ELECTRONIC CONTROL SECURITY INC - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - ELECTRONIC CONTROL SECURITY INC	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - ELECTRONIC CONTROL SECURITY INC	v239527_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - ELECTRONIC CONTROL SECURITY INC	v239527_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _________

Commission File Number: 000-31026

ELECTRONIC CONTROL SECURITY INC.

(Exact name of registrant as specified in its charter)

NEW JERSEY		22-2138196
(State or other jurisdiction		(IRS Employer Identification No.)
of incorporation or organization

790 BLOOMFIELD AVENUE, CLIFTON, NEW JERSEY 07012

(Address of principal executive offices)

(973) 574-8555

(Issuer's telephone number)

Indicate by checkmark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer	¨		Accelerated filer	¨
Non-accelerated filer	¨		Smaller reporting company	x

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

As of November 7, 2011, Electronic Control Security Inc. had outstanding 10,952,132 shares of common stock, par value $.001 per share.

INDEX PAGE

PART I — FINANCIAL INFORMATION

Forward Looking Statements	3

Item 1 - Financial Statements
Consolidated Balance Sheets September 30, 2011 (Unaudited) and June 30, 2011	F-2
Unaudited Consolidated Statements of Operations for the three months ended September 30, 2011 and 2010	F-3
Unaudited Consolidated Statements of Cash Flows for the three months ended September 30, 2011 and 2010	F-4
Notes to Consolidated Financial Statements	F-5

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	3

Item 4 - Controls and Procedures	6

PART II — OTHER INFORMATION	7

Item 6 – Exhibits	7

Signatures	8

Electronic Control Security Inc.

Consolidated Balance Sheets

	September 30,			June 30,
	2011			2011
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	724		$	7,040
Accounts receivable, current portion, net of allowance
of $225,000 and $25,000, respectively		1,407,134			1,063,502
Inventories, net of allowance of $80,000		2,011,863			1,943,676
Current portion of deferred income taxes		225,000			180,000
Other current assets		108,514			125,946

Total current assets		3,753,235			3,320,164

Property, equipment and software development costs - net		374,204			388,090
Intangible assets - net		931,468			950,401
Goodwill		196,962			196,962
Deferred income taxes, net of current portion		395,050			395,050
Other assets		6,933			7,205
	$	5,657,852		$	5,257,872
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	1,156,606		$	987,573
Due to officers and shareholders		28,566			93,405
Line of credit		475,000			425,000
Current maturities of debt		6,505			14,237
8% Convertible debentures		-			-

Total current liabilities		1,666,677			1,520,215

Noncurrent liabilities
Deferred income taxes		53,250			53,250

Total liabilities		1,719,927			1,573,465

Shareholders' equity
Series A Convertible Preferred stock, cumulative, $.01 par value; $2.00 liquidation preference; 5,000,000 shares authorized, 300,000 and 300,000 shares issued and outstanding, respectively		3,000			3,000
Series B 10% Convertible Preferred stock, cumulative, $.001 par value; $2,047 and $1,997 per share liquidation preference; 2,000 shares authorized, 791 shares issued and outstanding, respectively		1			1
Common Stock, $.001 par value; 30,000,000 shares authorized; 11,052,132 and 10,529,911 shares issued; 10,952,132 and 10,429,911 shares outstanding		11,052			10,530
Additional paid-in capital		13,470,826			13,337,534
Accumulated deficit		(9,541,744	)		(9,661,448	)
Accumulated other comprehensive income		4,790			4,790
Treasury stock, at cost, 100,000 shares		(10,000	)		(10,000	)

Total shareholders' equity		3,937,925			3,684,407

	$	5,657,852		$	5,257,872

See Notes to Consolidated Financial Statements.

F-2

Electronic Control Security Inc.

Consolidated Statements of Operations

	Three Months
	Ended
	September 30,
	2011			2010
	(Unaudited)

Revenues	$	1,114,431		$	801,552
Cost of revenues		424,781			262,292

Gross profit		689,650			539,260

Research and development		34,506			24,606
Selling, general and administrative expenses		523,135			341,815
Stock based compensation		-			24,198

Income from operations		132,009			148,641

Other expenses (income)
Interest expense		17,489			17,924
Interest income		-			(1,196	)

Total other expenses (income)		17,489			16,728

Income before income taxes		114,520			131,913

Income taxes		(45,000	)		-

Income before dividends		159,520			131,913

Dividends related to convertible preferred stock		39,816			36,071

Net income attributable to common shareholders	$	119,704		$	95,842

Net income per share:
Basic	$	0.01		$	0.01
Diluted	$	0.01		$	0.01

Weighted average number of common shares and equivalents:
Basic		10,560,466			10,330,620
Diluted		10,676,375			10,541,691

See Notes to Consolidated Financial Statements.

