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


FORM 8-K/A
(Amendment No. 1)


CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


Date of Report (Date of earliest event reported): June 4, 2012

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
Irvine, California, 92618
(Address of principal executive offices) (Zip code)

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

 Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway
New York, New York 10006
Phone: (212) 930-9700
Fax: (212) 930-9725



Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
1

 

Explanatory Note

On June 4, 2012, (“Closing Date”), DecisionPoint Systems, Inc. ("Company” or “DPS”), 2314505 Ontario Inc., a wholly-owned subsidiary of the Company (“Purchaser”), Karen Dalicandro (“KD”), Donald Dalicandro (“DD”), and 2293046 Ontario Inc. (“KD Co” and together with KD, the “Sellers”) entered into a Share Purchase Agreement (“SPA”).  Pursuant to the SPA, Purchaser purchased all of the issued and outstanding shares of Apex Systems Integrators Inc., a corporation organized under the laws of the Province of Ontario, Canada.  In consideration for the shares of Apex Systems Integrators, Inc., on the Closing Date the Purchaser paid CDN$5,000,000 (“Closing Amount”), of which CDN$240,000 was placed in escrow with the Purchaser’s attorney and CDN$10,000 is held by the Purchaser as a holdback.  On the Closing Date, the Purchaser and Apex merged under the corporate name of Apex Systems Integrators Inc., and is hereafter referred to herein as “Apex”.

Closing costs and associated expenses either previously paid, payable in cash or recorded as deferred financing costs were approximately $1.8 million, including the issuance of 325,000 shares of the Company’s common stock at the market price of $1.05 per share on the Closing Date.

The transaction was accounted for using the purchase method of accounting in accordance with Accounting Standard Codification (“ASC”) 805 - Business Combinations and the operating results for Apex have been consolidated into the Company’s results of operations beginning on June 5, 2012.

This Amendment No. 1 amends the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on June 7, 2012, related to the above transaction, to include the financial statements required by Items 9.01(a) and 9.01(b) of Form 8-K.  The information previously reported in the June 7, 2012, 8-K is hereby incorporated by reference into this Form 8-K/A.
 
 
2

 
 
Item 9.01. Financial Statements and Exhibits.
 
(a)
Financial statements of the business acquired

Audited annual combined financial statements of Apex Systems Integrators, Inc.

Report of Independent Certified Public Accountants
 
  
 Combined Statements of Income for the years ended July 31, 2011 and 2010
  
 Combined Balance Sheets as of July 31, 2011 and 2010
  
 Combined Statements of Changes in Stockholders’ Equity for the years ended
    July 31, 2011 and 2010
  
 Combined Statements of Cash Flows for the years ended July 31, 2011 and 2010
  
 Notes to the Combined Financial Statements
 
Reviewed financial Statements of Apex Systems Integrators, Inc.
 
 
Review Engagement Report
  ●  
Statements of Income for the eight months ended March 31, 2012 and 2011 
 ●   Statements of Retained Earnings for the eight months ended March 31, 2012 and 2011
 ●   Balance Sheets as of March 31, 2012 and July 31, 2011
 ●   Statements of Cash Flows for the eight months ended March 31, 2012 and 2011
 ●   Notes to the Financial Statements
 
(b) Unaudited Pro Forma financial information
 
Unaudited Pro Forma Combined Financial Information of DecisionPoint Systems, Inc. and    
Apex Systems Integrators, Inc.
   
●  
Unaudited Pro Forma Combined Balance Sheet as of March 31, 2012
●  
Unaudited Pro Forma Combined Statements of Operations for three months ended
    March 31, 2012 and twelve months ended December 31, 2011
●  
Notes to Unaudited Pro Forma Combined Financial Statements

 
3

 
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 hereunto duly authorized.

Date:
August 24, 2012
DecisionPoint Systems, Inc.
 
   
 
 
By:
/s/Roy A. Ceccato
 
      Name: Roy A. Ceccato  
      Title: Vice President - Finance  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4

 
 
Grant Thornton Logo
 
Combined Financial Statements
 
 
APEX Systems Integrators Inc. and APEX Systems Integrators (USA) Inc.
 
 
July 31, 2011 and 2010
 

 

 

 

 

 

 
 
 
 
 
 
 
 
5

 
 
Grant Thornton Logo
 
Contents
 
 
 
 
6

 
 
Grant Thornton Logo

 
 
To the Stockholders of
APEX Systems Integrators Inc. and APEX Systems Integrators (USA) Inc.
 
We have audited the accompanying combined balance sheets of APEX Systems Integrators Inc. and APEX Systems Integrators (USA) Inc. as of July 31, 2011 and July 31, 2010, and the related combined statements of income, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
 
We conducted our audit in accordance with auditing standards generally accepted in the United States of America established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of APEX Systems Integrators Inc. and APEX Systems Integrators (USA) Inc. as of July 31, 2011 and July 31, 2010, and the combined results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 

       
February 27, 2012   /s/ Grant Thornton LLP  
Hamilton, Canada Chartered Accountants   Licensed Public Accountants  
       
                                                                      
 
7

 
 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
(Amounts in Canadian $)
 
Years Ended July 31   2011     2010  
             
Revenue
           
Consulting fees
  $ 1,457,615     $ 1,744,454  
License and support
    946,894       877,060  
Equipment sales
    498,308       802,511  
Wireless data network services
    76,358       61,140  
Travel income
    57,216       35,760  
      3,036,391       3,520,925  
                 
Direct costs
               
Wages and benefits
    385,129       388,120  
Equipment purchases for resale
    283,837       436,138  
Licenses and support
    152,902       149,268  
Network services expenses
    69,695       72,342  
Project travel
    56,178       48,180  
      947,741       1,094,048  
                 
Gross profit
    2,088,650       2,426,877  
                 
Expenses
               
Management salaries
    1,014,031       987,537  
Rental of facilities
    184,569       185,083  
Insurance
    40,631       31,041  
Professional fees
    30,275       22,350  
Office expenses
    24,575       24,631  
Administrative salaries
    28,988       23,541  
Telephone and communications
    12,014       18,011  
Amortization
    10,851       13,934  
Promotion
    10,173       30,233  
Vehicle
    6,464       7,719  
Human resources
    5,101       8,980  
      1,367,672       1,353,060  
                 
Income before other income and income taxes
    720,978       1,073,817  
                 
Interest income
    27,509       15,316  
Foreign exchange gain (loss)
    27,019       (9,596 )
      54,528       5,720  
                 
Income before income taxes
    775,506       1,079,537  
                 
Income taxes (Note 7)
    182,995       231,414  
                 
Net income
  $ 592,511     $ 848,123  
 

 
See accompanying notes to the combined financial statements.

