UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

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Form 10-Q

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2011.

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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 1-11900

Integrated Security Systems, Inc.

(Exact name of registrant as specified in its charter)

(972) 444-8280

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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  ý    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  ¨    No  ý

Indicate by check mark whether the registrant is a (See definitions in Rule 12b-2 of the Exchange Act:

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

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

As of January 31, 2011, 5,607,315 shares of the registrant’s common stock were outstanding.

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INTEGRATED SECURITY SYSTEMS, INC.

INDEX

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PART I.  FINANCIAL STATEMENTS

Item 1.  Financial Statements

The accompanying notes are an integral part of the consolidated financial statements.

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The accompanying notes are an integral part of the consolidated financial statements.

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The accompanying notes are an integral part of the consolidated financial statements.

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INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Six Months Ended December 31, 2011 and 2010

Note 1:  Basis of Presentation

The consolidated financial statements include the accounts of Integrated Security Systems, Inc. (the “Company”) and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated. The consolidated balance sheet as of December 31, 2011, the consolidated statements of operations for the three and six months ended December 31, 2011 and 2010, and the consolidated statements of cash flows for the six months ended December 31, 2011 and 2010, are unaudited.  The preparation of interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Management does not believe these estimates or assumptions will change significantly in the future, however, actual results could differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments (generally consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements. Prior periods have been reclassified to conform to the current period presentation. We suggest you read these financial statements in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended June 30, 2011. The results of operations for the six months ended December 31, 2011 are not necessarily indicative of operating results for the full year.

Note 2:  Concentration of Credit Risks

The Company maintains cash balances with financial institutions which are, at times, in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). Management monitors the soundness of these institutions and has not experienced any collection losses with these institutions.

Note 3:  Restricted Cash

Restricted cash represents the portion of the cash consideration paid pursuant to the sale of B&B ARMR that was deposited to an escrow fund in order to secure the Company’s and B&B ARMR’s indemnification obligations under the Purchase Agreement as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.  This escrow period terminates on January 31, 2012.

Note 4:  Other Assets

Other assets at December 31, 2011 are comprised of a promissory note of Buyer in the original principal amount of $450,000, and a $450,000 equity investment in B&B Roadway Holdings, LLC, a Delaware limited liability company and the parent of Buyer, as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.  The note matures on January 31, 2016 and bears interest at 8% per annum, payable quarterly.  Each of these investments was valued at $300,000 at December 31, 2011 to reflect the subsequent selling price, which created an impairment of $300,000; see Note 11:  Subsequent Events.

Note 5:  Commitments and Contingencies

The Company is subject to certain legal actions and claims arising in the ordinary course of business. Management recognizes the uncertainties of litigation; however, based upon the nature and management’s understanding of the facts and circumstances which give rise to such actions and claims, management believes that such litigation and claims will be resolved without material effect on the Company’s financial position, results of operations or cash flows.

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Note 6:  Noncontrolling Interest in Discontinued Operations

Causey Lyon Enterprises (CLE) was the 35% owner of the B&B Roadway joint venture; per the joint venture agreement, CLE manufactured all products for B&B Roadway, and was also one of several outsourced fabrication vendors for XARMR.  XARMR’s investment in the joint venture was sold on January 31, as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

Note 7:  Comprehensive (Loss) Income

The following table provides a summary of total comprehensive (loss) income:

Note 8:  Discontinued Operations

The Company’s wholly-owned subsidiary, XARMR Corporation (“XARMR”) sold substantially all of the assets of XARMR on January 31, 2011. Such assets included, but were not limited to, the accounts receivable, fixed assets and intellectual property constituting XARMR’s business of providing anti-terrorist barriers, security gates and gate operators for perimeter security applications, along with its investment in the joint venture B&B Roadway, LLC (“B&B Roadway”), as described in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

The operating results for both XARMR and B&B Roadway have been aggregated and reported as discontinued operations in the Consolidated Statements of Operations, and the associated assets and liabilities are classified separately in the balance sheet. Prior periods have been reclassified to conform to the current-period presentation.

Income from discontinued operations:

Income from discontinued operations reported in the Consolidated Statements of Operations consists of the following:

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Assets related to discontinued operations of $2,355 and $81,585 at December 31 and June 30, 2011, respectively, were accounts receivable that were assigned to the Company in accordance with the Purchase Agreement, as described in Note 17 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended June 30, 2011.

Note 9:  Earnings per Share

Earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. At December 31, 2011 and 2010 there were 5,150 shares of in-the-money potentially dilutive common shares outstanding.

At December 31, 2011 and 2010, we had 6,771,320 and 6,773,851 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the Company’s outstanding equity instruments.  