F-3

Electronic Control Security Inc.

Consolidated Statements of Cash Flows

	Three Months
	Ended
	September 30,
	(Unaudited)
	2011			2010
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income before deemed dividends	$	159,520		$	131,913
Adjustments to reconcile income to net cash (used in) provided by operating activities:
Depreciation and amortization		51,587			43,009
Deferred income taxes		(45,000	)		-
Increase in allowance for doubtful accounts		200,000			-
Stock based compensation		-			24,198
Issuance of shares in repayment of amounts owed		-			19,076
Increase (decrease) in cash attributable to changes in
Accounts receivable		(544,932	)		1,581,692
Inventories		(68,187	)		(226,968	)
Other current assets		18,732			(27,589	)
Accounts payable and accrued expenses		169,031			(574,287	)
Other assets		272			-

Net cash (used in) provided by operating activities		(58,977	)		971,044

Cash flows from investing activities:
Acquisition of property plant and equipment		(18,768	)		(135,167	)

Net cash used in investing activities		(18,768	)		(135,167	)

Cash flows from financing activities:
Proceeds from line of credit		50,000			-
Principal payments on 8% convertible debentures		-			(100,000	)
Payments on debt		(7,732	)		(9,105	)
Increase (decrease) in loans from officers		29,161			(108,158	)

Net cash provided by (used in) financing activities		71,429			(217,263	)

Net (decrease) increase in cash and cash equivalents		(6,316	)		618,614

Cash and cash equivalents at beginning of year		7,040			168,465

Cash and cash equivalents at end of year	$	724		$	787,079

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	16,621		$	22,002
Taxes	$	-		$	-

Supplemental disclosures of noncash financing activities:
Exercise price of stock options paid via reduction in shareholder loans	$	-		$	33,500
Conversion of shareholders' loans to common stock	$	94,000		$	-

See Notes to Consolidated Financial Statements.

F-4

ELECTRONIC CONTROL SECURITY INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements of Electronic Control Security Inc. and its subsidiaries (collectively "the Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 8.03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended June 30, 2011, as filed with the Securities and Exchange Commission.

Note 2 - Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of shares of the Company’s common stock outstanding. Diluted earnings per share is computed based on the weighted-average number of shares of the Company’s common stock, including common stock equivalents outstanding. Certain common shares consisting of stock options, warrants, convertible debentures and convertible preferred stock that would have an anti-dilutive effect were not included in the diluted earnings per share attributable to common stockholders for the three months ended September 30, 2011 and 2010.

The following is a reconciliation of the denominators of the basic and diluted earnings per share computations:

	Three Months
	Ended September 30,
	2011	2010
Denominators:

Weighted-average shares outstanding used to compute basic earnings per share	10,560,466	10,330,620

Effect of dilutive stock options	115,909	211,071

Weighted-average shares outstanding and
dilutive securities used to compute
dilutive earnings per share	10,676,375	10,541,691

For the three months ended September 30, 2011 and 2010, respectively, there were outstanding potential common equivalent shares of 3,720,195 and 4,387,116, which were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive. These potential dilutive common equivalent shares may be dilutive to future diluted earnings per share.

Note 3 - Inventories

Inventories consist of the following:

	September 30,			June 30,
	2011			2011

Raw materials	$	328,961		$	470,259
Work-in-process		451,326			243,344
Finished goods, net		1,311,576			1,310,073
Subtotal		2,091,863			2,023,676
Allowance		(80,000	)		(80,000	)
	$	2,011,863		$	1,943,676

F-5

Note 4 - Due to Officers and Shareholders

In September 2011, 522,221 shares of common stock were issued to Officers and Shareholders in consideration of a reduction in the loans due to them in the amount of $94,000.

Note 5 – New Authoritative Pronouncements

The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.