 
8

 
 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
(Amounts in Canadian $)
                                                                                               
July 31   2011     2010  
             
Assets
           
Current
           
Cash and cash equivalents
  $ 2,362,856     $ 2,935,062  
Accounts receivable
    239,933       364,337  
Income taxes recoverable (Note 7)
    10,576       10,259  
Inventory
    26,874       -  
Prepaid expenses
    43,191       13,994  
      2,683,430       3,323,652  
                 
Property, plant and equipment (Note 3)
    34,755       42,450  
Licences and rights
    19,250       36,250  
    $ 2,737,435     $ 3,402,352  
 


Liabilities
           
Current
           
Accounts payable
  $ 44,199     $ 331,722  
Government remittances payable
    126,382       72,425  
Dividends payable
    552,795       -  
Customer deposits
    10,000       38,000  
Deferred revenue
    392,384       388,246  
      1,125,760       830,393  
                 
Deferred income tax liability
    8,000       8,000  
                 
Stockholders’ Equity
               
Share capital (Note 5)
    1,000       1,000  
Retained earnings
    1,602,675       2,562,959  
                 
      1,603,675       2,563,959  
                 
    $ 2,737,435     $ 3,402,352  
 

 
Commitment (Note 9)
Subsequent events (Note 10)

On behalf of the Board
 
    Director     Director
 
See accompanying notes to the combined financial statements.

 
9

 
 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
(Amounts in Canadian $)
 
Years Ended July 31

 
   
Share
   
Retained
       
   
capital
   
earnings
   
Total
 
                   
Balance at
                 
  July 31, 2009
  $ 1,000     $ 1,714,836     $ 1,715,836  
                         
Net Income
    -       848,123       848,123  
                         
Balance at
                       
  July 31, 2010
    1,000       2,562,959       2,563,959  
                         
Net Income
    -       592,511       592,511  
                         
Dividends
    -       (1,552,795 )     (1,552,795 )
                         
Balance at
                       
  July 31, 2011
  $ 1,000     $ 1,602,675     $ 1,603,675  
 

 
See accompanying notes to the combined financial statements.

 
10

 
 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
(Amounts in Canadian $)
 
Years Ended July 31,   2011     2010  
             
Increase (decrease) in cash and cash equivalents
           
             
Operating
           
Net income
  $ 592,511     $ 848,123  
Amortization
    10,851       13,934  
      603,362       862,057  
                 
Change in non-cash working capital items
               
Accounts receivable
    124,404       (89,137 )
Inventory
    (26,874 )     24,832  
Prepaids
    (29,197 )     3,200  
Income taxes
    (317 )     4,188  
Accounts payable
    (287,523 )     73,975  
Government remittances payable
    53,957       43,860  
Deposits
    (28,000 )     (217,875 )
Deferred revenue
    4,138       (55,854 )
      413,950       649,246  
                 
Financing
               
Dividends
    (1,000,000 )     -  
                 
Investing
               
Purchase of property, plant and equipment
    (3,156 )     (2,514 )
Proceeds on disposal of licenses and rights
    17,000       -  
      13,844       (2,514 )
                 
Net (decrease) increase in cash and cash equivalents
    (572,206 )     646,732  
                 
Cash and cash equivalents
               
Beginning of year
    2,935,062       2,288,330  
                 
End of year
  $ 2,362,856     $ 2,935,062  



See accompanying notes to the combined financial statements.

 
11

 
 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
July 31, 2011 and July 31, 2010
 

 
1. 
Nature of operations
 
APEX Systems Integrators Inc. and APEX Systems Integrators (USA) Inc. are suppliers of wireless mobile work force solutions. They are incorporated under the laws on Ontario.
 

 
2. 
Summary of significant accounting policies
 
Basis of accounting
The Company maintains its records on the accrual basis of accounting in accordance with accounting policies generally accepted in the United States.
 
Basis of presentation
The combined financial statements include the assets, liabilities, equity and operating results of APEX Systems Integrators Inc. and APEX Systems Integrators (USA) Inc., two companies controlled by related shareholders, after elimination of intercompany balances and transactions.
 
Revenue recognition
Consulting fees, license, equipment sales, wireless data network services and travel income are recognized when services are performed and goods are delivered and the title and risks of ownership pass to the customer and the collection of the resulting receivables are reasonably assured.
 
Support revenue is recognized ratably over the term of the support contract.
 
Inventories
Inventories are stated at the lower of cost and net realizable value using the first-in, first-out method of accounting.
 
Cash and cash equivalents
The Company maintains cash balances at various financial institutions.
 
For purposes of the Statement of Cash Flows, the Company considers all money-market instruments to be cash equivalents as all money market deposits are cashable at amounts recorded in the balance sheet.
 
Accounts receivable
The Company’s accounts receivable contain no allowance for doubtful accounts, as all accounts are determined to be collectible.
 
For the year ended July 31, 2011 bad debt expense net of the change in the allowance for doubtful accounts was $ nil (2010 - $ nil).

 
12

 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
Notes to the Combined Financial Statements
July 31, 2011 and July 31, 2010


2. 
Summary of Significant Accounting Policies (Continued)
 
Property, plant and equipment
Property, plant and equipment are stated at cost.  The cost of property, plant and equipment is depreciated over the estimated useful lives of the related assets.  Depreciation expense is calculated using the declining balance method.  The annual rates range from 20% to 30%. Maintenance and repairs are charged to operations when incurred.  Renewals and replacements of a routine nature are charged to expense, while those that improve or extend the life of existing properties are capitalized.
 
Licenses and rights
Intangible assets consist of licenses and rights. The intangibles are not amortized as they have an infinite life.
 
Impairment of property, plant and equipment
Property, plant and equipment are tested for impairment upon occurrence of a triggering event that indicates the carrying value of such asset is no longer recoverable. Examples of such triggering events include a significant disposal of a portion of such assets, an adverse change in the market involving the business employing the related asset, and a significant change in the operations of the business.
 
The Company has determined that there were no adverse changes in our markets or other triggering events that could affect the valuation of its assets during the fiscal years ended July 31, 2011 and July 31, 2010.
 
Impairment of licenses and rights
The Company annually reviews the carrying value of licenses and rights to determine whether impairment may exist. Accounting Standards Codification (“ASC”) 350 “Intangibles-Goodwill and Other” requires that certain intangible assets be assessed annually for impairment using fair value measurement techniques.
 
As of July 31, 2011 and July 31, 2010, it was determined that the fair value of the licenses and rights exceeded their carrying amounts and the second step of the impairment testing was therefore not necessary.
 
Fair value of financial instruments
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments.
 
Foreign currency translation
The Company uses the Canadian Dollar as its functional currency and reporting currency. Assets and liabilities denominated in foreign currencies are translated into Canadian Dollars at the rate of exchange at the balance sheet date, while revenue and expenses are translated at the weighted average rates prevailing during the respective periods.  Components of stockholders’ equity are translated at historical rates.  Exchange gains and losses resulting from translation are reflected in the statements of income.

 
13

 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
Notes to the Combined Financial Statements
July 31, 2011 and July 31, 2010

 
2. 
Summary of Significant Accounting Policies (Continued)
 
Income taxes
Deferred income taxes are recorded to reflect certain items of income and expense recognized in different periods for financial reporting than for tax purposes.  The principal source of temporary differences is differences in methods of depreciation. The Company accounts for income taxes in accordance with ASC 740 “Income Taxes”.  ASC 740 requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect or expected for the year in which the differences are expected to reverse. A valuation allowance is recognized, if necessary, to measure tax benefits to the extent that, based on available evidence, it is more likely than not that they will be realized.
 

