ELECTRONIC CONTROL SECURITY INC - FORM 10-Q

Attached files

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EX-32.1 - ELECTRONIC CONTROL SECURITY INC	v220508_ex32-1.htm
EX-31.1 - ELECTRONIC CONTROL SECURITY INC	v220508_ex31-1.htm
EX-10.1 - ELECTRONIC CONTROL SECURITY INC	v220508_ex10-1.htm
EX-10.2 - ELECTRONIC CONTROL SECURITY INC	v220508_ex10-2.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 March 31, 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

(registrant's telephone number, including area code)

Indicate by checkmark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of 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 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 ¨ 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 May 3, 2011, Electronic Control Security Inc. had outstanding 10,429,911 shares of common stock, par value $.001 per share.

INDEX PAGE

PART I — FINANCIAL INFORMATION

Forward Looking Statements		8

Item 1 - Financial Statements*
	Consolidated Balance Sheets March 31, 2011 (Unaudited) and June 30, 2010	F-3
	Unaudited Consolidated Statements of Operations for the nine and three months ended March 31, 2011 and 2010	F-4
	Unaudited Consolidated Statements of Cash Flows for the nine months ended March 31, 2011 and 2010	F-5
	Notes to Consolidated Financial Statements	6

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations		8

Item 4 - Controls and Procedures		11

PART II — OTHER INFORMATION

Item 6 – Exhibits		12

Signatures		13

Electronic Control Security Inc.

Consolidated Balance Sheets

	March 31,			June 30,
	2011			2010
	(Unaudited)

ASSETS
Current assets
Cash and cash equivalents	$	41,723		$	168,465
Accounts receivable, current portion, net of allowance of $25,000		525,971			1,932,910
Inventories		2,136,508			1,875,243
Other current assets		115,363			165,854

Total current assets		2,819,565			4,142,472

Property, equipment and software development costs - net		446,521			142,386
Intangible assets - net		971,368			1,032,469
Goodwill		196,962			196,962
Deferred income taxes		437,350			437,350
Other assets		8,786			8,786
	$	4,880,552		$	5,960,425

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	1,195,398		$	2,442,683
Due to officers and shareholders		89,587			259,778
Current maturities of debt		18,103			43,754
8% Convertible debentures		-			100,000

Total current liabilities		1,303,088			2,846,215
Noncurrent liabilities
Deferred income taxes		43,550			43,550

Total liabilities		1,346,638			2,889,765
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; $1,948 and $1,809 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; 10,529,911 and 10,259,259 shares issued; 10,429,911 and 10,159,259 shares outstanding		10,530			10,259
Additional paid-in capital		13,299,109			13,105,624
Accumulated deficit		(9,773,516	)		(10,043,014	)
Accumulated other comprehensive income		4,790			4,790
Treasury stock, at cost, 100,000 shares		(10,000	)		(10,000	)

Total shareholders' equity		3,533,914			3,070,660
	$	4,880,552		$	5,960,425

See Notes to Consolidated Financial Statements.

F-3

Electronic Control Security Inc.

Consolidated Statements of Operations

	Nine Months						Three Months
	Ended						Ended
	March 31,						March 31,
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Revenues	$	2,888,625		$	2,923,381			1,006,662		$	1,287,677
Cost of revenues		1,238,698			1,110,994			521,308			548,662

Gross profit		1,649,927			1,812,387			485,354			739,015

Research and development		97,817			104,752			36,606			24,084
Selling, general and administrative expenses		1,098,224			1,216,745			417,644			470,992
Stock based compensation		31,041			29,031			-			16,657

Income from operations		422,845			461,859			31,104			227,282

Other expenses (income)
Interest expense		44,276			79,393			12,638			25,689
Interest income		(2,068	)		(58	)		(5	)		(58	)
Legal settlement		1,000			-			1,000			-

Total other expenses (income)		43,208			79,335			13,633			25,631

Income before income taxes		379,637			382,524			17,471			201,651

Income taxes		-			-			-			-

Income before dividends		379,637			382,524			17,471			201,651

Dividends related to convertible preferred stock		110,139			99,781			37,088			33,600

Net income (loss) attributable to common shareholders	$	269,498		$	282,743			(19,617	)	$	168,051

Net income (loss) per share:
Basic	$	0.03		$	0.03		$	(0.00	)	$	0.02
Diluted	$	0.03		$	0.03		$	(0.00	)	$	0.02

Weighted average number of common shares and equivalents:
Basic		10,396,572			10,149,259			10,429,911			10,149,259
Diluted		10,660,512			10,471,726			10,429,911			10,351,669

See Notes to Consolidated Financial Statements.

