization			Net

Customer relationships	$	3,202	$	(2,006	)	$	1,196	$	3,264	$	(1,654	)	$	1,610	$	100	$	(100	)	$	-	$	100	$	(100	)	$	-
Contractor and resume databases		675		(506	)		169		675		(405	)		270
Tradename		845		(504	)		341		862		(364	)		498		130		(130	)		-		130		(130	)		-
Internal use software		2,702		(1,885	)		817		2,802		(1,299	)		1,503		310		(310	)		-		310		(310	)		-
Covenant not to compete		103		(103	)		-		104		(78	)		26		90		(90	)		-		90		(90	)		-

	$	7,527	$	(5,004	)	$	2,523	$	7,707	$	(3,800	)	$	3,907
Total (1)															$	630	$	(630	)	$	-	$	630	$	(630	)	$	-

(1) CMAC’s net intangible assets of $631,000 ($2,729,000 gross and $2,098,000 accumulated amortization) were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2014. Impairment charges of Apex’s net intangible assets of $958,000 ($3,764,000 gross and $2,806,000 accumulated amortization) were recorded in the second quarter of fiscal 2015.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The effect of foreign currency translation on the goodwill and intangible assets for the nine months ended September 30, ~~2014~~2015 is approximately ($~~100,000)~~131,000) and ($~~91,000).~~

Amortization expense for the three and nine months ended September 30, 2014 was $0.4 million and $1.3 million, respectively, and amortization expense for the three and nine months ended September 30, 2013 was $0.4 million and $1.4 million,86,000), respectively.

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

NOTE 7 – LINES OF CREDIT

SVB Line of Credit - The Company has a $10.0 million revolving line of credit with ~~Silicon Valley Bank (“SVB”)~~SVB which provides for borrowings based upon eligible accounts receivable, as defined in the ~~Loan Agreement (“SVB~~applicable loan agreement, dated December 15, 2006 (the “SVB Loan Agreement”). Under the SVB Loan Agreement as amended February 27, 2013, SVB has also provided the Company with term loans as discussed atin Note 8. On February 27, 2015, the Company entered into an agreement to further amend the SVB Loan Agreement to extend the maturity date of the revolving credit line provided thereunder, to February 28, 2017. The February 27, 2015 amendment provides for interest at prime plus 3.25% in 2015, and provides for further interest rate reductions upon achievement of certain financial thresholds. The SVB Loan Agreement is secured by substantially all the assets of the ~~Company and matures in February 2015.~~Company. As of September 30, ~~2014~~2015 and December 31, ~~2013,~~2014, the outstanding balance on the line of credit was approximately ~~$3.8~~$3.3 and ~~$3.9~~$5.8 million, respectively, and the interest rate ~~for September 30, 2014 and December 31, 2013~~ was 6.5% ~~and 7.0%, respectively. The line of credit is due February 2015. The line of credit has a certain financial covenant and other non-financial covenants.~~ The minimum Tangible Net Worth requirement of an $8.7 million deficit is to be further reduced by one half of any funds raised through sales of common stock (as only 50% of additional capital raises are given credit in the Tangible Net Worth calculation). As of September 30, 2014 and December 31, 2013, the Company was in compliance with the Tangible Net Worth financial covenant and had available a $0.6 million and $0.8 million cushion over the requirement, respectively. The Company believes that at the time of this filing it is compliant with the terms and provisions of its SVB Loan Agreement. Should the Company continue to incur losses in a manner consistent with its recent historical financial performance, the Company will violate Tangible Net Worth covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.

Availability under the line of credit was approximately ~~$0.7~~$ 0.3 million as of September 30, ~~2014.~~2015. The line of credit allows the Company to cause the issuance of letters of credit on account of the Company to a maximum of the borrowing base as defined in the ~~SVB~~ Loan Agreement. No letters of credit were outstanding as of September 30, ~~2014~~2015 or December 31, ~~2013.~~2014.

The February 27, 2015 amendment has certain financial covenant and other non-financial covenants. The minimum tangible net worth requirement under the Tangible Net Worth covenant is an $8.6 million tangible net worth deficit, which 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) on or after February 1, 2015. Should the Company incur losses in a manner consistent with its recent historical financial performance, the Company will violate the Tangible Net Worth covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred. Due to the failure to pay interest on the BDC term loan discussed below (see Note 8), the Company is in covenant default under the subordinated debt provisions of the SVB Loan Agreement. The Company has had discussions with SVB regarding this default and is working with SVB to cure. A SVB lending officer has orally indicated they do not intend exercising legal rights under the SVB Loan Agreement for this default, however, this is not evidenced in writing and is not enforceable.

RBC Line of Credit -The Company is party to a credit agreement, dated June 4, 2012 (the “RBC Credit Agreement”) with Royal Bank of Canada (“RBC”). Under the RBC Credit Agreement, the revolving demand facility allows for borrowings up to CDN$200,000 based upon eligible accounts ~~receivable.~~receivable of our Canadian entity Apex. Interest is based on the Royal Bank Prime (“RBP”) plus 1.5% and is payable on demand. As of September 30, ~~2014~~2015 and December 31, ~~2013,~~2014, the outstanding balance on the line of credit was ~~$193,000~~$7,500 and $58,000, respectively, and the interest rate ~~is 4.5%.~~was 4.2% and 4.35%, respectively. The RBC Credit Agreement is secured by the assets of Apex. The revolving demand facility has certain financial covenants and other non-financial covenants. The covenants were reset by RBC on August 16, 2013. The Company was ~~not~~ in compliance with the reset covenants at September 30, ~~2014~~2015 and December 31, ~~2013.~~2014. See further discussion regarding this condition at Note 8.

For the ~~nine~~three months ended September 30, ~~2014~~2015 and ~~2013,~~2014, the Company’s interest expense for the ~~SVB and RBC~~ lines of credit, including amortization of deferred financing costs, was approximately ~~$329,000~~$82,000 and ~~$262,000,~~$118,000, respectively. For the nine months ended September 30, 2015 and 2014, the Company’s interest expense for the lines of credit, including amortization of deferred financing costs, was approximately $282,000 and $329,000, respectively.

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

Under the RBC Credit Agreement, the lender provided Apex with a term loan as discussed atin Note 8.

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 – TERM DEBT

Term debt as of September 30, ~~2014,~~2015, consists of the following (in thousands):

	Balance December 31, 2014			Additions		Payments			Amortization of Note Discount		Effect of Currency Translation			Balance September 30, 2015
RBC term loan	$	358		$	-	$	(279	)	$	-	$	(27	)	$	52

BDC term loan		1,462			-		-					(168	)		1,294

SVB term loan		389			-		(250	)		-		-			139

Note payable to seller		200			-		-			-		(51	)		149

Total note discounts		(16	)		-		-			8		-			(8	)

Total debt	$	2,393		$	-	$	(529	)	$	8	$	(246	)		1,626

less current portion															(1,626	)

Debt, net of current portion														$	-

Balance
December 31, 2013 Additions Payments Amortization of Note Discount Effect of
Currency
Translation Balance
September 30,
2014
RBC term loan $ 1,169 $ - $ (570 ) $ - $ (38 ) $ 561

BDC term loan 1,589 - - - (65 ) 1,524

SVB term loan-2 722 - (250 ) - - 472

Total note discounts (45 ) - - 21 - (24 )

Total debt $ 3,435 $ - $ (820 ) $ 21 $ (103 ) 2,533

less current portion (878 )

Debt, net of current portion $ 1,655

The Company’s debt is recorded at par value adjusted for any unamortized discounts. Discounts and costs directly related to the issuance of debt are capitalized and amortized over the life of the debt using the effective interest rate method and isare recorded in interest expense in the accompanying unaudited condensed consolidated statements of operations. Unamortized deferred financing costs of approximately ~~$26,000~~$5,000 and ~~$48,000~~$26,000 are included in other assets in the accompanying unaudited condensed consolidated balance sheets as of September 30, ~~2014~~2015 and December 31, ~~2013,~~2014, respectively.

RBC Term Loan --On June 4, 2012, Apex entered into the RBC Credit Agreement with RBC described in Note 7, pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000, including a term facility ~~(“RBC~~(the “RBC Term Loan”) in the amount of CDN $2,500,000 (US$2,401,000 at the ~~Closing Date)~~closing date of June 4, 2012). The RBC Term Loan accrues interest at ~~RBP~~Royal Bank Prime plus 4% ~~(7%~~(6.7% at September 30, ~~2014)~~2015). Principal and interest is payable over a three year period at a fixed principal amount of CDN $70,000 a month beginning in July 2012 and continuing through ~~June~~September 2015. Apex paid approximately $120,000 in financing costs, which has been recorded as deferred financing costs or note discount in the accompanying unaudited condensed consolidated balance sheets as of September 30, ~~2014~~2015 and December 31, ~~2013,~~2014, and is being amortized to interest expense over the term of the loan.

In addition, the RBC Term Loan calls for mandatory repayments based on 20% of Apex’s free cash flow as defined in the RBC Credit Agreement, before discretionary bonuses based on the annual year end audited financial statements of Apex, beginning with the fiscal year ended December 31, 2012, and payable within 30 days of the delivery of the annual audited financial statements, and continuing every six months through December 31, 2014. This amount ~~is estimated to be~~was $0 at December 31, 2014 and September 30, ~~2014 and December 31, 2013.~~2015.

The RBC Term Loan has certain financial covenants and ~~other~~ non-financial covenants. On August 16, 2013 the RBC Credit Agreement was amended and certain financial covenants were modified. Pursuant to the amended credit agreement and commencing with the fiscal year ended December 31, 2013, the Company is required to maintain a fixed coverage ratio, calculated on a consolidated basis, of not less than 1.15:1, with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter. ~~As part~~The Company was in compliance with all of its RBC financial covenants as of September 30, 2015 and December 31, 2014. We expect to continue to meet the requirements of our RBC financial covenants over the remainder of the ~~revised financial covenants, covenant testing~~loan period. The final payment was ~~waived by~~originally scheduled to be paid in June 2015 and had been rescheduled with RBC for September ~~30, 2013. The Company was not in compliance with the reset covenants at September 30, 2014 and December 31, 2013. Although~~2015; the Company ~~believes it~~continues to be in negotiation with RBC on this payment. Such agreement has not been documented in writing and 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 September 30, 2014 and December 31, 2013.based on an oral agreement with RBC.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

BDC Term Loan --On June 4, 2012, Apex also entered into the BDC Loan Agreement ~~as part of the Apex Purchase Agreement described in Note 5,~~ pursuant to which BDC made available to Apex a term credit facility ~~(“BDC~~(the “BDC Term Loan”) in the aggregate amount of CDN $1,700,000 (USD $1,632,000 at the ~~Closing Date)~~closing date of June 4, 2012). The BDC Term Loan accrues interest at the rate of 12.5% per annum, and matures on June 23, 2016, with an available one year extension for a fee of 2%, payable at the time of extension. The Company does not currently have the liquidity to repay this obligation when due. In addition to the interest payable, consecutive quarterly payments of CDN$20,000 as additional interest are due beginning on June 23, ~~2012, and subject~~2012. Subject to compliance with bank covenants, Apex ~~will~~is returned to make a mandatory annual principal payment in the form of a cash flow sweep which will be equal to 50% of the Excess Available Funds (as defined by the BDC Loan Agreement) before discretionary bonuses based on the annual year end audited financial statements of Apex. The maximum annual cash flow sweep in any year will be CDN$425,000. As of September 30, ~~2014,~~2015, the Company estimates that the cash sweep will be approximately $0. ~~Such payments will be applied to reduce the outstanding principal payment due on the maturity date.~~ In the event that Apex’s annual audited financial statements are not received within 120 days of its fiscal year end, the full CDN$425,000 becomes due and payable on the next payment date. Apex paid approximately $70,000 in financing costs which $35,000 has been recorded as deferred financing costs and $35,000 recorded as a note discount in the accompanying consolidated balance sheet ~~as of September 30, 2014,~~ and is being amortized to interest expense over the term of the loan using the effective interest rate method. As of September 30, ~~2014,~~2015, there was approximately ~~$15,000~~$4,000 in unamortized deferred financing costs and ~~$15,000~~$6,000 in unamortized note discount.