 
3. 
Property, plant and equipment 
 
               
2011
 
         
Accumulated
   
Net
 
   
Cost
    
Amortization
   
Book Value
 
                   
Office furniture and equipment
  $ 68,096     $ 52,618     $ 15,478  
Tools and equipment
    31,083       18,487       12,596  
Computer hardware
    17,634       14,168       3,466  
Vehicle
    22,502       19,287       3,215  
                         
    $ 139,315     $ 104,560     $ 34,755  
                         
                      2010  
           
Accumulated
   
Net
 
   
Cost
   
Amortization
   
Book Value
 
                         
Office furniture and equipment
  $ 68,096     $ 48,748     $ 19,348  
Tools and equipment
    31,083       15,338       15,745  
Computer hardware
    14,477       11,712       2,765  
Vehicle
    22,502       17,910       4,592  
                         
    $ 136,158     $ 93,708     $ 42,450  
 
 
14

 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
Notes to the Combined Financial Statements
July 31, 2011 and July 31, 2010

 
4. 
Related party transactions

APEX Systems Integrators Inc. leases premises as described in Note 9 from an entity controlled by the spouse of a shareholder. Rent expense for the year included in the Combined Statement of Income was $185,000 (2010 - $185,000).

In addition, during the July 31, 2011 year end, a licence was sold to a stockholder for $17,000. At July 31, 2011, this amount remains unpaid and is included in accounts receivable.

These transactions have been recorded at the exchange amount, being the amounts agreed upon by the parties.

At July 31, 2011, APEX Systems Integrators Inc. purchased the support contracts entered into by APEX Systems Integrators USA Inc. and assumed the liability to carry-out these contracts. These contracts were transferred at the value of the related deferred revenue.
 

 
5. 
Stockholders’ equity

Authorized:

The Company is authorized to issue an unlimited number of common shares and unlimited special shares.  The preference shares are issuable in series with rights and conditions to be determined by directors other than as follows:

(a)  
8%, double-voting, non-cumulative Series A Special Shares.
 
Issued:
 
2011
   
2010
 
             
500    Common shares of APEX Systems            
Integrators Inc.   $ 500     $ 500  
500   Common shares of APEX Systems                
Integrators (USA) Inc.
    500       500  
    $ 1,000     $ 1,000  
 

 
6. 
Measurement uncertainty
 
The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management regarding certain types of assets, liabilities, revenues, and expenses.  Such estimates included in the preparation of these financial statements include the assumptions used in determining the useful lives of long-lived assets and the assumptions used in determining whether assets are impaired. Actual results could differ from those estimates.

 
15

 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
Notes to the Combined Financial Statements
July 31, 2011 and July 31, 2010


6.
Measurement uncertainty (Continued)
 
As well, these financial statements include deferred revenue relating to consulting work that was completed and delivered, but for which a liability remained. This amount is subject to significant uncertainty due to the level of judgment required in determining the consulting work that remains to be completed at each year end.
 
In addition, the Company has unrecognized tax benefits from uncertain tax positions of $170,000 (2010 - $115,000). This amount is subject to significant uncertainty due to the likelihood of the outcome in the event of a potential Canada Revenue Agency audit.
 

 
7.
Income taxes                                                                                                            

 
    2011     2010  
Income before income taxes
  $ 775,506     $ 1,079,537  
                 
Differences between financial statement income and
               
taxable income
               
Capital cost allowance in excess of amortization
    (4,000 )     (5,000 )
Scientific research and development claims, net
    21,000       (40,000 )
Other
    11,494       15,463  
                 
Taxable income
  $ 804,000     $ 1,050,000  
                 
Expected tax at statutory rates of 15.5% (2010 – 16.5%)
  $ 124,000     $ 170,000  
Unrecognized tax benefits from uncertain tax positions
    55,000       74,000  
Other
    3,995       (12,586 )
                 
Provision for income taxes
  $ 182,995     $ 231,414  
                 
Current income tax liability
  $ (155,959 )   $ (174,741 )
Scientific research and experimental development
               
tax credit
    166,535       185,000  
                 
Income taxes recoverable
  $ 10,576     $ 10,259  
                 
Deferred income tax liability
  $ 8,000     $ 8,000  
 
The deferred tax liability consists of differences between the book value and the tax value of specific assets.
 
The Company has unrecognized tax benefits of approximately $170,000 as at July 31, 2011 (2010 - $115,000) associated with tax positions taken in the current and prior year, all of which, if recognized, would impact the effective tax rate. The Company did not incur any income tax related interest expense or penalties related to uncertain tax positions during the years ended July 31, 2011 and July 31, 2010.

 
16

 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
Notes to the Combined Financial Statements
July 31, 2011 and July 31, 2010

 
8. 
Financial instruments

Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivables and accounts payables are assumed to approximate their carrying amounts because of their short term to maturity.
 
Financial risk
The financial risk to the Company’s earnings arises from fluctuations in foreign exchange rates and the degree of volatility of those rates.  The Company does not use derivative instruments to reduce its exposure to foreign exchange risk as management does not consider such risks to be material.
 
The Company’s exposure to foreign currency is as follows:
             
(in U.S. dollars)
 
2011
   
2010
 
             
Cash and cash equivalents
  $ 844,383     $ 312,064  
Accounts payable
    (9,809 )     (78,628 )
Gross balance sheet exposure
  $ 834,574     $ 233,436  
 
A one cent increase in the Canadian dollar against the U.S. dollar at July 31, 2011, would have decreased equity and net income by $8,346 (2010 - $2,334). This analysis assumes that all other variables remain constant (a one cent weakening of the Canadian dollar against the U.S. dollar at July 31, 2011 or July 31, 2010, would have had the equal but opposite effect).
 
Credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents and accounts receivable.  The Company has deposited cash equivalents with reputable financial institutions, from which management believes the risk of loss to be remote.  Credit risks associated with trade receivables are limited by the Company’s credit granting policies and an insurance policy which covers possible losses for certain of the Company’s customers.

 
 
17

 


APEX Systems Integrators Inc. and APEX Systems
Integrators (USA) Inc.
Notes to the Combined Financial Statements
July 31, 2011 and July 31, 2010


 
9. 
Commitment

The Company has the following annual operating lease commitment with a related party as described in Note 4 with respect to premises:
 
2012
  $ 192,000  
2013
    210,000  
2014
    219,000  
2015
    237,000  
2016
    159,000  


 
10. 
Subsequent events

Subsequent to the 2011 year end, the stockholder group entered into discussions with a U.S. corporation for the purchase of the shares of APEX Systems Integrators Inc. The sale is expected to close in the first quarter of calendar 2012.

 
18

 


 
Financial Statements
 
(Unaudited)
 
APEX Systems Integrators Inc.
 
March 31, 2012
 
 
 
 
 
19

 
 
APEX Systems Integrators Inc.
 
Contents
 
 
 
20

 

Grant Thornton Logo

 
     
Grant Thornton LLP
33 Main Street East
Hamilton, ON
L8N 4K5

T +1 905 523 7732
F +1 905 572 9333
 
To the Board of Directors of
APEX Systems Integrators Inc.

We have reviewed the accompanying balance sheet of APEX Systems Integrators Inc. as at March 31, 2012 and the related statements of income, retained earnings, and cash flows for the period then ended.  A review includes primarily applying analytical procedures to management's financial data and making inquiries of company management.  A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole.  Accordingly, we do not express such an opinion.