F-4

Electronic Control Security Inc.

Consolidated Statements of Cash Flows

	Nine Months
	Ended
	March 31,
	2011			2010
	(Unaudited)			(Unaudited)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net income before deemed dividends	$	379,637		$	382,524
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization		144,481			128,776
Stock based compensation		31,041			29,031
Issuance of shares in repayment of amounts owed		19,076
Increase (decrease) in cash attributable to changes in
Accounts receivable		1,406,939			(199,237	)
Inventories		(261,265	)		67,339
Other current assets		50,491			(8,567	)
Accounts payable and accrued expenses		(1,247,285	)		(107,213	)

Net cash provided by operating activities		523,115			292,653

Cash flows from investing activities:
Acquisition of property plant and equipment		(387,515	)		(12,886	)

Net cash used in investing activities		(387,515	)		(12,886	)

Cash flows from financing activities:
Principal payments on 8% convertible debentures		(100,000	)		(162,500	)
Payments on debt		(25,651	)		(11,598	)
Increase (decrease) in loans from officers		(136,691	)		(42,428	)

Net cash used in financing activities		(262,342	)		(216,526	)

Net (decrease) increase in cash and cash equivalents		(126,742	)		63,241
Cash and cash equivalents at beginning of period		168,465			15,735
Cash and cash equivalents at end of period	$	41,723		$	78,976

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	44,276		$	64,094
Taxes	$	-		$	-

Supplemental disclosures of noncash financing activities:
Exercise price of stock options paid via reduction in shareholder loans	$	33,500

See Notes to Consolidated Financial Statements.

F-5

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 nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. 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, 2010, 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 and nine months ended March 31, 2011 and 2010.

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

	Three Months				Nine Months
	Ended Mar. 31,				Ended Mar. 31,
	2011		2010		2011		2010
Denominators:

Weighted-average shares outstanding used to compute basic earnings per share		10,429,911		10,149,259		10,396,572		10,149,259

Effect of dilutive stock options		-		202,410		263,939		322,467

Weighted-average shares outstanding and dilutive securities used to compute dilutive earnings per share		10,429,911		10,351,669		10,660,512		10,471,726

For the nine months ended March 31, 2011, there were outstanding potential common equivalent shares of 4,485,874 compared to 4,323,627 in the same period in 2010 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:
	March		June
	2011		2010

Raw materials	$	473,006	$	307,935
Work-in-process		315,016		215,188
Finished goods		1,348,486		1,367,120
	$	2,136,508	$	1,890,243

Note 4 - Due to Officers and Shareholders

In July 2010, a reduction of $33,500 was made to the balance in the loan accounts in lieu of the exercise price on a total of 200,000 shares issued to Officers and Shareholders.

Note 5 - New Authoritative Pronouncements

Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying consolidated financial statements.

Note 6 – Financing Agreements

(i) On February 8, 2011, the Company entered into an equity financing and registration rights agreement (collectively the "Agreements") with Auctus Private Equity Fund, LLC ("Auctus") pursuant to which Auctus has committed, subject to certain conditions, to purchase up to $10 million of Common Stock over a term of up to five years commencing from the effective date of a Registration Statement.

The Company is not required to sell shares under the Agreements. The Agreements give the Company the option to sell to Auctus shares of Common Stock at a per share purchase price of equal to 96% of the lowest closing volume weighted average price (VWAP) during the five trading days following the delivery to Auctus of a draw-down notice (the "Notice"). At the Company's option, they may set a floor price under which Auctus may not sell the shares which were the subject of the Notice. The maximum amount of Common Stock that the Company can sell pursuant to any Notice is the greater of: (i) an amount of shares with an aggregate maximum purchase price of $200,000 or (ii) 200% of the average daily volume based on the trailing ten (10) days preceding the Notice date, whichever is of a larger value.

Auctus is not required to purchase the shares, unless the shares which are subject to the Notice have been registered for resale and are freely tradable in accordance with the Federal securities laws, including the Securities Act of 1933, as amended. The Company is obligated to file with the U.S. Securities and Exchange Commission (the "SEC") a registration statement on Form S-1 (the “Registration Statement”) within 180 days from the date of the Agreements and to use all commercially reasonable efforts to have such registration statement declared effective by the SEC within 120 days of filing.