F-6

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with our financial statements and the notes related to those statements. Some of our discussion is forward-looking and involves risks and uncertainties. For information regarding risk factors that could have a material adverse effect on our business, refer to the risk factors section of the annual report for the year ended June 30, 2011 on Form 10-K.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Our Company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in this report and other Company filings with the Securities and Exchange Commission and in our reports to shareholders. Statements that relate to other than strictly historical facts, such as statements about our plans and strategies, expectations for future financial performance, new and existing products and technologies, and markets for our products are forward-looking statements. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "will" and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on our management's then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors including, but not limited to, our Company's current and future capital needs, uncertainty of capital funding, our clients' ability to cancel contracts with little or no penalty, government initiatives to implement Homeland Security measures, the likelihood of completing transactions for which we have entered into letters of intent, the state of the worldwide economy, competition, our customer's ability to pay our invoices within our standard credit terms, and other risks detailed in our Company's most recent Annual Report on Form 10-K and other Securities and Exchange Commission filings. We undertake no obligation to publicly update or revise any forward-looking statements.

OVERVIEW

We are engaged in the design, development, manufacture and marketing of technology-based integrated entry control and perimeter security solutions. We also perform support services consisting of risk assessment and vulnerability studies to ascertain a customer's security requirements in developing a comprehensive risk management and mitigation program as well as product design and engineering services in support of the systems integrators and dealers/installers providing these services to a client.

We market our products domestically and internationally to:

security system integrators;

national and local government entities;

large industrial facilities and major office complexes;

energy facilities, including nuclear plants, power utilities and pipelines; and commercial transportation centers, such as airports and seaports.

We believe we are one of the few true comprehensive security solution providers in the industry. We are able to analyze a security risk and develop security solutions specifically tailored to mitigate that risk, including design, engineering and manufacturing individual components of a system as may be necessary to deliver a fully integrated security system customized to a client's requirements. We are frequently engaged by security system integrators, security system dealers/installers, and commercial architects and engineers because we are able to deliver the integrated platform of design, engineering services and fully integrated security solutions that support their requirements for the completion of a given project.

We believe that we have developed a superior reputation as a provider of integrated security systems since our inception in 1976 because we:

offer the complete range of solutions-driven responses to accommodate our customers' needs;

offer technologically superior products;

are able to design, engineer and manufacture systems customized to our clients' specific requirements;

deliver systems that are easy to operate and maintain while providing superior life cycle cost performance compared to systems offered by competitors;

have established solid credentials in protecting high value targets; and

offer customers perhaps the best warranty in the industry.

During fiscal 2011, we submitted proposals on projects for Department of Defense facilities and certain nuclear power stations in the United States and Southeast Asia valued at approximately $16,750,000. We anticipate decisions relating to these proposals during fiscal 2012.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires that we make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. We base our estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.

We do not participate in, nor has there been created, any off-balance sheet special purpose entities or other off-balance sheet financing. In addition, we do not enter into any derivative financial instruments for speculative purposes.

We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

INVENTORY VALUATION

Inventories are valued at the lower of cost or market. We routinely evaluate the composition of our inventory to identify obsolete or otherwise impaired inventories. Inventories identified as impaired are evaluated to determine if reserves are required. We currently have a reserve of $80,000 against inventory.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The allowance for doubtful accounts is comprised of two parts, a specific account analysis and a general reserve. Accounts where specific information indicates a potential loss may exist are reviewed and a specific reserve against amounts due is recorded. As additional information becomes available, such specific account reserves are updated. Additionally, a general reserve is applied to the aging categories based on historical collection and write-off experience.

ACCOUNTING FOR INCOME TAXES

We record a valuation allowance to our deferred tax assets for the amount that is more likely than not to be realized. While we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net amount recorded, an adjustment to the deferred tax asset would increase income in the period such determination has been made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged against income in the period such determination was made.

FAIR VALUE OF EQUITY INSTRUMENTS

The valuation of certain items, including valuation of warrants or stock options that may be offered as compensation for goods or services, involve significant estimations with underlying assumptions judgmentally determined. Warrants are valued using the most reliable measure of fair value, such as the value of the goods or services rendered, if obtainable. If such value is not readily obtainable, the valuation of warrants and stock options are then based on the Black-Scholes valuation model, which involves estimates of stock volatility, expected life of the instruments and other assumptions.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2011 (“2011 Period”) COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2010 (“2010 Period”)

REVENUES. We had net revenues of $1,114,431 for the 2011 Period compared to $801,552 for the 2010 Period, representing an increase in net revenues for the 2010 Period of approximately 39%. The increase in net revenues during the 2011 Period compared to the 2010 Period is primarily attributable to the increase in deliverable products and support services.