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

Our responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services issues by the American Institute of Certified Public Accountants.  Those standards require us to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements.  We believe that the results of our procedures provide a reasonable basis for our report.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

The comparative figures for the eight month period ended March 31, 2011 were neither audited nor reviewed.
 
    /s/ Grant Thornton LLP
Hamilton, Canada
August 9, 2012
 
Chartered Accountants
Licensed Public Accountants
 
 
21

 
 


APEX Systems Integrators Inc.
(Unaudited)
(Amounts in Canadian $)
 
   
8-month
   
8-month
 
   
period ended
   
period ended
 
   
March 31, 2012
   
March 31, 2011
 
   
(note 1)
   
(note 1)
 
             
Revenues
           
Consulting fees
  $ 915,219     $ 1,026,316  
Licence and support income
    606,673       648,608  
Equipment sales
    976,096       448,290  
Wireless data network services income
    54,632       51,563  
Travel income
    8,643       47,875  
      2,561,263       2,222,652  
                 
Direct costs
               
Wages and benefits
    243,274       231,563  
Equipment purchases for resale
    706,840       247,238  
Licenses and support
    233,862       180,297  
Network services expenses
    27,298       26,278  
Project travel
    15,650       46,875  
      1,226,924       732,251  
Gross profit
    1,334,339       1,490,401  
                 
Expenses
               
Management salaries
    689,643       733,920  
Rental of facilities
    171,806       123,046  
Insurance
    15,854       32,631  
Professional fees
    47,654       22,275  
Office expenses
    16,036       22,292  
Telephone and communications
    5,222       8,709  
Amortization
    8,027       7,234  
Promotion
    967       9,813  
Vehicle
    3,335       4,078  
Human resources
    8,872       4,576  
Administrative salaries
    19,320       19,931  
      986,736       988,505  
Income before other items and income taxes
    347,603       501,896  
                 
Other items
               
Interest
    597       18,455  
(Loss) gain on foreign exchange
    (22,022 )     11,809  
      (21,425 )     30,264  
Income before income taxes
    326,178       532,160  
                 
Income taxes
               
Current
    79,667       126,000  
Deferred
    6,000       -  
      85,667       126,000  
Net income
  $ 240,511     $ 406,160  
 
 
22

 
 


APEX Systems Integrators Inc.
(Unaudited)
(Amounts in Canadian $)
 
   
8-month
   
8-month
 
   
period ended
   
period ended
 
   
March 31, 2012
   
March 31, 2011
 
   
(note 1)
   
(note 1)
 
             
Retained earnings, beginning of period
  $ 1,602,675     $ 2,562,959  
                 
Retained earnings, APEX Systems Integrators
               
(USA) Inc. (Note 1)
    (1,364,539 )     -  
                 
Retained earnings, APEX Systems Integrators Inc.,
               
beginning of period
    238,136       2,562,959  
                 
Net income
    240,511       406,160  
                 
Dividends declared
    (473,000 )     -  
                 
Retained earnings, end of period
  $ 5,647     $ 2,969,119  

 
23

 
 


APEX Systems Integrators Inc.
(Unaudited)
(Amounts in Canadian $)
 
   
March 31,
   
July 31,
 
   
2012
   
2011
 
             
             
Assets
           
Current
           
Cash and cash equivalents
  $ 573,973     $ 2,362,856  
Accounts receivable
    178,077       239,856  
Income taxes recoverable
    -       10,576  
Inventory
    7,760       26,874  
Prepaid expenses
    17,075       43,191  
Deposits
    2,755       -  
Government remittance receivable
    1,048       -  
      780,688       2,683,430  
                 
Property, plant and equipment (Note 3)
    28,644       34,755  
Licences and rights
    -       19,250  
                 
    $ 809,332     $ 2,737,435  
 

 
Liabilities
               
Current
               
Accounts payable
  $ 84,404     $ 44,199  
Deferred revenue
    580,593       392,384  
Income taxes payable
    124,188       -  
Government remittances payable
    -       126,382  
Dividends payable
    -       552,795  
Customer deposits
    -       10,000  
Deferred income taxes
    14,000       8,000  
      803,185       1,133,760  
                 
Shareholder’s equity
               
Share capital (Note 4)
    500       1,000  
Retained earnings
    5,647       1,602,675  
                 
      6,147       1,603,675  
                 
    $ 809,332     $ 2,737,435  
 

 
On behalf of the Board
 
    Director     Director
 
See accompanying notes to the combined financial statements.
 
24

 
 


APEX Systems Integrators Inc.
(Unaudited)
(Amounts in Canadian $)
 
   
8-month
   
8-month
 
   
period ended
   
period ended
 
   
March 31, 2012
   
March 31, 2011
 
   
(note 1)
   
(note 1)
 
             
Increase (decrease) in cash and cash equivalents
           
             
Operating
           
Net income
  $ 240,511     $ 406,160  
Amortization
    8,027       7,234  
Deferred income taxes
    6,000       -  
      254,538       413,394  
                 
Change in non-cash working capital items
               
Accounts receivable
    61,856       (11,821 )
Inventory
    19,114       -  
Prepaid expenses
    26,116       (18,000 )
Deposits
    (2,755 )     -  
Government remittances
    (127,430 )     62,069  
Accounts payable
    40,205       (234,522 )
Deferred revenue
    188,209       205,402  
Income taxes
    134,764       72,708  
Customer deposits
    (10,000 )     (33,000 )
      584,617       42,836  
                 
Financing
               
Dividends paid
    (1,025,795 )     -  
Issuance of share capital
    499       -  
      (1,025,296 )     -  
                 
Investing
               
Purchase of property, plant and equipment
    (5,980 )     (3,491 )
Proceeds on disposal of property, plant and equipment
    3,052       -  
      (2,928 )     (3,491 )
                 
Cash flows related to APEX Systems Integrators
               
(USA) Inc. (Note 1)
    (1,345,276 )     -  
                 
(Decrease) increase in cash and cash equivalents
    (1,788,883 )     452,739  
                 
Cash
               
Beginning of period
    2,362,856       2,935,062  
                 
End of period
  $ 573,973     $ 3,387,801  
 

 
See accompanying notes to the combined financial statements.
 
25

 
 


APEX Systems Integrators Inc.
(Unaudited)
March 31, 2012
 

 
 
1.
Nature of operations
APEX Systems Integrators Inc. (the Company) is a supplier of wireless mobile work force solutions and is incorporated under the laws on Ontario.
 
The comparative financial information for the year ended July 31, 2011 and eight month period ended March 31, 2011 is presented on a combined basis with APEX Systems Integrators (USA) Inc.  Effective August 1, 2011, the operations were combined and all operations were prospectively recorded in the Company’s records.  Accordingly, these financial statements are for the eight month period ended March 31, 2012 and only include the results of APEX Systems Integrators Inc.  The comparative information for the eight month period ended March 31, 2011 is neither audited nor reviewed.
 
 
2.
Summary of significant accounting policies

Basis of accounting
 
The Company maintains its records on the accrual basis of accounting in accordance with accounting policies generally accepted in the United States.
 