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

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

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

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

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

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

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

The BDC Loan Agreement contains certain financial and non-financial covenants. On August 22, 2013, the BDC Term Loan was amended and certain financial covenants were modified. Pursuant to the amended loan agreement, the Company is required to maintain, for the duration of the ~~investment,~~loan, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised yearly 120 days after each year end. The Company was in compliance with all of ~~our~~its BDC financial covenants as of the last testing date of December 31, ~~2013. We expect~~2014. As of September 2015, the Company did not comply with the covenant and is not expected to ~~continue~~be in compliance at the next testing date, December 31, 2015.

The Company has not paid the interest due on the BDC Term Loan since June 2015. BDC advised the Company on July 30, 2015 that the financing is in arrears as to ~~meet~~interest. The failure to pay interest is a violation of the ~~requirements~~terms of ~~our BDC financial covenants over~~ the ~~short and long term.~~financing agreement. The Company is in negotiations to secure acceptable refinancing terms.

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

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

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The ~~Amended~~ SVB Loan Agreement includes various ~~customary~~ covenants, limitations and events of default. Financial covenants, among others, include liquidity and fixed charge coverage ratios, minimum tangible net worth requirements and limitations on indebtedness. As of September 30, ~~2014,~~2015, the Company was in compliance with the ~~tangible~~Tangible Net Worth ~~financial~~ covenant and had available a ~~$0.6~~$0.3 million cushion over the requirement. The Company currently believes that at the time of this filing it is compliant with the terms and provisions of its SVB lending agreement and expects to continue to meet the requirements of our SVB financial covenants over the short and long term. ShouldHowever, should the Company ~~continue to~~ incur losses in a manner consistent with its recent historical financial performance, the Company will violate ~~this~~the Tangible Net Worth covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred. Due to the failure to pay interest on the BDC term loan discussed above, the Company is in covenant default under to the subordinated debt provisions of the SVB Loan Agreement. The Company has had discussions with SVB regarding this default and is working with SVB to cure. A SVB lending officer has orally indicated they do not intend exercising legal rights under the SVB Loan Agreement for this default, however, this is not evidenced in writing and is not enforceable.

On February 27, 2013, SVB provided the Company ~~amended the Loan and Security Agreement which provided~~with an additional term loan ~~(the “SVB Term Loan 2”)~~ of $1,000,000. The ~~new~~additional term loan is due in 36 monthly installments of principal plus accrued interest beginning on April 1, 2013. The additional term loan accrues interest at 7.5% per annum. As of September 30, ~~2014~~2015 and December 31, ~~2013,~~2014, the outstanding balance on the ~~SVB Term Loan 2~~additional term loan was approximately ~~$472,000~~$139,000 and ~~$722,000,~~$389,000, respectively.

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

For the ~~nine~~three months ended September 30, ~~2014~~2015 and ~~2013,~~2014, the Company’s interest expense on the term debt, including amortization of deferred financing costs, was approximately $62,000 and $101,000, respectively. For the nine months ended September 30, 2015 and 2014, the Company’s interest expense on the term debt, including amortization of deferred financing costs, was approximately $213,000 and $317,000, ~~and $439,000,~~ respectively.

In the event either or both RBC Loan Agreement ~~and/~~or the BDC Loan Agreement ~~were~~are deemed to be in default, then the ~~Amended~~ SVB Loan agreement would be in default, which could, among other things, terminate the facility and term loan, demand immediate repayment of any outstanding amounts, and foreclose on our assets. Any such action would require us to curtail or cease operations, as the Company does not currently have alternative sources of financing.

Seller Note - In December 2014, the Company executed a convertible note payable with the seller of Apex for the fair value of the Apex earn-out originally agreed in connection with the acquisition of Apex. The note is payable in eight quarterly payments (“Installment Dates”) of principal and interest beginning July 1, 2014. The convertible notes accrues interest of 9% per annum for the first year and 11% for the second year. The note is convertible, only on each Installment Date, at the option of the note holder, into shares of our common stock at a conversion price that is equal to the greater of the 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 the Canadian Dollar equivalent of US$1.00 = CDN$1.04. Given the fixed exchange rates, the embedded conversion option was not required to be bifurcated. The shares issuable under the note will be restricted but will have certain piggy back registration rights as set forth in the original Apex purchase agreement. The convertible note matures in June 2016. As of September 30, 2015 and December 31, 2014, the outstanding balance on the note was approximately $149,000 and $200,000, respectively. As of the date of this filing, the quarterly payments due March 30, 2015, June 30, 2015 and September 30, 2015 have not been paid. The Company is in default on the note as of the date of this filing. The seller of Apex has demanded payment in full including certain monitoring and administrative fees. The Company has accrued $69,000 as of September 30, 2015 for certain fees related to the demand payment.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 9 – STOCKHOLDERS’ ~~DEFICIT~~EQUITY

The Company is authorized to issue two classes of stock designated as common stock and preferred stock. As of September 30, ~~2014,~~2015, the Company is authorized to issue 110,000,000 total shares of stock. Of that amount, 100,000,000 shares are common stock, each having a par value of $0.001. The remaining 10,000,000 shares are preferred stock, each having a par value of $0.001, of which 500,000 shares are designated as Series A Preferred Stock, of which 269,608 are issued and outstanding, 500,000 shares are designated as Series B Preferred Stock, of which 131,347 are issued and outstanding, 4,000,000 shares are designated as Series D Preferred Stock, of which 730,357 shares are issued and outstanding, and 2,000,000 are designated as Series E Preferred Stock, of which 416,533 shares are issued and outstanding.

(a) Cumulative Convertible Preferred Stock

A summary of preferred stock outstanding as of September 30, ~~2014~~2015 is as follows (in thousands, except share data):

Description

Series A Preferred, $0.001 par value per share, 500,000 shares designated, 269,608 shares issued and outstanding, liquidation preference of $975 plus cumulative dividends of $500	$	1,475
Series B Preferred, $0.001 par value per share, 500,000 shares designated, 131,347 shares issued and outstanding, liquidation preference of $380 plus cumulative dividends of $146		525
Series D Preferred, $0.001 par value per share, 4,000,000 shares designated, 730,357 shares issued and outstanding (net of $1,374 in issuance costs), liquidation preference of $7,303 plus accrued PIK dividends of $722; cumulative imputed dividends and beneficial conversion feature of $1,621		7,502
Series E Preferred, $0.001 par value per share, 2,000,000 shares designated, 416,533 shares issued and outstanding (net of $875 in issuance costs), liquidation preference of $4,165 plus accrued PIK dividends of $472; cumulative imputed dividends of $110		3,401

Total convertible preferred stock	$	12,903

Description

Series A Preferred, $0.001 par value per share, 500,000 shares designated,
269,608 shares issued and outstanding, liquidation preference of $975
plus cumulative dividends of $422 $ 1,397
Series B Preferred, $0.001 par value per share, 500,000 shares designated,
131,347 shares issued and outstanding, liquidation preference of $380
plus cumulative dividends of $116 496
Series D Preferred, $0.001 par value per share, 4,000,000 shares designated,
730,357 shares issued and outstanding (net of $1,374 in issuance costs),
liquidation preference of $7,451 plus cumulative imputed dividends and
beneficial conversion feature of $1,589 7,470
Series E Preferred, $0.001 par value per share, 2,000,000 shares designated,
416,533 shares issued and outstanding (net of $875 in issuance costs),
liquidation preference of $4,270 plus cumulative imputed dividends of $82 3,372

Total convertible preferred stock $ 12,735

Non-Payment of Required Dividend Payments

As discussed below, pursuant to the terms of the Series D and Series E preferred stock agreements, dividend payments totaling $722,000 and $472,000, respectively, were to be paid-in-kind, in common stock, for the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015. None of the payments have been made as of the date of this filing and the Company is not in compliance with the specific terms of the related preferred stock agreements. Such amounts have been accrued as of September 30, 2015 and are reflected in the current liabilities in the accompanying unaudited condensed consolidated balance sheets.

Series A Preferred Stock and Series B Preferred Stock

The holders of the Series A and Series B Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors, dividends at an annual rate of 8% of the stated value. The stated value of the Series A Preferred is $4.00 per share and the stated value of the Series B Preferred is $3.20 per share. Dividends shall be cumulative and shall accrue on each share of the outstanding preferred stock from the date of its issue.

The holders of the Series A and Series B Preferred Stock have no voting rights except on matters affecting their rights or preferences. Subject to the rights of the Series D Preferred Stock, upon any liquidation, dissolution or winding-up of the Company, the holders of the Series A (subject to the rights of the Series B Preferred) and Series B Preferred Stock shall be entitled to receive an amount equal to the stated value per share of $4.00 and $3.20, respectively, plus any accrued and unpaid dividends before any payments shall be made to the holders of any common stock or hereinafter issued preferred stock. The Series A Preferred Stock has preference over the Series B Preferred Stock in liquidation.

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

DECISIONPOINT SYSTEMS, INC.

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Series C Preferred Stock

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

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

Series D Preferred Stock

On December 20, 2012, we filed a Certificate of Designation of Series D Preferred Shares (the “Series D Certificate of Designation”) with the Secretary of State of Delaware. Pursuant to the Series D Certificate of Designation, we designated 4,000,000 shares of our preferred stock as Series D Preferred Stock. The Series D Preferred Stock has a Stated Value of $10.00 per share, votes on an as-converted basis with the common stock, and is convertible, at the option of the holder, into such number of shares of our common stock equal to the number of shares of Series D Preferred Stock to be converted, multiplied by the Stated Value, divided by the Conversion Price in effect at the time of the conversion. The initial Conversion Price is $1.00, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. As a result of the 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 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 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. ~~Dividends totaling $147,000 are~~The Board of Directors intends to declare a PIK dividend payable in the form of shares of Series D Preferred Stock. The dividends will be payable to holders of record as of March 31, 2015 for accrued dividends for the period of January 1, 2015 to March 31, 2015 and to holders of record as of September 30, 2015 for accrued dividends for the period of April 1, 2015 to September 30, 2015. As those shares were not issued as of September 30, 2015, they have not been included in the Series D Preferred Stock balance at September 30, 2015. As such, the Company recorded an estimated dividend payable in Current Liabilities ~~at September 30, 2014~~ in the ~~accompanying~~ unaudited condensed consolidated balance ~~sheet.~~sheets at September 30, 2015 at an estimated fair value of $722,000 and accrued PIK dividends shares of 473,000. The Company expects to issue accrued PIK dividends in November 2015.

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.~~

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.

DECISIONPOINT SYSTEMS, INC.