GROSS MARGINS. Gross margins for the 2011 Period were 62% as compared to 67% from the 2010 Period. The decrease in gross margins is primarily attributable to a change in the order mix of equipment sales and support services. Although we encountered a small decrease in material cost, we experienced an increase in design and engineering support service costs which, combined, resulted in the decrease in gross margins for the period.

RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of those incurred in designing and developing upgrades to existing products and systems as well as new product development work on the WISE® (Water Infrastructure Sensing Equipment) water technology. Research and development expenses were $34,506 for the 2011 period and $24,606 for the 2010 period. The increase in research and development costs during the 2011 Period as compared to the 2010 Period is attributable to the higher research and development expenditures during the 2011 Period for the design and development upgrades of our technologies.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the 2011 Period were $523,135 compared to $341,815 for the corresponding period in 2010. The increase in selling, general and administrative expenses during the 2011 Period as compared to the 2010 Period is primarily attributable to an increase in our allowance for doubtful accounts in the amount of $200,000.

STOCK BASED COMPENSATION. We issued stock options to our directors and various employees and consultants. The value of these options is being amortized over their respective vesting periods. Stock-based compensation is non-cash and, therefore, has no impact on cash flow or liquidity.

Income Tax Benefit. We recognized a net $45,000 deferred tax benefit from net operating losses carryforwards.

INTEREST EXPENSE. Interest expense in the 2011 Period was $17,489 compared to $17,924 incurred during the 2010 Period.

INCOME. Income before dividends related to convertible preferred stock for the 2011 Period was $159,520 compared to $131,913 in the 2010 Period.

DIVIDENDS RELATED TO PREFERRED STOCK.

We recorded dividends totaling $39,816 on our Series B Convertible Preferred Stock in the 2011 Period and $36,071 in the 2010 Period. In lieu of a cash payment, we have elected, under the terms of these securities, to add this amount to the stated value of the Series B Convertible Preferred Stock.

These dividends are non-cash and, therefore, have no impact on our net worth, cash flow or liquidity.

LIQUIDITY AND CAPITAL RESOURCES

We believe that cash on hand, together with anticipated collection of accounts receivable during the short term, will be sufficient to provide for our working capital needs for the next 12 months. However, we may need to raise funds in order to allow for shortfalls in anticipated revenue or to expand existing capacities and/or to satisfy any additional significant purchase order that we may receive. At the present time, we have no assurances of additional revenue beyond the firm purchase orders we have received.

At September 30, 2011, we had working capital of approximately $2.1 million compared to approximately $1.8 million at June 30, 2011. Net cash used in operating activities for the 2011 Period was $58,977 as compared to $971,044 provided by operating activities for the 2010 Period.

Inventory increased by $68,187 during the three months ended September 30, 2011. The increase is primarily due to work in process for our currently released backlog. The shipments of the Company’s primary products are scheduled to be delivered over the next nine months.

Accounts receivable have increased by $343,632 to $1,407,134 for the three months ended September 30, 2011. This increase is due to delays in cash receipts from certain customers.

Accounts payable and accrued expenses have increased by $169,033 to $1,156,606 for the three months ended September 30, 2011. Included in accrued expenses are accrued salaries to officers and other key employees in the amount of $482,510. The increase in accounts payable is directly related to the timing of payments due to delays in cash receipts from certain customers.

We purchased equipment in the aggregate of $18,768 during the three months ended September 30, 2011. We do not have any major material commitments for capital expenditures going forward.

ITEM 4. CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (and Principal Financial Officer and Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, management and our Chief Executive Officer (and Principal Financial Officer and Accounting Officer) concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

There was no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the foregoing evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 5. EXHIBITS.

Exhibit No.		Title

31.1		Certification of Chief Executive Officer (and Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer (and Principal Financial and Accounting Officer) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		XBRL Taxonomy Extension Definition Linkbase

101.LAB*		XBRL Taxonomy Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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.

	ELECTRONIC CONTROL SECURITY INC.

Date: November 14, 2011	By: /s/ Arthur Barchenko

	Arthur Barchenko
	President, Chief Executive Officer
	(duly authorized officer; principal executive officer, and
	principal financial and accounting officer)

Attached files

Stock widget

Investing forum

ELECTRONIC CONTROL SECURITY INC Reports