Revenue recognition
 
Consulting fees, license, equipment sales, wireless data network services and travel income are recognized when services are performed and goods are delivered and the title and risks of ownership pass to the customer and the collection of the resulting receivables are reasonably assured.
 
Support revenue is recognized ratably over the term of the support contract.
 
Inventory
 
Inventory is valued at the lower of cost and net realizable value.  Cost is determined using the first-in, first-out method.
 
Cash
 
The Company maintains cash balances at various financial institutions.
 
For purposes of the Statement of Cash Flows, the Company considers all money-market instruments to be cash equivalents as all money market deposits are cashable at amounts recorded in the balance sheet.
 
Accounts receivable
 
The Company’s accounts receivable contain no allowance for doubtful accounts, as all accounts are determined to be collectible.
 
For the period ended March 31, 2012 bad debt expense, net of the change in the allowance for doubtful accounts, was $ nil (2011 - $ nil).
 
 
26

 
 


APEX Systems Integrators Inc.
Notes to the Financial Statements
(Unaudited)
March 31, 2012
 

 
 
2.
Summary of significant accounting policies (continued)
 
Property, plant and equipment

Property, plant and equipment are stated at cost.  The cost of property, plant and equipment is depreciated over the estimated useful lives of the related assets.  Depreciation expense is calculated using the declining balance method.  The annual rates range from 20% to 30%. Maintenance and repairs are charged to operations when incurred.  Renewals and replacements of a routine nature are charged to expense, while those that improve or extend the life of existing properties are capitalized.
 
Impairment of long-lived assets
 
Property, plant and equipment are tested for impairment upon occurrence of a triggering event that indicates the carrying value of such asset is no longer recoverable.  Examples of such triggering events include a significant disposal of a portion of such assets, an adverse change in the market involving the business employing the related asset, and a significant change in the operations of the business.
 
The Company has determined that there were no adverse changes in its markets or other triggering events that could affect the valuation of its assets during the fiscal periods ended March 31, 2012 and March 31, 2011.
 
Fair value of financial instruments
 
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments.
 
Foreign currency translation
 
The Company uses the Canadian Dollar as its functional currency and reporting currency.  Assets and liabilities denominated in foreign currencies are translated into Canadian Dollars at the rate of exchange at the balance sheet date, while revenue and expenses are translated at the weighted average rates prevailing during the respective periods.  Components of stockholders’ equity are translated at historical rates.  Exchange gains and losses resulting from translation are reflected in the statements of income.
 
Income taxes
 
Deferred income taxes are recorded to reflect certain items of income and expense recognized in different periods for financial reporting than for tax purposes.  The principal source of temporary differences is differences in methods of depreciation.  The Company accounts for income taxes in accordance with ASC 740 “Income Taxes”. ASC 740 requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect or expected for the year in which the differences are expected to reverse.  A valuation allowance is recognized, if necessary, to measure tax benefits to the extent that, based on available evidence, it is more likely than not that they will be realized.
 
 
27

 
 


APEX Systems Integrators Inc.
Notes to the Financial Statements
(Unaudited)
March 31, 2012
 

 
3.
Property, plant and equipment
 
  
               
March 31
2012
   
July 31
2011
 
         
Accumulated
   
Net
   
Net
 
   
Cost
   
Amortization
   
Book Value
   
Book Value
 
                         
Office furniture and equipment
  $ 66,692     $ 55,118     $ 11,574     $ 15,478  
Tools and equipment
    31,083       21,006       10,077       12,596  
Computer hardware
    23,614       16,621       6,993       3,466  
Vehicle
    -       -       -       3,215  
Computer software
    34,097       34,097       -       -  
                                 
    $ 155,486     $ 126,842     $ 28,644     $ 34,755  
 

 
4.
Share capital
 
Authorized:
 
Unlimited number of Class A voting shares
 
 
Issued:
 
        March 31,     July 31,  
        2012     2011  
                 
  500  
Common shares of APEX Systems Integrators Inc.
  $ 500     $ 500  
                       
  500  
Common shares of APEX Systems Integrators (USA) Inc.
    -       500  
                       
          $ 500     $ 1,000  


 
5.
Commitments
 
The Company has the following annual operating lease commitment with a related party as described in Note 7 with respect to premises:
 
2013
  $ 210,000  
2014
    219,000  
2015
    237,000  
2016
    159,000  
    $ 825,000  
 
 
28

 


APEX Systems Integrators Inc.
Notes to the Financial Statements
(Unaudited)
March 31, 2012

 
6.
Measurement uncertainty
 
The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management regarding certain types of assets, liabilities, revenues, and expenses.  Such estimates included in the preparation of these financial statements include the assumptions used in determining the useful lives of long-lived assets and the assumptions used in determining whether assets are impaired.  Actual results could differ from those estimates.
 
As well, these financial statements include deferred revenue relating to consulting work that was completed and delivered, but for which a liability remained.  This amount is subject to significant uncertainty due to the level of judgment required in determining the consulting work that remains to be completed at each year end.
 
In addition, the Company has unrecognized tax benefits from uncertain tax positions of $170,000 (2011 - $170,000).  This amount is subject to significant uncertainty due to the likelihood of the outcome in the event of a potential Canada Revenue Agency audit.
 

 
7.
Related party transactions

APEX Systems Integrators Inc. leases premises as described in Note 5 from an entity controlled by the spouse of a shareholder.  Rent expense for the period included in the Statement of Income was $125,276 (2011 - $123,046).

This transaction has been recorded at the exchange amount, being the amount agreed upon by the parties.
 

 
8.
Financial instruments

Fair value of financial instruments
 
The fair values of cash and cash equivalents, accounts receivables and accounts payables are assumed to approximate their carrying amounts because of their short term to maturity.
 
 
29

 


APEX Systems Integrators Inc.
Notes to the Financial Statements
(Unaudited)
March 31, 2012

 
8.
Financial instruments (continued)
 
Financial risk

The financial risk to the Company’s earnings arises from fluctuations in foreign exchange rates and the degree of volatility of those rates.  The Company does not use derivative instruments to reduce its exposure to foreign exchange risk as management does not consider such risks to be material.  The Company’s exposure to foreign currency is as follows:
 
   
March 31,
2012
   
July 31,
2011
 
Cash and cash equivalents   $ 205,731     $ 844,383  
      (8,368 )     (9,809 )
Accounts payable                
Gross balance sheet exposure   $ 197,363     $ 834,574  
 
A one cent increase in the Canadian dollar against the U.S. dollar at March 31, 2012, would have decreased equity and net income by $1,974 (2011 - $8,346).  This analysis assumes that all other variables remain constant (a one cent weakening of the Canadian dollar against the U.S. dollar at March 31, 2012 or July 31, 2011, would have had the equal but opposite effect).

Credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash equivalents and accounts receivable.  The Company has deposited cash equivalents with reputable financial institutions, from which management believes the risk of loss to be remote.  Credit risks associated with trade receivables are limited by the Company’s credit granting policies and an insurance policy which covers possible losses for certain of the Company’s customers.
 

 
9.
Subsequent events

Subsequent to the 2012 period end, the Company was acquired by DecisionPoint Systems Inc.  The sale closed on June 4, 2012.
 