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 December 31, 2013. As such, the Company recorded a dividend payable in Current Liabilities in the Condensed Consolidated Balance Sheet at December 31, 2013 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. ~~Dividends totaling $105,000 are~~The Board of Directors intends to declare a PIK dividend payable in the form of shares of Series E Preferred Stock. The dividends will be payable to holders of record as of March 31, 2015 for accrued dividends for the period of January 1, 2015 to March 31, 2015 and to holders of record as of September 30, 2015 for accrued dividends for the period of April 1, 2015 to September 30, 2015. As those shares were not issued as of September 30, 2015, they have not been included in the Series E Preferred Stock balance September 30, 2015. As such, the Company recorded an estimated dividend payable in Current Liabilities ~~at September 30, 2014~~ in the ~~accompanying~~ unaudited condensed consolidated balance ~~sheet.~~sheets at September 30, 2015 at an estimated fair value of $472,000 and accrued PIK dividend shares of 216,000. The Company expects to issue accrued PIK dividends in November 2015.

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.

In addition, commencing on the trading day on which the closing price of the common stock is greater than $1.35 for thirty consecutive trading days with a minimum average daily trading volume of at least 10,000 shares for such period, and at any time thereafter, the Company may, in our sole discretion, effect the conversion of all of the outstanding shares of Series E Preferred Stock to common stock (subject to the condition that, all of the shares issuable upon such conversion may be re-sold without limitation under an effective registration statement or pursuant to Rule 144 under the Securities Act of 1933, as amended).

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

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

DECISIONPOINT SYSTEMS, INC.

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(b) Common Stock

For the nine months ended September 30, ~~2014~~2015

There were no common stock issuances for the nine months ended September 30, ~~2014.~~2015.

For the year ended December 31, ~~2013~~2014

~~On April 26, 2013, the Company issued 70,207 shares of its~~There were no 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~~issuances for the ~~consolidated statement of operations and comprehensive loss as of~~year ended December 31, ~~2013.~~

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

On August 21, 2013, the final closing date (the “Final Closing”) of the Purchase Agreement, we sold (i) an aggregate of 333,333 shares of our Common Stock for $0.60 per share and (ii) 166,667 Investor Warrants for aggregate gross proceeds of $200,000.2014.

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.

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 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, 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.

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

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

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).

(c) Warrants

For the nine months ended September 30, ~~2014~~2015

There were no warrant issuances for the nine months ended September 30, ~~2014.~~2015.

For the year ended December 31, ~~2013~~2014

~~On August 15, 2013 and August 21, 2013,~~There were no warrant issuances for 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.

~~As of August 15, 2013 and August 21, 2013, the dates of issuance, we recorded the warrant liability at $1,099,000. At~~year ended December 31, 2013, the warrants were re-valued with a fair value of $803,000. At September 30, 2014, the warrants were revalued with a fair value of $549,000 with the difference of $254,000 recorded in the Company’s Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss for the nine months ended September 30, 20142014.

~~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.

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~

The following table summarizes information about the Company’s outstanding common stock warrants as of September 30, ~~2014:~~2015:

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

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

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

								3,278,600		$	2,102,721	$	0.64

* 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~~nine months ended September 30, ~~2014,~~2015, was ~~$45,000~~$134,000 representing approximately ~~$37,000~~$115,000 for the ESOP principal payment and $8,000 for the ESOP interest. The Company’s contribution expense for the nine months ended September 30, 2014, was $134,000 representing approximately $109,000 for the ESOP principal payment and $25,000$19,000 for the ESOP interest. ESOP shares are allocated to individual employee accounts as the loan obligation of the ESOP to the Company is reduced. These amounts were previously calculated on an annual basis by an outside, independent financial advisor. Compensation costs relating to shares released are based on the fair value of shares at the time they are committed to be released. The unreleased shares are not considered outstanding in the computation of earnings per common share. ESOP compensation expense consisting of both cash contributions and shares committed to be released for the nine months ended September 30, ~~2014~~2015 was approximately ~~$62,000. The~~$41,000. As of September 30, 2015, the fair value of the shares was ~~$0.45~~$0.24 per share, based on the average of ~~the~~ daily market closing share ~~price.~~prices from the nine months ended September 30, 2015.

NOTE 11 - STOCK OPTION PLAN

In December 2010, the Company established the 2010 Stock Option Plan (the ~~“Plan”~~“2010 Plan”). The Plan authorizes the issuance of 1,000,000 shares of common stock. Pursuant to the terms of the August 16, 2010 merger agreement, the Company assumed all of Old DecisionPoint’s obligations under their outstanding stock option plans.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Under the 2010 Plan, common stock incentives may be granted to officers, employees, directors, consultants, and advisors. Incentives under the 2010 Plan may be granted only in the form of non-statutory stock options and all stock options of Old DecisionPoint that were assumed by the Company became non-statutory options on the date of the assumption.

The 2010 Plan is administered by the Company’s 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~~2010 Plan 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.

In October 2014, the Company established the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan authorizes the issuance of 2,500,000 shares of common stock.

Under the 2014 Plan, common stock incentives may be granted to officers, employees, directors, consultants, and advisors (and prospective directors, officers, managers, employees, consultants and advisors) of the Company and its affiliates can acquire and maintain an equity interest in the Company, or be paid incentive compensation, which may (but need not) be measured by reference to the value of our common stock. The 2014 Plan permits the Company to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock and other stock bonus awards and performance compensation awards. For the nine months ended September 30, 2015, the Company granted 779,148 stock options under the 2014 Plan.

The 2014 Plan is administered by the Company’s Board of Directors, or a committee appointed by the Board of Directors, which determines recipients and the number of shares subject to the awards, the exercise price and the vesting schedule. The term of stock options granted under the 2014 Plan cannot exceed ten years. Options shall not have an exercise price less than 100% of the fair market value of the Company’s common stock on the grant date, and generally vest over a period of five years. If the individual possesses more than 10% of the combined voting power of all classes of stock of the Company, the exercise price shall not be less than 110% of the fair market of a share of common stock on the date of grant.

A summary of the status of the ~~Plans~~plans as of September 30, ~~2014,~~2015, and information with respect to the changes in options outstanding is as follows:

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

December 31, 2013 195,495 804,505 $ 1.39 $ -
Granted (272,475 ) 272,475 0.47 -
Exercised - - - -
Forfeited 310,640 (310,640 ) 1.66 -
September 30, 2014 233,660 766,340 $ 0.95 $ -

Exercisable options at September 30, 2013 717,053 $ 0.91 $ -

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

December 31, 2014		2,114,106			1,385,894	$	0.56	$	-
Granted		(779,148	)		779,148		0.50		-
Exercised		-			-		-		-
Forfeited		-			-		-		-
September 30, 2015		1,334,958			2,165,042	$	0.54	$	-

Exercisable options at September 30, 2015					1,568,511	$	0.62	$	-

DECISIONPOINT SYSTEMS, INC.

~~Notes to the Unaudited Condensed Consolidated Financial Statements~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes information about stock options outstanding as of September 30, ~~2014:~~2015:

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

$ 0.40 - 0.53 532,475 2.39 $ 0.49 513,607 2.40 $ 0.48
$ 1.33 - 2.03 122,730 2.25 1.90 122,730 2.25 1.90
$ 2.06 - 4.34 111,135 6.53 2.16 80,716 6.47 2.16
122
Total 766,340 2.97 $ 0.95 717,053 2.83 $ 0.91

	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

$0.31 - 0.53		2,021,889		3.03	$	0.44		1,430,889		2.53	$	0.48
$1.33 - 2.03		88,874		1.51		1.90		88,874		1.51		1.90
$2.06 - 4.34		54,279		5.96		2.17		48,748		5.96		2.17

Total		2,165,042		3.04	$	0.54		1,568,511		2.58	$	0.62

No awards were exercised during the nine months ended September 30, ~~2014~~2015 and ~~2013,~~2014, respectively. The total fair value of awards vested for the nine months ended September 30, 2015 and 2014 was $101,000 and ~~2013 was~~ $109,000, ~~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 three and nine months ended September 30, 2015, was $22,000 and $67,000, respectively. The fair value of options granted during the three and nine months ended September 30, 2014 was $19,000 and $79,000, ~~(no options were granted during the nine months ended September 30, 2013).~~respectively. The fair values were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

For the Nine Months Ended
September 30,
2014 2013
Expected term 1.50 years N/A
Expected volatility 140.28% N/A
Dividend yield 0% N/A
Risk-free interest rate 0.30% N/A

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Expected term		1.5 years			1.5 years			1.5 years			1.5 years
Expected volatility		245.65	%		134.02	%		224.55	%		140.28	%
Dividend yield		0	%		0	%		0	%		0	%
Risk-free interest rate		0.49	%		0.36	%		0.47	%		0.30	%

The Company estimates expected volatility using historical volatility of its common stock over a period equal to the 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 and nine months ended September 30, 2015 and 2014, was $31,000 and ~~2013, was~~$101,000 and $39,000 and $89,000, ~~and $31,000,~~ respectively, and is included in selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations. As of September 30, ~~2014,~~2015, total unrecognized estimated employee and director compensation cost related to stock options granted prior to that date was ~~$37,000~~$98,000 which is expected to be recognized over a weighted-average vesting period of ~~1.65~~2.06 years.

The weighted-average fair value on the date of grant of options granted during the nine months ended September 30, 2015 and 2014 was $0.08 and $0.29, respectively.

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 nine months ended September 30, ~~2014.~~2015. Please refer to Note 15 to the audited consolidated financial statements for the year ended December 31, ~~2013,~~2014, included in the Company’s Annual Report on Form 10-K filed with the SEC on March ~~31, 2014.~~18, 2015.

DECISIONPOINT SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Rent expense for the nine months ended September 30, 2015 and 2014, was $271,000 and ~~2013, was $396,000 and $511,000,~~$282,000, respectively.

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

~~DECISIONPOINT SYSTEMS, INC.~~

~~Notes~~Apex Lease –Between April 2015 and June 2015, Apex had been delinquent on its lease obligations to Harvester Properties of Burlington, Inc. In June 2015, Harvester Properties gave notice of termination of the ~~Unaudited Condensed Consolidated Financial Statements~~

lease agreement. Since that time, Apex has relocated its operations. There is $125,000 relating to these lease obligations including interest and other fees at September 30, 2015 outstanding and included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.

~~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 June 18, 2014, shall be paid in arrears on the last day of each calendar quarter commencing on September 30, 2014. On June 9, 2014, the accounting expert issued their final report and 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 (77.78%) payable in the form of a convertible promissory note. At September 30, 2014, there is CDN$311,000 (US$279,000) recorded in accrued earn out consideration in the unaudited condensed consolidated financial statements.~~The convertible promissory note is expected to be executed in the fourth quarter of 2014.The interest rate shall be determined as follows:~~

~~(i)~~

~~9% per annum, calculated and compounded quarterly before July 1, 2015; and~~

~~(ii)~~

~~11% per annum, calculated and compounded quarterly after 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 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.