Note 10:  Related Party Transactions

The Company had the following transactions with Causey Lyon Enterprises:

Note 11:  Subsequent Events

On January 3, 2012 the Board of Directors of the Company approved the retirement of the 2,785 shares of common stock in treasury.

On January 6, 2012, the Company sold its equity investment in B&B Roadway Holdings, LLC to certain affiliates of Strait Lane Capital Partners LLC for a purchase price of $300,000.  In addition, on January 6, 2012, XARMR Corporation sold a promissory note of B&B Roadway and Security Solutions, LLC (“Solutions”), in the original principal amount of $450,000, to Solutions for a purchase price of $300,000.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “believe,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “estimate,” or “continue” or the negative of those words or other variations or comparable terminology.  

All statements other than statements of historical fact included in this quarterly report on Form 10-Q, including the statements under “Part I. - Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere in this quarterly report on Form 10-Q regarding our financial position and liquidity are forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors regarding forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from our expectations, are disclosed in this quarterly report on Form 10-Q. We do not undertake any obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report on Form 10-Q.

Important factors that could cause actual results to differ materially from those in the forward-looking statements in this quarterly report on Form 10-Q include changes from anticipated levels of operations, valuation of investments, anticipated levels of revenues, future national or regional economic and competitive conditions, changes in relationships with our employees, access to capital, casualty to or other disruption of the operations that the Company is invested in, government regulations and our ability to meet our stated business goals.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by our cautionary statements.

Results of Operations

General and administrative: General and administrative expenses represent the operating expenses for the corporate parent, and decreased $0.14 million for the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010, and $0.23 million for the six months ended December 31, 2011 compared to six months ended December 31, 2010. This decrease was due to decreased headcount and operating expenses from transitioning to a shell company, offset by transaction costs of $0.03 for the quarter and six months ended December 31, 2011 incurred related to the search for a business engaged in active operations.

Other income: Other income represents income on the equity investment in B&B Roadway Holdings, LLC, which was acquired on January 31, 2011 and sold on January 6, 2012.

Interest expense: Interest expense decreased $0.02 million for the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010, and $0.03 million for the six months ending December 31, 2011 compared to the six months ended December 31, 2010, due to the elimination of debt.  

Impairment of other assets: Impairment of other assets of $0.3 million for the quarter and six months ended December 31, 2011 was due to the sale of investments subsequent to the quarter.

Liquidity and Capital Resources

Our cash position increased $.08 million during the six months ended December 31, 2011 to $3.85 million and is expected to be sufficient to cover ongoing operating costs for the foreseeable future.

Our operating activities used $0.06 million of cash for the six months ended December 31, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There is no information required to be reported under this Item 3.

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Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. As indicated in the certifications in Exhibit 31 of this report, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2011.  Based on that evaluation, we have concluded that, as of December 31, 2011, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the officers, to allow timely decisions regarding required disclosure.

Based upon this assessment, our CEO and CFO concluded that, as of December 31, 2011, there existed a material weakness in our processes, procedures and controls related to the preparation of our quarterly financial statements. We have concluded that our internal control over financial reporting was not effective as of December 31, 2011. Due to this material weakness, in preparing our quarterly financial statements, we performed compensating additional procedures designed to ensure that such financial statements were fairly presented in all material respects in accordance with generally accepted accounting principles.

(b) Changes in Internal Controls. There were no changes to our internal controls over financial reporting during our last completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved)

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1+

Officer’s Certificates Pursuant to Section 302

31.2+

Officer’s Certificates Pursuant to Section 302

32.1+

Officer’s Certificates Pursuant to Section 906

32.2+

Officer’s Certificates Pursuant to Section 906

101.INS+ XBRL Instance Document

101.SCH+ XBRL Schema Document

101.CAL+ XBRL Calculation Linkbase Document

101.DEF+ XBRL Definition Linkbase Document

101.LAB+ XBRL Labels Linkbase Document

101.PRE+ XBRL Presentation Linkbase Document

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Filed herewith.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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EXHIBIT INDEX

31.1+

Officers’ Certificate Pursuant to Section 302

31.2+

Officers’ Certificate Pursuant to Section 302

32.1+

Officers’ Certificate Pursuant to Section 906

32.2+

Officers’ Certificate Pursuant to Section 906

101.INS+ XBRL Instance Document

101.SCH+ XBRL Schema Document

101.CAL+ XBRL Calculation Linkbase Document

101.DEF+ XBRL Definition Linkbase Document

101.LAB+ XBRL Labels Linkbase Document

101.PRE+ XBRL Presentation Linkbase Document

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Filed herewith.

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