 
30

 
 
Item 9.01(b). Unaudited Pro Forma Combined Financial Information
 
The following unaudited pro forma combined financial information of DecisionPoint Systems, Inc. (“Company”) is presented to reflect the acquisition (“Acquisition”) by the Company of all the issued and outstanding shares of Apex Systems Integrators, Inc. (“Apex”).  The Acquisition was consummated on June 4, 2012.  The unaudited pro forma combined balance sheet of the Company at March 31, 2012, reflects the effects of the Acquisition as if it occurred on such date.  The unaudited pro forma combined statements of operations for the three months ended March 31, 2012 and the year ended December 31, 2011 reflect the effects of the Acquisition as if it occurred at the beginning of each period presented.  The unaudited pro forma financial information is based on the historical consolidated financial statements of the Company and Apex.  The historical financial information of Apex includes the financial information of Apex Systems Integrators, Inc. and Apex Systems Integrators (USA), Inc. (“Apex USA”) as Apex purchased the operations of Apex USA in July 2011; accordingly, the combined historical information of both entities are necessary to provide a fair presentation of the historical operations that have been acquired by the Company.

Such unaudited pro forma combined financial information should be read in conjunction with the historical consolidated financial statements of the Company for the year ended December 31, 2011, including the notes thereto, which were filed as part of the Company’s Form 10-K filed with the Securities and Exchange Commission on March 30, 2012, and the Company’s Quarterly Report on Form 10-Q for the three month period ended March 31, 2012, which was filed with the Securities and Exchange Commission on May 14, 2012.  Such unaudited pro forma combined financial information includes unaudited historical combined financial information of Apex as of March 31, 2012 and for the three month period ended March 31, 2012 and year ended December 31, 2011, which have been prepared by management of Apex.  The unaudited pro forma combined statements of operations of the Company only include the acquisition of Apex.  In addition, the unaudited pro forma combined financial statements are based upon pro forma allocations of the purchase price of Apex based upon the fair value of the assets and liabilities acquired in connection with the Acquisition.  Management believes that all material adjustments necessary to reflect the effect of the Acquisition have been made to the unaudited pro forma combined financial information.

The unaudited pro forma combined financial information is for informational purposes only and is not necessarily indicative of the results of operations of the Company that would have occurred if the acquisition of Apex had been completed on the dates indicated, nor does it purport to represent the Company’s results of operations as of any future date or for any future period.
 
 
31

 
 
DecisionPoint Systems, Inc.
                               
Unaudited Pro Forma Combined Balance Sheet
 
March 31, 2012
(000's except share amounts)
                               
ASSETS
 
DecisionPoint
     
Apex
     
Combined
   
Pro Forma
Adjustments
 
Pro Forma
Combined
 
Current assets
                               
Cash
  $ 493     $ 574     $ 1,067     $ (574 )
(a)
  $ 493  
Accounts receivable, net
    10,502       178       10,680       -         10,680  
Other receivable
    1,494       -       1,494       -         1,494  
Inventory, net
    963       8       971       -         971  
Deferred costs
    3,402       -       3,402       -         3,402  
Prepaid expenses and other current assets
    326       20       346       429   (b, c)     775  
Total current assets
    17,180       780       17,960       (145 )       17,815  
                                           
Property and equipment, net
    99       29       128       -         128  
Other assets, net
    240       -       240       156  
(i)
    396  
Deferred costs, net of current portion
    1,879       -       1,879       -         1,879  
Goodwill
    5,538       -       5,538       2,823  
(c)
    8,361  
Intangible assets, net
    2,065       -       2,065       4,651  
(c)
    6,716  
Total assets
  $ 27,001     $ 809     $ 27,810     $ 7,485       $ 35,295  
                                           
LIABILITIES AND STOCKHOLDERS' EQUITY
                                         
Current liabilities
                                         
Accounts payable
  $ 10,300     $ 84     $ 10,384     $ 1,024  
(l)
  $ 11,408  
Accrued expenses and other current liabilities
    1,830       138       1,968       -         1,968  
Line of credit
    1,600       -       1,600       800  
(d)
    2,400  
Current portion of debt
    1,000       -       1,000       840  
(e)
    1,840  
Due to related party
    909       -       909       -         909  
Unearned revenue
    5,742       581       6,323       (134 ) (c, f)     6,189  
Total current liabilities
    21,381       803       22,184       2,530         24,714  
                                           
Long term liabilities
                                         
Unearned revenue, net of current portion
    2,578       -       2,578       -         2,578  
Debt, net of current portion and discount
    727       -       727       3,360  
(e)
    4,087  
Deferred tax liabilities
    22       -       22       1,233   (c, g)     1,255  
Present value of earnout payment
    -       -       -       1,236   (c, h)     1,236  
Interest payable
    60       -       60       -         60  
Total liabil ities
    24,768       803       25,571       8,359         33,930  
                                           
Commitments and contingencies
                                         
      -       -       -       -         -  
STOCKHOLDERS' EQUITY
                                         
Cumulative convertible preferred stock, $0.001 par value, 10,000,000 shares
                                   
authorized, 1,816,289  shares issued and outstanding, including
                                         
cumulative and imputed preferred dividends of $567 and $436, and
                                   
with a liquidation preference of  $10,679 and $10,652, respectively
    6,451       -       6,451       -         6,451  
Common stock, $0.001 par value, 100,000,000 shares authorized,
                    -                 -  
8,182,791 issued and 8,028,908 outstanding at March 31, 2012 (historical)
                                   
and 8,507,792 issued and 8,353,908 outstanding at March 31, 2012 (pro forma)
    8       1       9       (1 )
(m)
    8  
Additional paid-in capital
    14,535       -       14,535       341  
(m)
    14,876  
Treasury stock, 153,883 shares of common stock
    (205 )     -       (205 )     -         (205 )
Accumulated deficit
    (17,690 )     5       (17,685 )     (1,214 )
(k)
    (18,899 )
Unearned ESOP shares
    (866 )     -       (866 )     -         (866 )
Total stockholders’ equity
    2,233       6       2,239       (874 )       1,365  
Total liabilities and stockholders' equity
  $ 27,001     $ 809     $ 27,810     $ 7,485       $ 35,295  
 
32

 
 
DecisionPoint Systems, Inc.
                                 
Unaudited Pro Forma Combined Statement of Operations
                             
   
For the Three Months Ended March 31, 2012
   
                     
Pro Forma
     
Pro Forma
   
(000's except per share data)
 
DecisionPoint
   
Apex
   
Combined
   
Adjustments
 
Combined
   
                                   
Net sales
  $ 17,810     $ 1,221     $ 19,031     $ -       $ 19,031    
                                             
Cost of sales
    14,057       763       14,820       -         14,820    
                                             
Gross profit
    3,753       458       4,211       -         4,211    
                                             
Selling, general and administrative expense
    3,835       356       4,191       (7 ) (c, j)     4,184    
                                             
Operating (loss) income
    (82 )     102       20       7         27    
                                             
Total interest and other expense
    113       25       138       175  
(e)
    313    
                                             
Net (loss) income before income taxes
    (195 )     77       (118 )     (168 )       (286 )  
                                             
Provision for income taxes
    42       22       64       -  
(n)
    64    
                                             
Net (loss) income
    (237 )     55       (182 )     (168 )       (350 )  
                                             
Cumulative dividends on perferred stock
    222       -       222       -         222    
                                             
Income available to common shareholders
  $ (459 )   $ 55     $ (404 )   $ (168 )     $ (572 )  
                                             
Net loss per share - basic and diluted
  $ (0.06 )                             $ (0.07 )  
                                             
Weighted-average shares outstanding -
                                           
basic and diluted
    7,392,441                                 7,717,441  
(m)
 
 
33

 
 
DecisionPoint Systems, Inc.
   