Employment Agreement -The Company entered into an employment agreement with Donald Dalicandro, the ~~Former~~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~~the executive’s employment is retained. The fair value of the bonus was calculated to be approximately CDN$160,000 (US$153,000 at the Apex ~~Closing Date)~~closing date of June 4, 2012). At September 30, ~~2014,~~2015, there is CDN$~~101,000~~0 (US$~~90,000)~~0) recorded infor accrued ~~earn out consideration~~bonus 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 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 – In addition to the matter discussed below, from time to time the Company is subject to the possibility of involvement in litigationincidental to the conduct of our business. When applicable, we record accruals for contingencies when it is probable that a liability 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~~Securities and Exchange 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 then President and Chief Executive Officer and a then-serving member of the ~~Board~~board of ~~Directors,~~directors, also received a Wells Notice. ~~The SEC staff has informed the Company that both~~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. OnIn response to the Wells Notice, the Company’s Audit Committee conducted an internal review, assisted by new outside legal counsel, and on August 8, 2014, ~~the Company~~we submitted to the SEC a response to the Wells Notice setting forth why no action should be commenced against ~~it. As of the date of this filing, there~~us. No proceedings have been ~~no further developments in this matter.~~

~~Settlement of Taglich Action~~ ~~– In July 2014,~~commenced against 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 would hold an annual meeting. The Company’s annual meeting was held on October 28, 2014.Company.

~~ITEM 2.~~~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~On August 15, 2014, Mr. Toms resigned from his positions as Chief Executive Officer, President and member of the Company’s board of directors. On February 11, 2015, the SEC commenced a formal administrative proceeding against Mr. Toms. On March 26, 2015, the proceeding was stayed pending review by the SEC of Mr. Tom’s signed Offer of Settlement. In regards to the administrative proceeding against Mr. Toms, indemnification agreements are provided to the Company’s Directors and Executive Officers to minimize potential personal liability for actions taken in their capacity as Directors and Officers. The Company previously accrued $175,000 as a potential obligation related to the Company’s indemnification of Mr. Toms. As of September 30, 2015, $125,000 is included as part of Accrued Expenses in the unaudited condensed consolidated balance sheets. During the second quarter of 2015, $50,000 has been placed in escrow as payment under these agreements.

ITEM 2.

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

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of the business of DecisionPoint Systems, Inc. (“DecisionPoint”, the “Company”, “we” or “us”). Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our unaudited 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~~18, 2015 and the following:

•

●

Our ability to raise capital when needed and on acceptable terms and conditions;

•

●

Our ability to manage the growth of our business through internal growth and acquisitions;

•

●

The intensity of competition;

•

●

General economic conditions; and,

•

●

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

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~~have a history of investing in building out our capabilities to support these markets and business ~~needs. For example, in July 2012, we invested~~needs and expect to continue to do so 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.future as funds are available. 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 ~~our~~out East Coast depot facility into our larger facility in Irvine, CA in order to provide our East Coast customers with later service hours and to gain some economies of scale. We also continue to invest in our “MobileCare EMM” enterprise mobility management offering. 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.

~~Recent Events~~

Recent Events

Sale of CMAC Operations

As part of our efforts to evaluate its liquidity and capital resource needs for 2015 and focus on core value-added segments of its business, we decided in second quarter to consider discontinuing the CMAC, Inc. (“CMAC”) business after the loss of a significant customer of that business. Thereafter, the opportunity arose to sell the business to its former owner, our former Senior Vice President. On ~~July 2,~~June 30, 2015, we completed the sale of 100% of the issued and outstanding share capital of CMAC, Inc. (“CMAC”) and recorded a loss on sale of $89,000, which is classified as loss on sale of discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive loss. The agreement provided for the sale of substantially all of the assets and liabilities of CMAC for $302,000 in cash consideration and $348,000 in liabilities forgiven by the CMAC purchaser. We have accounted for this business as discontinued operations and accordingly, our unaudited condensed consolidated financial statements and accompanying notes for current and prior periods have been restated to present the results of operations of CMAC as discontinued operations. In addition, the assets and liabilities have been treated and classified as discontinued operations in the accompanying condensed consolidated balance sheets as of September 30, 2015 and have been restated at December 31, 2014 to provide a comparable presentation.

Debt Obligations

We are currently in default on certain obligations as of September 30, 2015. We have not made the final payment on the Royal Bank of Canada (“RBC”) Term Loan was originally scheduled to be paid in June 2015. The payment was rescheduled with RBC for September 2015, the Company ~~received~~continues to be in negotiation with RBC on this payment. Such agreement has not been documented in writing and is based on an oral agreement with RBC. The Company also did not pay interest due on the BDC, Inc. (“BDC”) Term Loan due since June 2015. BDC has advised us on July 30, 2015 that the financing is in arrears on interest. The failure to pay interest due is a ~~written “Wells Notice” from the staff~~violation of the Securities Exchange 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 memberterms of the ~~Board~~financing agreement. We are in negotiations with BDC to secure acceptable refinancing terms.

We are currently in default on the Apex seller note as of ~~Directors, also received a Wells Notice.~~the date of this filing. The ~~SEC staff~~seller of Apex has ~~informed~~demanded payment in full including certain monitoring and administrative fees. We have accrued $69,000 as of September 30, 2015 for certain fees related to the demand payment. Between April 2015 and June 2015, Apex had been delinquent on its lease obligations to Harvester Properties of Burlington, Inc. In June 2015, Harvester Properties gave notice of termination of the lease agreement. Since that time, Apex has relocated its operations. There is $125,000 relating to these lease obligations including interest and other fees at September 30, 2015 outstanding and included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.

Due to the failure to pay interest on the BDC term loan discussed above, the Company is in covenant default under the subordinated debt provisions of the applicable SVB loan agreement (the “SVB Loan Agreement”). The Company has had discussions with SVB regarding this default and is working with SVB to cure. A SVB lending officer has orally indicated that ~~both Wells Notices relate~~SVB does not intend exercising legal rights under the SVB Loan Agreement for this default, however, this is not evidenced in writing and is not enforceable.

Former Employee Matters

For the three and nine months ended September 30, 2015, there has been significant decrease in sales to ~~allegations that, from late 2009~~certain customers in our North East region, which we believe is substantially the result of the departure of four former employees who resigned earlier in 2015 and are now working for one of our competitors (see the further discussion in Part II - Other Information, Item 1: Legal Proceedings).

Non-Payment of Required Dividend Payments

Pursuant to ~~early 2011, Mr. Toms was~~ the ~~beneficial owner~~terms of ~~shares of~~the Series D and Series E preferred stock agreements, dividend payments totaling $722,000 and $472,000, respectively, were to be paid-in-kind, in common stock, for the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015. None 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 shouldpayments have been reflected at the relevant times in public disclosures of Mr. Toms’ other holdings of the Company’s common stock. On August 8, 2014, the Company submitted to the SEC a response to the Wells Notice setting forth why no action should be commenced against it. Asmade as of the date of this filing ~~there~~and we are not in compliance with the specific terms of the related preferred stock agreements. Such amounts have been ~~no further developments.~~accrued as of September 30, 2015 and are reflected in the current liabilities in the accompanying unaudited condensed consolidated balance sheets.

~~On August 15, 2014, Nicholas Toms, a director~~

Results of the Company and the Chief Executive Officer, who has been on leave from his duties as an officer since July 2014 (see the Company’s Form 8-K dated July 10, 2014), resigned from his positions as Chief Executive Officer, President and member of the board of directors, effective immediately. The directors have commenced a search for a new, permanent Chief Executive Officer. Continuing Operations

~~On September 10, 2014,~~In the Board of Directors of Company caused the Company to file a proxy statement with the SEC in preparation for notifying its shareholders of, and conducting, an annual meeting of shareholders. The Company’s proxy statement proposed the reelection of the incumbent members of the Board and the election of a new, additional director, James F. DeSocio. On September 16, 2014, shareholders Michael N. Taglich and Robert F. Taglich filed a preliminary proxy statement contesting the Company’s director slate and proposing an alternative slate of directors to be elected at the October 15, 2014 meeting. Effective as of the close of business on October 3, 2014, the Company’s incumbent directors and Messrs. Michael and Robert Taglich reached a settlement of their differences. Pursuant to the settlement, five of the incumbent directors, Board Chairman Lawrence Yelin and Board members Jay B. Sheehy, David M. Rifkin, Marc Ferland and Donald Dalicandro, resigned from the Board; James F. DeSocio was appointed to the Board; and Donald Dalicandro was authorized to serve as a Board observer until the end of the term during which he is eligible, under his employment agreement with the Company, to remain as a member of the Board. Thereafter, remaining incumbent director Robert Schroeder and new director Mr. DeSocio appointed the following four additional individuals as directors (all of whom were members of the alternative director slate proposed by Messrs. Michael and Robert Taglich): Michael N. Taglich, John Guttilla, Stanley P. Jaworski and Paul A. Seid. TheCompany’s annual shareholders meeting was held on October 28, 2014. At the meeting, the sitting directors, Messrs. Schroeder, DeSocio, Michael N. Taglich, Guttilla, Jaworski and Seid, were elected to serve as the Company’s directors until the next annual meeting.

~~Results of Operations~~

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

Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
2014 203 (Decrease) 2014 2013 (Decrease)
Net sales $ 14.1 $ 17.6 (19.5 %) $ 47.4 $ 46.1 2.8 %
Gross profit 3.0 3.5 (12.8 %) 10.4 9.9 5.3 %
Total operating expenses 3.0 3.7 (17.4 %) 10.2 13.2 (22.8 %)
Operating income (loss) (0.0 ) (0.2 ) (96.2 %) 0.2 (3.3 ) (106.5 %)
Net loss before income taxes (0.2 ) (0.3 ) (39.7 %) (0.2 ) (3.9 ) (95.4 %)

	Three Months Ended September 30,						Increase			Nine Months Ended September 30,						Increase
	2015			2014			(Decrease)			2015			2014			(Decrease)
				(Restated)									(Restated)
Net sales	$	8,240		$	11,608			(29.0	%)	$	27,410		$	37,809			(27.5	%)
Gross profit		1,678			2,403			(30.2	%)		5,562			8,085			(31.2	%)
Total operating expenses		1,730			2,419			(28.5	%)		9,207			8,246			11.7	%
Operating loss from continuing operations		(52	)		(16	)		225.0	%		(3,645	)		(161	)		2164.0	%
Net loss from continuing operations, before income taxes		(83	)		(174	)		(52.3	%)		(3,894	)		(553	)		604.2	%
Benefit for income taxes from continuing operations		(312	)		(307	)		1.6	%		(277	)		(327	)		(15.3	%)
Net (loss) income from continuing operations		229			133			72.6	%		(3,617	)		(226	)		1501.6	%
Discontinued operations:
Loss on sale of discontinued operations, net of tax		-			-						(89	)		-
Income (loss) from discontinued operations, net of tax		-			(696	)		(100.0	%)		(94	)		(469	)		(80.0	%)
Net (loss) income		229			(563	)		(140.7	%)		(3,800	)		(695	)		446.9	%

Net Sales

Net sales for the three and nine months ended September 30, ~~2014~~2015 and ~~2013~~2014 is summarized below:

Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
2014 2013 (Decrease) 2014 2013 (Decrease)
Hardware $ 8.8 $ 11.9 (26.1 %) $ 30.7 $ 28.8 6.4 %
Professional services 4.3 4.3 (1.5 %) 12.9 12.7 1.9 %
Software 0.8 0.9 (18.6 %) 2.7 3.5 (22.0 %)
Other 0.3 0.4 (20.2 %) 1.1 1.1 (1.5 %)
$ 14.1 $ 17.6 (19.5 %) $ 47.4 $ 46.1 2.8 %

	Three Months Ended							Nine Months Ended
	September 30,				Increase			September 30,				Increase
	2015		2014		(Decrease)			2015		2014		(Decrease)
			(Restated)							(Restated)
Hardware	$	5,453	$	7,906		(31.0	%)	$	18,030	$	26,039		(30.8	%)
Professional services		2,057		2,675		(23.1	%)		6,721		8,196		(18.0	%)
Software		401		730		(45.0	%)		1,708		2,519		(32.2	%)
Other		328		297		10.4	%		951		1,055		(9.9	%)
	$	8,240	$	11,608		(29.0	%)	$	27,410	$	37,809		(27.5	%)

Net sales were ~~$14.1~~$8.2 million for the three months ended September 30, ~~2014,~~2015, compared to ~~$17.6~~$11.6 million for the same period ended September 30, ~~2013,~~2014, a decrease of ~~$3.5~~$3.4 million or ~~19.5%~~29.0%.The decrease was driven principally by our hardware category, ~~where net sales~~which declined by ~~$3.1~~$2.4 million, or ~~26.1%~~31.0% over the comparable period. The decrease in hardware ~~revenue~~sales was ~~partially~~ due to ~~significant orders by~~ several large retail customers inwith lower than expected sales for the ~~first and second quarters of 2014 not being repeated at the same level in the third quarter of 2014.~~three months ended September 30, 2015.