Unaudited Pro Forma Combined Statement of Operations
   
   
For the Year Ended December 31, 2011
   
                     
Pro Forma
 
Pro Forma
   
(000's except per share data)
 
DecisionPoint
   
Apex
   
Combined
   
Adjustments
 
Combined
   
                                   
Net sales
  $ 58,359     $ 3,102     $ 61,461     $ -       $ 61,461    
                                             
Cost of sales
    46,368       1,102       47,470       -         47,470    
                                             
Gross profit
    11,991       2,000       13,991       -         13,991    
                                             
Selling, general and administrative expense
    13,597       1,213       14,810       1,330   (c, j)     16,140    
                                             
Operating (loss) income
    (1,606 )     787       (819 )     (1,330 )       (2,149 )  
                                             
Total interest and other expense
    3,462       (41 )     3,421       701  
(e)
    4,122    
                                             
Net (loss) income before income taxes
    (5,068 )     828       (4,240 )     (2,031 )       (6,271 )  
                                             
Provision for income taxes
    100       170       270       -  
(n)
    270    
                                             
Net (loss) income
    (5,168 )     658       (4,510 )     (2,031 )       (6,541 )  
                                             
Cumulative dividends on perferred stock
    486       -       486       -         486    
                                             
Income available to common shareholders
  $ (5,654 )   $ 658     $ (4,996 )   $ (2,031 )     $ (7,027 )  
                                             
Net loss per share - basic and diluted
  $ (0.94 )                             $ (1.11 )  
                                             
Weighted-average shares outstanding -
                                     
basic and diluted
    6,019,900                                 6,344,900  
(m)
 
 
34

 
 
Notes to Pro Forma Financial Statements
Note 1 – Basis of Presentation

On June 4, 2012, (“Closing Date”), DecisionPoint Systems, Inc. ("Company” or “DPS”), 2314505 Ontario Inc., a wholly-owned subsidiary of the Company (“Purchaser”), Karen Dalicandro (“KD”), Donald Dalicandro (“DD”), and 2293046 Ontario Inc. (“KD Co” and together with KD, the “Sellers”) entered into a Share Purchase Agreement (“SPA”).  Pursuant to the SPA, Purchaser purchased all of the issued and outstanding shares of Apex Systems Integrators Inc., a corporation organized under the laws of the Province of Ontario, Canada.  In consideration for the shares of Apex Systems Integrators, Inc., on the Closing Date the Purchaser paid CDN$5,000,000 (“Closing Amount”), of which CDN$240,000 (“Escrow Amount”) was placed in escrow with the Purchaser’s attorney and CDN$10,000 is held by the Purchaser as a holdback.  On the Closing Date, the Purchaser and Apex merged under the corporate name of Apex Systems Integrators Inc., and is hereafter referred to herein as “Apex”.

Closing costs and associated expenses either previously paid, payable in cash or recorded as deferred financing costs after the Closing Date total approximately $1.8 million, including the issuance of 325,000 shares of the Company’s common stock at the market price of $1.05 per share on the Closing Date.  Of this amount, approximately $190,000 was reflected as deferred financing costs and the remainder was reflected as a charge to selling, general and administrative expenses in the historical financial statements of the Company as follows: 1) Fourth quarter ended December 31, 2011: $46,000; 2) First quarter ended March 31, 2012: $351,000; and 3) Second quarter ended June 30, 2012: $1,213,000.  The transaction was accounted for using the purchase method of accounting in accordance with Accounting Standard Codification (“ASC”) 805 - Business Combinations and the operating results for Apex have been consolidated into the Company’s results of operations beginning on June 5, 2012.

The unaudited pro forma combined financial statements have been prepared to give effect to the acquisition by the Company of Apex using the historical consolidated financial statements of the Company and the historical combined financial statements Apex.  Please note that the unaudited pro forma combined financial statements should be read in conjunction with the audited and unaudited historical financial statements of the Company and Apex, respectively.  This information can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and Quarterly Report on Form 10-Q for the three months ended March 31, 2012, and in Item 9.01 of this Current Report on Form 8-K/A.

The historical financial information of Apex includes the financial information of Apex Systems Integrators, Inc. and Apex Systems Integrators (USA), Inc. (“Apex USA”) as Apex purchased the operations of Apex USA in July 2011; accordingly, the combined historical information of both entities is necessary to provide a fair presentation of the historical operations that have been acquired by the Company.

The unaudited pro forma combined balance sheet as of March 31, 2012, combines the unaudited consolidated balance sheets of the Company and Apex on March 31, 2012, and gives effect to the Acquisition as if it had occurred on March 31, 2012.

The unaudited pro forma combined statement of operations for the three months ended March 31, 2012, combines the unaudited results of operations of the Company and Apex to give the effect as if the Acquisition occurred the first day of the period presented (January 1, 2012).  The unaudited pro forma combined statement of operations for the twelve months ended December 31, 2011, combines the audited consolidated statements of operations of the Company for the twelve months fiscal year ended December 31, 2011, with the unaudited combined statement of operations of Apex for the twelve months ended December 31, 2011, to give the effect as if the Acquisition occurred the first day of the period presented (January 1, 2011).

The unaudited pro forma combined financial statements reflect the value of the Canadian Dollar equal to one United States Dollar (1:1) at March 31, 2012, for the three month period ended March 31, 2012 and the year ended December 31, 2011 as that value approximates the conversion rate for all dates and periods presented.  Accordingly, the historical financial information of Apex is translated from its reporting currency (Canadian Dollars) to the Company’s reporting currency (US Dollars) using $1CDN = $1US.

 
35

 
 
Note 2 - Unaudited Pro Forma Adjustments

The following are explanations that correspond by letter to the pro forma adjustments in the accompanying unaudited pro forma combined financial statements:

(a)  
Cash impact upon paying the Closing Amount to the Sellers: (000’s except where indicated)
 
1 )
Apex cash was distributed to shareholder prior to consummation of purchase transaction
  $ (574 )
2 )
Borrowing on DPS line of credit to fund acquisition
    800  
3 )
Borrowing from RBC to fund acquisition
    2,500  
4 )
Borrowing from BDC to fund acquisition
    1,700  
5 )
Payment of cash purchase consideration
    (5,000 )
   
Net impact on cash
  $ (574 )
 
(b)  
Working capital adjustment arising from the negative working capital delivered to the Company on the Closing Date and the $0.2 million positive working capital as required pursuant to the terms of the SPA.