Net sales were ~~$47.4~~$27.8 million for the nine months ended September 30, ~~2014,~~2015, compared to ~~$46.1~~$37.8 million for the same period ended September 30, ~~2013, an increase~~2014, a decrease of ~~$1.3~~$10.4 million or ~~2.8%~~27.5%.The ~~increase~~decrease was driven principally by our hardware category, which ~~grew~~declined by ~~$1.9~~$8.0 million, or ~~6.4%~~30.8% over the comparable period. The ~~increase~~decrease in hardware ~~revenue~~sales was ~~partially~~ due to ~~significant orders by~~ several large retail customers in all three quarters were lower than expected.

For the ~~first~~three and ~~second quarters 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~~ nine months ended September 30, ~~2014, compared~~2015, there has been a significant decrease in sales to certain customers in our North East region, which we believe is substantially the ~~period ended September 30, 2013. We also recognized higher revenues through~~result of the ~~expansion~~departure of four former employees who resigned earlier in 2015 and are now working for one of our ~~customer base and continued ordering from customers acquired after~~competitors (see the ~~first quarter of 2013. The decrease~~further discussion in software revenue of $0.8 million, or 22.0% for the nine months ended September 30, 2014 was primarily attributable to the decrease of $0.4 million associated with the Apex business. Software revenue for Apex in the nine months ended September 30, 2013 received the benefit of a new customer and additional business opportunities not recognized at the same level in the nine months ended September 30, 2014.Part II - Other Information, Item 1: Legal Proceedings).

Improved economic conditions in the U.S. have had a positive effect on our sales. In 2013, major retail chains 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. While the slowly improving economic conditions in the U.S. have had a positive effect generally, we have continued to experience greater competitive forces in the market place within our core traditional solutions business.

Cost of Sales

Cost of sales for the three and nine months ended September 30, ~~2014~~2015 and ~~2013~~2014 is summarized below:

Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
2014 2013 (Decrease) 2014 2013 (Decrease)
Hardware $ 7.2 $ 9.8 (26.1 %) $ 25.0 $ 23.4 6.8 %
Professional services 2.8 2.9 (6.1 %) 8.4 8.6 (2.6 %)
Software 0.9 1.1 (18.6 %) 2.8 3.4 (17.8 %)
Other 0.3 0.3 (19.6 %) 0.9 0.9 (0.1 %)
$ 11.1 $ 14.1 (21.2 %) $ 37.0 $ 36.2 2.1 %

	Three Months Ended							Nine Months Ended
	September 30,				Increase			September 30,				Increase
	2015		2014		(Decrease)			2015		2014		(Decrease)
			(Restated)							(Restated)
Hardware	$	4,482	$	6,450		(30.5	%)	$	14,784	$	21,163		(30.1	%)
Professional services		1,410		1,651		(14.6	%)		4,548		5,096		(10.8	%)
Software		423		870		(51.4	%)		1,775		2,635		(32.6	%)
Other		248		234		6.0	%		741		829		(10.6	%)
	$	6,562	$	9,205		(28.7	%)	$	21,848	$	29,724		(26.5	%)

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 was ~~$11.1~~$6.6 million for the three months ended September 30, ~~2014,~~2015, compared to ~~$14.1~~$9.2 million for the same period ended September 30, ~~2013,~~2014, a decrease of ~~$3.0~~$2.6 million or ~~21.2%~~28.7%. The decrease in cost of sales for hardware of ~~26.1%~~30.5% for the three months ended September 30, ~~2014~~2015 compared to the same period in ~~2013~~2014 was approximately in proportion to the decrease in hardware sales. The decrease in cost of sales for software from the three months ended September 30, 2015 compared to the three months ended September 30, 2014 is in direct correlation with the decrease in software.

Cost of sales was $21.8 million for the nine months ended September 30, 2015, compared to $29.7 million for the same period ended September 30, 2014, a decrease of $7.9 million or 26.5%. The decrease in cost of sales for hardware of 30.1% for the nine months ended September 30, 2015 compared to the same period in 2014 was consistent with ~~the~~ hardware ~~revenue~~sales decrease. The decrease in cost of sales for professional services ~~from~~of 10.8% for the ~~three~~nine months ended September 30, ~~2014~~2015 compared to the ~~three months ended September 30, 2013 was 6.1%, more than~~same period in 2014 is correlated to the decrease in net sales for professional services ~~revenue decline~~ of ~~1.5% for the same period, whichwas due to reductions~~18.0%, offset by fixed costs in professional service personnel ~~that we achieved as a component of our operational improvement efforts.~~carried throughout the period. The decrease in cost of sales for software of 18.6% for the three months ended September 30, 2014 compared to the similar period in 2013 was consistent with the decrease in software revenues for the same period and related to professional service personnel reductions. ~~The decrease in other cost of sales was approximately in proportion to the decrease in the other revenues.~~

~~Cost of sales was $37.0 million~~32.6% for the nine months ended September 30, ~~2014,~~2015 compared to ~~$36.2 million for the same period ended September 30, 2013, an increase of $0.8 million or 2.1%. The increase in cost of sales for hardware of 6.8% for~~ the nine months ended September 30, 2014 ~~compared to~~is in direct correlation with the ~~same period in 2013 was slightly higher than the hardware revenue 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 nine months ended September 30, 2014 to the nine months ended September 30, 2013 was 2.6% compared to the revenue growth rate of 1.9%, andwas 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 17.8% for the nine months ended September 30, 2014 compared to the same period in 2013 wasalso related to professional service personnel reductions.The increase in other cost of sales was approximately in proportion to the increase on other revenues.~~software.

Gross Profit

Gross profit for the three and nine months ended September 30, ~~2014~~2015 and ~~2013~~2014 is summarized below:

Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
2014 2013 (Decrease) 2014 2013 (Decrease)
Hardware $ 1.6 $ 2.2 (26.4 %) $ 5.7 $ 5.4 4.5 %
Professional services 1.5 1.4 8.4 % 4.5 4.1 11.3 %
Software (0.1 ) (0.2 ) (19.0 %) (0.1 ) 0.1 (187.2 %)
Other 0.1 0.1 (22.7 %) 0.2 0.3 (6.2 %)
$ 3.0 $ 3.5 (12.8 %) $ 10.4 $ 9.9 5.3 %
As a percentage of sales 21.4 % 19.7 % 1.7 % 21.9 % 21.4 % 0.5 %

	Three Months Ended									Nine Months Ended
	September 30,						Increase			September 30,						Increase
	2015			2014			(Decrease)			2015			2014			(Decrease)
				(Restated)									(Restated)
Hardware	$	971		$	1,456			(33.3	%)	$	3,246		$	4,875			(33.4	%)
Professional services		647			1,024			(36.8	%)		2,173			3,099			(29.9	%)
Software		(21	)		(140	)		(84.6	%)		(67	)		(116	)		(42.4	%)
Other		80			63			26.6	%		210			226			(7.1	%)
	$	1,678		$	2,403			(30.2	%)	$	5,562		$	8,085			(31.2	%)
As a percentage of sales		20.4	%		20.7	%		(0.3	%)		20.3	%		21.4	%		(1.1	%)

Our gross profit was ~~$3.0~~$1.7 million for the three months ended September 30, ~~2014,~~2015, compared to ~~$3.5~~$2.4 million for the same period ended September 30, ~~2013,~~2014, a decrease of ~~$0.5~~$0.7 million or ~~12.6%~~30.2%. Our gross margin ~~increased~~decreased by ~~1,656~~35 basis points to ~~21.4%~~20.4% in ~~2014,~~2015, from ~~19.7%~~20.7% in the comparable period of ~~2013.~~2014. Our gross margin declined due to changes in product mix related to hardware sales along with higher recognized fixed costs for professional services.

Our gross profit was ~~$10.4~~$5.6 million for the nine months ended September 30, ~~2014,~~2015, compared to ~~$9.9~~$8.1 million for the same period ended September 30, ~~2013, an increase~~2014, a decrease of ~~$0.5~~$2.5 million or ~~5.3%~~31.2%. Our gross margin ~~increased~~decreased by ~~524~~109 basis points to ~~21.9%~~20.3% in ~~2014,~~2015, from 21.4% in the comparable period of ~~2013.~~2014. Our gross margin declined due to changes in product max related to hardware sales along with higher recognized fixed costs for professional services.

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.

Selling, General and Administrative Expenses

Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
2014 2013 (Decrease) 2014 2013 (Decrease)
Selling, general and administrative expenses $ 3.0 $ 4.5 (32.5 %) $ 10.2 $ 14.0 (27.3 %)
As a percentage of sales 21.4 % 25.5 % (4.1 %) 21.5 % 30.3 % (8.9 %)

Adjustment to earn-out obligations $ - (0.8 ) $ - (0.8 )

	Three Months Ended									Nine Months Ended
	September 30,						Increase			September 30,						Increase
	2015			2014			(Decrease)			2015			2014			(Decrease)
				(Restated)									(Restated)
Selling, general and administrative expenses	$	1,730		$	2,419			(28.5	%)	$	6,160		$	8,246			(25.3	%)
Goodwill and intangible asset impairment charge	$	-			-						3,047			-
As a percentage of sales		21.0	%		20.8	%		0.2	%		22.5	%		21.8	%		0.7	%

Selling, general and administrative expenses were ~~$3.0~~$1.7 million for the three months ended September 30, ~~2014,~~2015, compared to ~~$4.5~~$2.4 million for the same period in the prior year. This represents a decrease of ~~$1.5~~$0.7 million, or ~~32.5%~~28.5%.

~~Selling,~~Excluding the impact of goodwill and intangible asset impairment, selling, general and administrative expenses were ~~$10.2~~$6.2 million for the nine months ended September 30, ~~2014,~~2015, compared to ~~$14.0~~$8.3 million for the same period in the prior year. This represents a decrease of ~~$3.8~~$2.1 million, or ~~27.3%~~25.3%.

~~The~~Overall decrease in selling, general and administrative expenses for the three and nine months ended September 30, ~~2014 compared~~2015 from the prior comparable periods is primarily related to reductions in headcount and associated salaries and commissions along with other reductions in general expenses.

Subsequent to the ~~similar periods~~2014 annual impairment test, and during the second quarter ended June 30, 2015, we concluded there were indicators of potential goodwill impairment for our Apex business based on changes in our long-term strategy and outlook for Apex. As a result of identifying indicators of impairment, we performed an impairment review of goodwill and intangible assets as of September 30, 2015.

Based on the analysis, we recorded an impairment charge to goodwill of $2.1 million and intangible assets of $0.9 million in the ~~prior year~~second quarter of 2015. This impairment was reported as part of the continuing operations results for the nine months ended September 30, 2015. As a result, we have no goodwill or intangible assets remaining related to the Apex business.

No on-going corporate costs or general overhead expenses were ~~due~~allocated to ~~significant~~discontinued operations.

We continued efforts to streamline our business model. These past 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 ~~cost reduction measures~~activities have reduced the expense structure of our business significantly. We are continually focused on ~~continuing to improve~~improving processes and ~~reduce~~reducing 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 and nine month periods ended September 30, ~~2014~~2015 and ~~2013~~2014 is summarized below:

Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
Depreciation and 2014 2013 (Decrease) 2014 2013 (Decrease)
amortization
In cost of sales $ 0.2 $ 0.2 5.5 % $ 0.6 $ 0.6 4.7 %
In operating expenses 0.2 0.3 (23.9 %) 0.7 0.9 (21.3 %)
Total depreciation and amortization $ 0.4 $ 0.5 (12.0 %) $ 1.3 $ 1.5 (10.6 %)
As a percentage of sales 3.1 % 2.8 % 0.3 % 2.8 % 3.2 % (0.4 %)

	Three Months Ended									Nine Months Ended
	September 30,						Increase			September 30,						Increase
	2015			2014			(Decrease)			2015			2014			(Decrease)
				(Restated)									(Restated)
Depreciation and amortization
In cost of sales	$	-		$	0.2			(100.0	%)	$	0.3		$	0.6			(57.4	%)
In operating expenses		0.0			0.1			(90.0	%)		0.1			0.4			(63.9	%)
Total depreciation and amortization	$	0.0		$	0.3			(96.6	%)	$	0.4		$	1.0			(59.7	%)
As a percentage of sales		0.1	%		2.8	%		(2.6	%)		1.5	%		2.6	%		(1.2	%)

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.

Interest Expense

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

Interest expense was ~~$229,000~~$178,000 for the three months ended September 30, ~~2014,~~2015, compared to ~~$241,000~~$229,000 for the same period in the prior year. The ~~$12,000~~$51,000 decrease in interest expense reflected a decrease in our average outstanding general debt obligations during the three months ended September 30, ~~2014~~2015 compared to the similar period in the prior ~~year.~~year offset by increased interest fees associated with the default in the Apex seller’s note.

Interest expense was ~~$658,000~~$580,000 for the nine months ended September 30, ~~2014,~~2015, compared to ~~$723,000~~$658,000 for the same period in the prior year. The ~~$65,000~~$78,000 decrease in interest expense reflected a decrease in our average outstanding general debt obligations during the nine months ended September 30, ~~2014~~2015 compared to the similar period in the prior ~~year.~~year offset by increased interest fees associated with the default in the Apex seller’s note.

Discontinued Operations

On June 30, 2015, we completed the sale of 100% of the issued and outstanding share capital of CMAC and recorded a loss on sale of $157,000, which is classified as loss on sale of discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive loss. The Company’s unaudited condensed consolidated financial statements and accompanying notes for current and prior periods have been restated to present the results of operations of CMAC as discontinued operations. In addition, the assets and liabilities have been treated and classified as discontinued operations in the accompanying condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014.

The loss on sale of CMAC was determined as follows (in thousands):

Assets sold
Deferred costs	$	506
Other current assets		81
Intangible assets		459
Goodwill		678
Other long term assets		208
Total assets		1,932

Liabilities assumed by purchaser
Unearned revenue - current		782
Other current liabilities		19
Unearned revenue - long term		296
Other long term liabilities		28
Total liabilities		1,125
Net assets sold		807
Cash received		(302	)
Non-cash consideration-liabilities forgiven by CMAC purchaser		(348	)
Net loss on sale of discontinued operations, before income tax		157
Income tax benefit on loss on sale		(68	)
Net loss on sale of discontinued operations, net of tax	$	89

	September 30,		December 31,
	2015		2014
ASSETS
Current assets
Accounts receivable, net	$	-	$	1,144
Inventory, net				37
Deferred costs		-		645
Deferred tax asset		-		2
Prepaid expenses and other current assets		-		1
Total current assets of discontinued operations		-		1,829

Noncurrent assets
Other assets, net		-		15
Deferred costs, net of current portion		-		310
Goodwill		-		678
Intangible assets, net		-		631
Total noncurrent assets of discontinued operations		-		1,634
Total assets of discontinued operations	$	-	$	3,463
LIABILITIES
Current liabilities
Accounts payable	$	-	$	263
Accrued expenses and other current liabilities		-		727
Unearned revenue		-		1,003
Total current liabilities of discontinues operations		-		1,993

Noncurrent liabilities
Unearned revenue, net of current portion		-		455
Other long term liabilities		-		32
Total noncurrent liabilities of discontinued operations		-		487
Total liabilities of discontinued operations	$	-	$	2,480

The reconciliation of the major classes of income and expense constituting income (loss) from discontinued operations on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss are as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,		September 30,			September 30,			September 30,
	2015		2014			2015			2014

Net sales	$	-	$	2,535		$	3,156		$	9,557
Cost of sales		-		1,918			2,432			7,265
Selling, general & administrative expenses		-		609			812			1,915
Operating (loss) income from discontinued operations		-		8			(88	)		377
Other expense (income)
Interest expense		-		-			6			-
Other income		-		-			-			-
Total other expense from discontinued operations		-		-			6			-
(Loss) income from operations, before income tax		-		8			(94	)		377
Income tax benefit on operations		-		704			-			846
Loss from discontinued operations, net of tax	$	-	$	(696	)	$	(94	)	$	(469	)

Net loss on sale of discontinued operations, before income tax	$	-	$	-		$	(157	)	$	-
Income tax benefit on loss on sale of discontinued operations		-		-			68			-
Loss on discontinued operations	$	-	$	-		$	(89	)	$	-

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 does 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 sustained positive operating results through increased sales, ~~successfully implement cost cutting measures,~~ avoid further unforeseen expenses, improve our liquidity and working capital, and potentially raise additional equity or debt ~~capital, and successfully refinance our current debt obligations when they come due in February of 2015.~~capital. There can be no assurance that we will be able achieve sustained positive operating results or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us.

We are currently in default on certain obligations as of September 30, 2015. We have not made the final payment on the RBC Term Loan that was originally scheduled to be paid in June 2015. The payment had been rescheduled with RBC for September 2015; the Company continues to be in negotiation with RBC with regard to this payment. Such rescheduling has not been documented in writing and is based on an oral agreement with RBC. We also have not paid interest due on the BDC Term Loan due for July 2015. BDC advised us on July 30, 2015 that the financing is in arrears on interest. The failure to pay interest due is a violation of the terms of the financing agreement. We are currently negotiating with BDC on restructuring the debt.

We are currently in default on the Apex seller Note as of the date of this filing. The seller of Apex has demanded payment in full including certain monitoring and administrative fees. We have accrued $69,000 as of September 30, 2015 for certain fees related to the demand payment. Between April 2015 and September 2015, Apex had been delinquent on its Canadian premises lease obligations to Harvester Properties of Burlington, Inc. In June 2015, Harvester Properties gave notice of termination of the lease agreement. Since that time, Apex has relocated its operations.At September 30, 2015, there is $125,000 relating to these lease obligations including interest and other fees included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.

Due to the failure to pay interest on the BDC term loan discussed above, we are in covenant default under the subordinated debt provisions of the SVB Loan Agreement. We have had discussions with SVB regarding this default and are working with SVB to cure. A SVB lending officer has orally indicated SVB does not intend exercising legal rights under the SVB Loan Agreement for this default; however, this is not evidenced in writing and is not enforceable.

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

If we do not ~~continue to~~ achieve sustained positive operating results and do not raise sufficient additional capital when and if needed, 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~~enforcement actions taken under our various loan agreements. If such events were to occur, they would have material adverse effect on the Company. 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 ~~if our liquidity position does not improve.~~in the event of any of the adverse outcomes discussed above relating to this uncertainty.

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, establish sustained positive operating results and access additional equity or debt capital. There can be no assurance that we will be able to achieve sustainable positive operating results or cost reductions or that we can obtain additional funds 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. However, there is no assurance that this will occur.

In the quarter ended September 30, ~~2014,~~2015, we experienced a decrease in revenue from continuing operations of $3.4 million, or ~~19.5%~~29.0% compared to the quarter ended September 30, ~~2013,~~2014, and a ~~$1.3~~$10.4 million, or ~~2.8% increase~~27.5% decrease in revenue for the nine months ended September 30, ~~2014~~2015 over the comparable nine months of ~~2013.~~2014. In the quarter ended September 30, ~~2014,~~2015 we experienced ~~net~~an operating loss from continuing operations of ~~$563,000~~$52,000 compared to the ~~net~~operating loss from continuing operations of ~~$167,000~~$16,000 for the quarter ended September 30, ~~2013,~~2014, and excluding the impact of goodwill and intangible asset impairment charge of $3,047 million, we experienced a ~~$696,000 net~~$598,000 operating loss from continuing operations for the nine months ended September 30, ~~2014~~2015 compared to ~~a net~~an operating loss from continuing operations of ~~$3.4 million~~$161,000 for the comparable period in ~~2013.~~2014. At September 30, ~~2014~~2015 and December 31, ~~2013,~~2014 we had a substantial working capital deficit, excluding discontinued operations, totaling ~~$9.9 million.~~$10.3 million and $7.8 million, respectively. 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 of~~ the ~~Notes to the Unaudited Condensed Consolidated Financial Statements), our~~ liabilities that ~~we expect will~~are expected to be satisfied in the foreseeable future in cash ~~substantially~~far exceed ~~the operating~~our receivables and other assets that are expected to be satisfied in cash. AsIn addition, as a ~~result~~consequence of our recent historical results of operations, ~~the~~ availability under our credit line with Silicon Valley Bank has contracted and our overall liquidity has ~~been~~become further constrained. We are dependent upon future growth in net sales to meet our liquidity needs and our debt covenants for the next twelve months.

To address liquidity constraints, we have reduced non-essential expenses. Such expense reductions have included, but have not been limited to, the consolidation of information technology environments, the 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. 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 cost reduction measures have reduced the expense structure of our business significantly. We are focused on continuing to improve processes and reduce costs. Additionally, we are in negotiations to restructure our outstanding debt obligations. Currently, we have no plans to seek additional 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.

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

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 iswas due February 2015. On February 27, 2015, we entered into an agreement to further amend the original SVB line of credit dated December 15, 2006 to extend the maturity date of the revolving credit line provided thereunder to February 28, 2017.