(c)  
The following table summarizes the fair values of the Apex assets acquired and liabilities assumed and the allocation of the excess purchase price to certain identifiable intangible assets.  The two periods presented represent the pro forma balance sheet date of this report on March 31, 2012 and the actual Closing Date of June 4, 2012, given effect to currency exchange rates at that date: (000’s except where indicated)
 
   
Pro Forma
   
Closing
 
   
March 31, 2012
   
June 4, 2012
 
             
Assets acquired:
           
Accounts receivable
  $ 178     $ 243  
Due from related party
    429       412  
Other current assets
    28       63  
Property and equipment
    29       30  
Intangible assets
    4,651       4,466  
Goodwill
    2,823       2,449  
Total assets acquired
    8,138       7,663  
                 
Liabilities assumed:
               
Accounts payable and other accrued liabilities
    (222 )     (195 )
Unearned revenue
    (447 )     (297 )
Deferred tax liability
    (1,233 )     (1,184 )
Total liabilities assumed
    (1,902 )     (1,676 )
Net assets acquired
  $ 6,236     $ 5,987  
                 
Purchase consideration:
               
Cash paid at closing
  $ 5,000     $ 4,801  
Earn out consideration
    1,236       1,186  
Total purchase consideration
  $ 6,236     $ 5,987  
 
The Company has allocated the purchase price to the tangible and identified intangible assets acquired and liabilities assumed based on their fair values in accordance with generally accepted accounting principles in accordance with ASC 805.  ASC 805 considers the existence of intangible assets in the following areas: marketing, customer relationships, proprietary software, artistic creations, contracts, and technology.  The Company has identified and valued software for customer sales, customer relationships, trademarks / tradenames and non-compete agreements as Apex’s principal intangible assets in accordance with ASC 805 requirements.
 
 
36

 
 
As of the unaudited pro forma combined balance sheet date, below are the fair values of the identified intangible assets and their respective amortization periods for their useful life: (000’s except where indicated)

   
Fair Value
 
Estimated Useful life
         
Customer relationships
  $ 1,600  
9 years
Software
    2,586  
3.5 years
Trade name
    450  
7 years
Covenant not to compete
    15  
1 year
           
    $ 4,651    
 
Amortization of customer relationships and tradenames are calculated using the discounted cash flow methodology to more properly reflect the greater useful life of the assets in the early years while the proprietary software, ApexWare, is amortized using proportional revenue approach and the covenant not to compete is amortized on a straight-line basis.  For the unaudited pro forma combined periods presented, monthly amortization would have been $114,700, based upon their respective useful lives.  Total amortization for the three months ended March 31, 2012 and the year ended December 31, 2011, was $344,000 and $1,376,000, respectively.

The estimated total amortization expenses for the five years after the closing are as follows: (000’s except where indicated)
 
Years ending December 31:
     
2012
  $ 803  
2013
    1,123  
2014
    987  
2015
    896  
2016 and thereafter
    842  
         
    $ 4,651  
 
There is no pro forma adjustment for depreciation expense since the historical depreciation is comparable.

(d)  
Drawdown of $0.8 million on DPS line of credit to fund the acquisition of Apex.

(e)  
Term loan debt to fund the acquisition of Apex and the commensurate additional interest along with other increase in interest expense as result of transaction:

RBC Term Loan -- On June 4, 2012, Apex entered into the Royal Bank of Canada (“RBC”) Credit Agreement with RBC pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2.75 million, including a term facility in the amount of CDN$2.5 million.  The loan requires monthly payments of principal totalling CDN$70,000, plus interest with a final maturity date of June 2015.
 
BDC Term Loan -- On June 4, 2012, Apex entered into a Loan Agreement with BDC Capital Inc., a wholly-owned subsidiary of Business Development Bank of Canada, (“BDC”), pursuant to which BDC made available to Apex a term credit facility in the aggregate amount of CDN$1.7 million. The maturity date of the loan is June 2016.
 
Based on the payment terms of these purchase related obligations, the pro forma combined current portion of the loans is $840,000 and the pro forma long term portion, net is $3,360,000.
 
 
37

 
 
Additional interest expense is as follows: (000’s except where indicated)
 
RBC Term Loan -
           
Principal
  $ 2,500        
Approximate rate of interest
    7.0 %      
Pro forma annual interest expense
            175  
                 
BDC Term Loan -
               
Principal
  $ 1,700          
Approximate rate of interest
    12.0 %        
Pro forma annual interest expense
            204  
                 
Additional required interest payments of $20 per quarter
            80  
                 
SVB Line of Credit -
  $ 800          
Approximate rate of interest
    7.5 %        
Pro forma annual interest expense
            60  
                 
Amortization of deferred financing costs -$190,000/3years
            64  
                 
Related Party Additional Annual Interest -
               
Expense reflects the increase in rate from 12% to 25% on
               
$909 related party obligation
            118  
                 
Pro forma increase in interest expense for the year ended December 31, 2011.
          $ 701  
Pro forma increase in interest expense for the three months ended March 31, 2012.
          $ 175  
 
(f)  
Fair value of Apex’ unearned revenue related service obligations.

(g)  
Deferred tax liability of $1.233 million arising from the future amortization of the intangible assets calculated using an estimated Canadian tax rate of 26.5%.

(h)  
Present value of the future potential contingent earn-out and bonus consideration the Sellers may earn based upon Apex achieving certain earnings before interest, taxes, depreciation and amortization and revenue targets as defined in the SPA.

(i)  
In connection with the financing as described in (e), the Company incurred deferred financing costs of $190,000, which are to be amortized over 3 years.  Of this, $34,000 was previously deferred by DPS as of March 31, 2012.

(j)  
Pro forma add back of one-time transaction costs expensed in the historical periods ended March 31, 2012 and December 31, 2011 of $351,000 and $46,000, respectively.

(k)  
Impact upon retained earnings: (000’s except where indicated)
 
1 )
Total acquisition related costs
  $ 1,796  
2 )
Costs reflected in DPS historical financial statements as of March 31, 2012
    (431 )
3 )
Total acquisition costs not recorded in historical financial statements as of March 31, 2012
    1,365  
4 )
Acquisition costs reflected as debt discount and deferred financing costs (see (i))
    (156 )
   
Acquisition costs which are expensed and thus reflected as a reduction to retained earnings
    1,209  
5 )
Reflects the removal of the $5 in retained earnings of Apex in the acquisition.
    5  
   
Pro Forma reduction to retained earnings
  $ 1,214  
 
 
38

 
 
(l)  
Impact on accounts payable: (000’s except where indicated)
 
1 )
Total acquisition related costs
  $ 1,796  
2 )
Costs reflected in DPS historical financial statements as of March 31, 2012
    (431 )
3 )
Total acquisition costs not recorded in historical financial statements as of March 31, 2012
    1,365  
4 )
Acquisition costs reflected through the issuance of 325,000 shares of common stock at March 31. 2012
    (341 )
   
Pro Forma acquistion costs reflected through the recordation of accounts payable at March 31, 2012
  $ 1,024  
 
(m)  
Reflects the issuance of 325,000 shares of common stock as consideration for acquisition related expenses.  Shares were valued at $1.05 per share or $341,000.  Shares are assumed to be fully outstanding in the periods presented.
 
(n)  
The pro forma does not reflect an adjustment to income tax expense as the pro forma combined income expense would not be materially different from the historical stand alone income tax expense of the Company and Apex.
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
39