As of September 30, ~~2014~~2015 and December 31, ~~2013,~~2014, the outstanding balance on our SVB line of credit was approximately ~~$3.8~~$3.3 and ~~$3.9~~$5.8 million, respectively, and the interest rate ~~for September 30, 2014 and December 31, 2013~~ was 6.5% ~~and 7.0%, respectively.~~. As of September 30, ~~2014,~~2015, there was ~~$0.7 million~~$342,000 available under the SVB line of credit. The ~~line of credit~~February 27, 2015 amendment has a certain financial covenant and other non-financial covenants. The minimum Tangible Net Worth requirement of ~~$8.7~~an $8.6 million deficit, which is to be further reduced by one half of any funds raised through sales of common stock (as only 50% of additional capital raises are given credit in the Tangible Net Worth calculation). on or after February 1, 2015. As of September 30, ~~2014 and December 31, 2013, we were~~2015, the Company was in compliance with ~~the~~The Tangible Net Worth financial covenant and had available a ~~$0.6 million and $0.8~~$0.3 million cushion over the ~~requirement, respectively. We believe that at~~requirement. Should the ~~time of this filing we are in compliance with the terms and provisions of its SVB lending agreement. Should our results fail to improve further or once more deteriorate~~Company incur losses in a manner consistent with its recent historical financial performance, wethe Company will violate ~~the~~ Tangible Net Worth ~~financial~~ covenant without additional net capital ~~outside funding~~raises in amounts that are approximately twice the amount of the losses incurred. Due to the default with the BDC term loan discussed above, the Company is in default under the subordinated debt provisions of the SVB Loan Agreement. The Company has had discussions with SVB regarding this default and is working with SVB to cure. A SVB lending officer has orally indicated they do not intend exercising legal rights under the SVB Loan Agreement for this default, however, this is not evidenced in writing and is not enforceable.

We have ~~$0.6 million~~$52,000 of term debt with the Royal Bank of Canada (the “RBC Term Loan”), ~~$1.5~~$1.3 million (US$) of term debt with the BDC (the “BDC Term Loan”) and ~~$0.5 million~~$139,000 of term debt with SVB (the “SVB Term Loan”). For more information regarding these Term Loans, please see our Annual Report on Form 10-K filed with the SEC on March ~~31, 2014.~~18, 2015. All three Term Loans have financial covenants. ~~We were~~The Company was in compliance with the covenants of these Term Loans ~~except for~~at December 31, 2014. At September 30, 2015, the Company was in compliance with the covenants of its RBC ~~Term Loan, for which we were~~and SVB term loans. As of September 2015, the Company did not comply with the BDC covenant and is not expected to be in compliance at the next testing date of December 31, 2015. For the nine months ended September 30, ~~2014~~2015, we were able to achieve $1.7 million positive operating cash flow from continuing operations. The final RBC payment was originally scheduled to be paid in June 2015 and ~~December 31, 2013. Although~~has been rescheduled with RBC for September 2015; the Company ~~believes it is not likely that~~continues to be in negotiation with RBC will exercise their rights up to, and including, acceleration of the outstanding debt, there can be no assurance that RBC will not exercise their rights pursuant to the provisions of the debt obligation. Accordingly, the Company has classified the term debt obligation as current at September 30, 2014 and December 31, 2013.on this payment.

~~As part~~The Company has not paid the interest due on the BDC Term Loan due since June 2015. BDC has advised the Company on July 30, 2015 that the financing is in arrears on interest. The failure to pay interest is a violation of the ~~Apex Purchase Agreement, from the Apex Closing Date up until the expiry~~terms of the ~~bonus period, under that agreement we are obligated~~financing agreement. The Company is in negotiations 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.secure acceptable refinancing terms.

In the last five complete years of operations from ~~2009~~2010 through ~~2013,~~2014, we have not experienced any significant effects of inflation on our product and service pricing, revenues or our income ~~(loss)~~ from continuing operations.

Adjusted Working Capital

As referred to above under the heading “Non-GAAP Financial Measures,” we monitorour ‘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 deficit from continuing operations, excluding discontinued operations and classified assets and liabilities held for sale, at September 30, ~~2014~~2015 and December 31, ~~2013~~2014 are computed as follows (in thousands):

	September 30,			December 31,
	2015			2014
					(Restated)
Current assets	$	7,627		$	18,427
Current liabilities		17,944			26,369

Working capital - U.S. GAAP		(10,317	)		(7,942	)
Deferred costs		(2,104	)		(2,532	)
Deferred revenue		3,273			5,915

Current assets of discontinued operations		-			(1,829	)
Current liabilities of discontinued operations		-			1,993

Adjusted working capital deficit from continuing operations- Non-GAAP measure	$	(9,148	)	$	(4,395	)

September 30, December 31,
2014 2013

Current assets $ 13,150 $ 16,912
Current liabilities 23,107 26,787

Working capital - U.S. GAAP (9,957 ) (9,875 )
Deferred costs (3,667 ) (3,809 )
Deferred revenue 5,824 7,481

Adjusted working capital - Non-GAAP measure $ (7,800 ) $ (6,203 )

2015 Financing

We have not engaged in any securities issuances or other material capital raising in the first nine months of 2015.

2014 ~~Financing~~Financings

We have not engaged in any securities issuances or other material capital raising in the first nine 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.~~

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 for the nine months ended September 30, ~~2014~~2015 and ~~2013~~2014 (in millions):

Nine Months Ended
September 30,
2014 2013 Increase/(Decrease)
Operating activities $ 2.2 $ (2.2 ) $ 4.4 202.8 %
Investing activities (0.0 ) (0.0 ) 0.0 27.1 %
Financing activities (1.3 ) 1.4 (2.7 ) (198.6 %)

	Nine Months Ended
	September 30,
	2015			2014			Increase/(Decrease)

Operating activities	$	1.7		$	2.2		$	(0.5	)	(22.7	%)
Investing activities		0.2			(0.0	)		0.2		674.5	%
Financing activities		(3.3	)		(1.3	)		2.0		153.8	%

~~Net cash~~Cash provided by operating activities during the first nine months of ~~2014 increased~~2015 decreased by ~~$4.4~~$0.5 million over the same period in the prior year. The ~~increase in cash from operations~~decrease was primarily driven by changes in net working capital and other balance sheet changes, most notably from a $2.5 million decrease in accounts receivable due to timing of receivable collections and a $1.2 million decrease in inventory offset by decreases in accounts payable of $1.4 million and unearned revenue of $0.6 million. Also attributing to changes in net working capital were non-cash expenses as noted below.

During the nine months ended September 30, 2015, net cash provided by operating activities was $1.7 million. Our net loss was $3.8 million in the first nine months of 2015, a portion of which was the result of non-cash transactions during the period. Specifically, we had non-cash expense of $101,000 related to employee and non-employee stock based compensation, $46,000 in amortization of deferred financing costs, $3.0 million for impairment of goodwill and intangible assets related to Apex, $0.4 million in the change of fair value of warrants and $0.4 million of other non-cash transactions such as depreciation and amortization.

During the nine months ended September 30, 2014, ~~of $2.7~~net cash provided by operating activities was $2.2 million. Our net loss was ~~$696,000 in~~$695,000 during the first nine months of 2014, a portion of which was the result of non-cash transactions during the year. Specifically, we had a $0.1 million non-cash expense related to employee and non-employee stock based compensation and a net $1.4 million of other non-cash transactions such as depreciation and amortization. Additionally, the changes in net working capital and other balance sheet changes contributed to a $0.9 million increase in cash provided by operating activities, most notably from a $4.1 million decrease in accounts receivable due to timing of receivable collections, a $3.8 million decrease in accounts payable and a $1.0 million decrease in inventory.

During the nine months ended September 30, 2013, net cash used in operating activities was $2.2 million. Our net loss was $3.5 million during the first nine months of 2013, most of which was the result of non-cash transactions during the quarter.period. Specifically, we had a $0.8 million non-cash expense including depreciation and amortization, employee and non-employee stock-based compensation.

Net cash ~~used in~~provided by or (used in) investing activities was ~~negligible~~$0.2 million during the nine months ended September 30, ~~2014~~2015 and increased by $0.2 million over the comparable nine months of ~~2013.~~2014. The increase was primarily related to cash received for the sale of CMAC.

During the nine months ended September 30, 2015, net cash used in financing activities was $3.3 million, due to $0.1 million in paid financing costs, a net $2.5 million in repayments under lines of credit, $0.5 million in repayments under our term loans, and $0.3 million in payments for the Series D and Series E Preferred Stock dividends.

During the nine months ended September 30, 2014, net cash used in financing activities was $1.3 million, due to $0.1 million in paid financing costs, $0.8 million in repayments under our term loans, $0.5 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 $0.2 million in net amounts borrowed under our lines of credit.

~~During~~

Discontinued Operations

Net cash flows provided by discontinued operations were $0.4 million for the nine months ended September 30, ~~2013, net~~2015 and consisted of $0.6 million of cash flows provided by financing activities was $1.4 million, primarily due to $1.0 million in proceeds from the bank term loan, net of $1.6 million in payments for term loans, a net $0.8 million in borrowings under our lines of credit, payment of $0.3operating activities.

Net cash flows provided by discontinued operations were $0.7 million for the ~~Series D Preferred Stock dividend~~nine months ended September 30, 2014 and ~~$1.5~~consisted of $1.1 million ~~in net proceeds from a common stock private placement.~~of cash flows provided by operating activities.

Critical Accounting Policies

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

There have been no material changes to the Company's critical accounting policies during the nine months ended September 30, ~~2014.~~2015. See Footnote 2 of the Company's consolidated financial statements included in the Company's ~~2013~~2014 Annual Report on Form 10-K filed on March ~~31, 2014~~18, 2015 with the SEC, for a description of the Company's critical accounting policies. See Note 3 in the accompanying unaudited condensed consolidated financial statements for the impact on the financial statements of the discontinued operation presentation.

Recently Issued Accounting Pronouncements

In May 2014, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued Accounting Standards Update (“ASU”) ~~No.~~ASU 2014-09, ~~“Revenue~~“Revenue from Contracts with ~~Customers”~~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~~2014-09 states that ~~requires a company to~~an entity should recognize revenue to depict the transfer of promised goods or services to ~~a customer at~~customers in an amount that reflects the consideration itto which the entity expects to ~~receive~~be entitled in exchange for those goods or services. On July 9, 2015, the FASB voted to delay the effective date of the new revenue standard by one year but to permit entities to choose to adopt the standard as of the original effective date. The new standard will be effective for the Company on January 1, 2018. We are currently evaluating the method of adoption and the potential impact the update may have on its financial statements.

In April 2015, the FASB issued Accounting Standards Update (“ASU”) ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability instead of being presented as an asset. This guidance is effective for public companies for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. For all other entities, this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The new guidance is to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance and represents a change in accounting principle. We are currently evaluating the impact of the adoption of this accounting standard update on its financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles–Goodwill and Other–Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” This update provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. This guidance is effective for public companies for fiscal years and interim periods beginning after December 15, 2015. For all other entities, this guidance is effective for annual ~~reporting~~ periods beginning after December 15, ~~2016~~2015, and ~~early~~interim periods within fiscal years beginning after December 15, 2016. Early adoption is ~~not permitted. Accordingly, we will adopt this~~permitted for all entities. The new guidance ~~beginning in fiscal 2017. Companies may use~~is to be applied either ~~a full retrospective~~prospectively to new cloud computing arrangements or ~~a modified retrospective approach to adopt this new guidance and management is~~retrospectively. We are currently evaluating ~~which transition approach to use and~~ the impact of ~~this new guidance on our consolidated financial position or results of operations.~~

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (Subtopic 205-40), which defines management's responsibility to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide related disclosures. Currently, this evaluation has only been an auditor requirement. Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of the consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that financial statements are issued. This amended guidance will be effective for us beginning January 1, 2016. We do not expect the adoption of this ~~amended guidance to have a significant impact~~accounting standard update on ~~our Consolidated Financial Statements.~~its financial statements.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements as of September 30, ~~2014.~~2015.

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 AND PROCEDURES~~

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) 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 September 30, ~~2014,~~2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II-OTHER INFORMATION

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

ITEM 1.

LEGAL PROCEEDINGS

In addition to the ~~matter~~matters 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 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, we received a written “Wells Notice” from the staff of the ~~SEC~~Securities and Exchange Commission (the “SEC”) indicating that the staff has made a preliminary determination to recommend that the SEC bring an administrative proceeding against us. On the same day, Nicholas R. Toms, our then President and Chief Executive Officer and a then-serving member of the ~~Board~~board of ~~Directors,~~directors, also received a Wells Notice. ~~The SEC staff has informed us that both~~Both Wells Notices relate to allegations that, from late 2009 to early 2011, Mr. Toms was the beneficial owner of shares of ~~our~~ common stock our 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~~our shareholding and trades should have been reflected at the relevant times in public disclosures of Mr. Toms’ other holdings of our 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. OnIn response to the Wells Notice, our Audit Committee conducted an internal review, assisted by new outside legal counsel, and on August 8, 2014, we submitted to the SEC a response to the Wells Notice setting forth why no action should be commenced against ~~it.~~us. No proceedings have been commenced against us, and we have not had a response to our letter submitted on August 8, 2014.

On August 15, 2014, Mr. Toms resigned from his positions as Chief Executive Officer, President and member of the Company’s board of directors. On February 11, 2015, the SEC commenced a formal administrative proceeding against Mr. Toms. On March 26, 2015, the proceeding was stayed pending review by the SEC of Mr. Toms signed Offer of Settlement. On October 19, 2015, the SEC announced that it had settled the proceeding with Mr. Toms, with Mr. Toms agreeing to cease and desist from violating certain securities laws, to be barred for five years from acting as an officer or director of a public company, to pay $102,871 in disgorgement and interest and to pay a civil money penalty of $175,000. In regard to the proceeding against Mr. Toms, he has rights under Delaware law and the Company’s Articles of Incorporation to indemnification for actions taken in his capacity as director or executive officer. The Company previously accrued $175,000 as a potential obligation related to the Company’s indemnification of Mr. Toms. As of September 30, 2015, $125,000 is included as part of accrued expenses in the ~~date~~unaudited condensed consolidated balance sheets. During the second quarter of ~~this filing, there have been no further developments~~2015, $50,000 was placed in ~~this matter.~~escrow as potential payment in respect of Mr. Toms indemnification.

~~Settlement of Taglich Action~~ ~~– In July 2014, we~~ ~~settled an action brought against it by stockholder Michael N. Taglich,~~On April 3, 2015, the Company commenced a lawsuit in the ~~Delaware Chancery~~United States District Court for the District of New Jersey, seeking ~~to compel us to hold an annual meeting~~monetary and injunctive relief against four former sales employees, (the “Individual Defendants”), and against North Rock Solutions, Inc. (“North Rock” and, collectively with the Individual Defendants, the “Defendants”). Between January and March 2015, each of ~~stockholders. Pursuant~~the Individual Defendants resigned from the Company. Shortly thereafter, the Company discovered that they were all working for Tolt Solutions, Inc., a direct competitor of the Company, and had for months been taking actions that, in the Company’s view, constituted serious and harmful breaches of their contractual and common law obligations owed to the ~~settlement,~~Company. The Company alleges that the Individual Defendants unlawfully misused Company information and their positions at the Company in order to exit the Company with Company customers, business and property. The Company alleges that the Individual Defendants had, in concert, been laying the foundation for their scheme for months. The Company also alleges that, based on additional discoveries it made after the Individual Defendants’ resignations, the Individual Defendants had for years been diverting business from the Company while working for the Company, by surreptitiously funneling paid installation and related work to an entity they created and owned, North Rock. As such, the Company claims that the Individual Defendants have breached duties of confidentiality and loyalty and that all of the Defendants have misappropriated confidential information and trade secrets, and are soliciting the Company’s customers unlawfully and competing unfairly against the Company, to its detriment. Discovery is continuing in the case and the parties ~~agreed~~have requested that it be extended from March 18, 2016, when it is due to close, until May 16, 2016.

On April 9, 2015, District Court Judge Claire C. Cecchi granted the Company’s motion for a temporary restraining order against the Defendants, ordering them to return all Company information, forbidding them from using any confidential information and restraining them from soliciting Company customers. On or about April 21, 2015, the Court held a conference on the Company’s motion for a preliminary injunction and entered interim relief pending trial, including a prohibition against the Defendants soliciting certain named Company customers. The minutes of the conference were sealed to protect the confidentiality of the identity of the customers. On May 1, 2015, the parties appeared for a conference before Magistrate Judge James B. Clark, who ordered that discovery begin immediately on an expedited basis. Contemporaneously with the commencement of our lawsuit to Federal court in New Jersey, Tolt Solutions, Inc. filed suit against the Company in state court in New York City, alleging that we ~~would hold an annual meeting.~~had engaged in business defamation. On May 12, 2015, we answered Tolt's complaint, denying all charges, and filed a separate lawsuit in the same court against John Chis, who had resigned as the Company’s Senior Vice President of Sales in November 2014 and then joined Tolt, and who we allege has orchestrated or helped orchestrate the defendants' in the New Jersey case and Tolt's multiple unlawful actions against us and has, among other things, violated his duties as a senior executive while working for the Company, and engaged in further unlawful actions since leaving the Company. On or about May 12, 2015, Tolt voluntarily dismissed its defamation claim against the Company, and thereafter, the Company filed a complaint against Tolt in New York State Supreme Court alleging that Tolt induced Chis to breach his fiduciary duty to the Company and violated a confidentiality agreement with the Company. The ~~annual meeting was held~~Court dismissed both claims on ~~October 28, 2014.~~grounds of lack of personal jurisdiction over Chis and on grounds of forum non conveniens on September 18, 2015. The Court did not decide the merits of either case and the Company intends to continue to vigorously pursue its remedies.

~~ITEM 1A.~~~~RISK FACTORS~~

ITEM 1A.

RISK FACTORS

~~There~~During the three months ended September 30, 2015 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.~~18, 2015. Please refer to that Risk Factors section for information concerning risks associated with the Company and an investment in the Company’s securities.

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

~~ITEM 3.~~ ~~DEFAULTS UPON SENIOR SECURITIES~~Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

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

~~Not applicable.~~

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

~~Not applicable.~~

ITEM 6. EXHIBITS

Exhibit Number		Description of Exhibit

31.1		Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a) *
~~31.2~~
31.2		Certification of the Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a) *
~~32.1~~
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~~
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

* Filed herewith

** Furnished herewith

SIGNATURES

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


	DecisionPoint Systems, Inc.

Date: November ~~10, 2014~~13, 2015	By:	/s/ ~~Dan Romanello~~
		~~Dan Romanello~~
		~~Acting Chief Executive Officer (Principal Executive Officer)~~ Greg A. Henry
		Greg A. Henry
		Chief Executive Officer (Principal Executive Officer)

Date: November ~~10, 2014~~13, 2015	By:	/s/Michael P. Roe
		Michael P. Roe
		Chief Financial Officer ~~(Principal~~ (Principal Financial and Accounting ~~Officer~~

		Officer)

		Nine Months ended September 30,
		2014			2013
Cash flows from operating activities:
Net loss	$	(696	)	$	(3,385	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization		1,331			1,497
Amortization of deferred financing costs and note discount		117			140
Employee and Director stock-based compensation		89			31
Acquisition earn-out adjustment		-			(820	)
Change in fair value of warrants		(254	)		(166	)
ESOP compensation expense		37			79
Allowance for doubtful accounts		(30	)		56
Loss on disposal of property and equipment		2			13
Deferred taxes. net		(9	)		(5	)
Changes in operating assets and liabilities:
Accounts receivable		3,669			(468	)
Due from related party		184			-
Inventory, net		891			(107	)
Deferred costs		543			496
Prepaid expenses and other current assets		(251	)		(578	)
Other assets, net		11			5
Accounts payable		(1,854	)		1,961
Accrued expenses and other current liabilities		447			106
Due to related parties		69			158
Unearned revenue		(2,085	)		(1,163	)
Net cash provided by (used in) operating activities		2,211			(2,150	)

Cash flows from investing activities
Purchases of property and equipment		(42	)		(33	)
Net cash used in investing activities		(42	)		(33	)

Cash flows from financing activities
Borrowings from lines of credit, net		165			817
Proceeds from issuance of term debt		-			1,000
Repayment of debt		(819	)		(1,552	)
Paid financing costs		(100	)		(119	)
Dividends paid		(499	)		(296	)
Payments for contingent acquisition liability		(84	)		-
Common stock issued in private placement, net of costs		-			1,502
Net cash (used in) provided by financing activities		(1,337	)		1,352
Effect on cash of foreign currency translation		(2	)		(2	)
Net increase (decrease) in cash		830			(833	)
Cash at beginning of period		641			1,103
Cash at end of period	$	1,471		$	270

Supplemental disclosures of cash flow information:
Interest paid	$	634		$	705
Income taxes paid		32			234

Supplemental disclosure of non-cash financing activities:
Accrued and imputed dividends on preferred stock	$	1,002		$	661
Warrants issued in connection with common stock private placement		-			1,099

			Quoted prices inactive markets		Significant other observable inputs		Significant other unobservable inputs
	Total		Level 1		Level 2		Level 3
Liabilities
Contingent consideration liability
recorded for business combinations	$	90	$	-	$	-	$	90

Fair value of warrants issued in connection
with share purchase agreement		549		-		-		549

Balance at September 30, 2014	$	639	$	-	$	-	$	639


			Quoted prices inactive markets		Significant other observable inputs		Significant other 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

	Level 3
	Contingent			Derivative
	consideration			warrants

Balance at December 31, 2013	$	468		$	803
Adjustments to fair value of warrants (reflected in other income)		-			(254	)
Cash paid for contingent acquisition liability		(84	)		-
Settlement of earn-out obligation reflected in accrued liabilities		(279	)		-
Effect of currency translation		(15	)		-
Balance at September 30, 2014	$	90		$	549

Balance at December 31, 2013	$	8,395

Effect of currency translation on Apex		(100	)
Balance at September 30, 2014	$	8,295

	Balance December 31, 2013			Additions		Payments			Amortization of Note Discount		Effect of Currency Translation			Balance September 30, 2014
RBC term loan	$	1,169		$	-	$	(570	)	$	-	$	(38	)	$	561

BDC term loan		1,589			-		-			-		(65	)		1,524

SVB term loan-2		722			-		(250	)		-		-			472

Total note discounts		(45	)		-		-			21		-			(24	)

Total debt	$	3,435		$	-	$	(820	)	$	21	$	(103	)		2,533

less current portion															(878	)

Debt, net of current portion														$	1,655


	For the Nine Months Ended
	September 30,
	2014	2013
Expected term	1.50 years	N/A
Expected volatility	140.28%	N/A
Dividend yield	0%	N/A
Risk-free interest rate	0.30%	N/A

	Three Months Ended							Nine Months Ended
	September 30,				Increase			September 30,				Increase
	2014		2013		(Decrease)			2014		2013		(Decrease)
Hardware	$	7.2	$	9.8		(26.1	%)	$	25.0	$	23.4		6.8	%
Professional services		2.8		2.9		(6.1	%)		8.4		8.6		(2.6	%)
Software		0.9		1.1		(18.6	%)		2.8		3.4		(17.8	%)
Other		0.3		0.3		(19.6	%)		0.9		0.9		(0.1	%)
	$	11.1	$	14.1		(21.2	%)	$	37.0	$	36.2		2.1	%