(ii) On March 23, 2011, the Company, through its wholly owned subsidiary, ECSI International Inc., entered into an agreement with a northern New Jersey bank (the “Bank”) pursuant to which the Bank agreed to advance to the to the Subsidiary, from time to time and as needed, up to $475,000 for working capital purposes. Interest on outstanding amounts accrues at the Prime Rate plus 0.25% with a floor of 4.5%.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR 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, 2010 on Form 10-K.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Electronic Control Security Inc. (the “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 client'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 power stations, 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.

As reported previously, the Company submitted proposals during fiscal 2010 and 2011 on projects for Department of Defense (DoD) facilities and certain nuclear power stations in the United States and southeast Asia valued at approximately $13,650,000. Approximately $2.2 million of these DoD and nuclear projects were awarded and partially shipped during the fourth quarter of fiscal 2010 and the first quarter of fiscal 2011. An additional $850,000 of these proposals were awarded during the second quarter of fiscal 2011. We anticipate decisions relating to the remaining proposals during the fourth quarter of fiscal 2011 with deliveries scheduled through the first six months of 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 do not currently have any reserves 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 upon the Black-Scholes valuation model, which involves estimates of stock volatility, expected life of the instruments and other assumptions.

RESULTS OF OPERATIONS

NINE MONTHS ENDED MARCH 31, 2011 ("2011 PERIOD") COMPARED TO NINE MONTHS ENDED MARCH 31, 2010 ("2010 PERIOD") AND THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THREE MONTHS ENDED MARCH 31, 2010.

REVENUES. We had net revenues of $2,888,625 for the 2011 Period compared to $2,923,381 for the 2010 Period, representing a decrease of 1%. Net revenues for the three months ended March 31, 2011 were $1,006,662 as compared to $1,287,677 for the corresponding three month period in 2010, representing a decrease of 22%. The decrease in net revenues during the 2011 period and the three months ended March 31, 2011 compared to the corresponding periods in 2010 is primarily attributable to delays by the U.S. Navy in finalizing its design and issuing approvals on the Lockheed Martin contract, on which we serve as sub-contractor.

GROSS MARGINS. Gross margins for the 2011 Period were $1,649,927, or approximately 57% of net revenues, compared to $1,812,387, or approximately 62% of net revenues, for the 2010 Period. Gross margins were $485,354, or approximately 48% of revenue for the three months ended March 31, 2011 compared to $739,015 or 57% for the corresponding three-month period in 2010. The decrease of 9% in gross margins for the three months ended March 31, 2011 represents an anticipated fluctuation from period to period. Our sales and gross margins were adversely affected during this period due to delays in approval and release of our backlog relating to the U.S. Navy project with Lockheed Martin, on which we serve as subcontractor.

RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of expenses incurred in designing and developing upgrades to existing products and systems. Research and development expenses for the 2011 Period were $97,817 compared to $104,752 for the 2010 Period. For the three months ended March 31, 2011, research and development costs were $36,606 compared to $24,084 for the three months ending March 31, 2010. The increase in research and development expenses for the three months ended March 31, 2011 compared to the corresponding period in 2010 was directly attributable to the development and application of our new long-range, infrared illumination camera system .

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the 2011 Period and for the three months ended March 31, 2011 were $1,098,224 and $417,644, respectively, compared to $1,216,745 and $470,992 for each of the corresponding periods in 2010. The decrease in selling, general and administrative expenses during the 2011 Period and the three months ended March 31, 2011 compared to the corresponding periods in 2010 was primarily due to our continued efforts to reduce our marketing, sales and sales support costs.

STOCK BASED COMPENSATION. From time to time, we issue stock options to our directors and employees and consultants. There were no stock options issued during the three-month period ending March 31, 2011.

INCOME FROM OPERATIONS. The income from operations for the 2011 Period was $422,845 compared to $461,859 for the 2010 Period. For the three months ended March 31, 2011, we had income from operations of $31,104 compared to $227,282 for the corresponding three months in 2010. The decrease in income from operations in the 2011 Period and the three months ended March 31, 2011 as compared to the corresponding periods in 2010 is due to the delays incurred on the U.S. Navy project with Lockheed Martin as well as the receipt of lower gross margin purchase orders and a less profitable mix of design and engineering support services billings.

INTEREST EXPENSE. Interest expense in the 2011 Period was $44,276 compared to $79,393 incurred during the 2010 Period. The decrease is due to the payment in full in July 2010 of all principal and interest relating to the convertible debentures issued in 2006.

INCOME BEFORE DIVIDENDS. Income before dividends related to convertible preferred stock for the 2011 Period was $379,637 compared to $382,524 in the 2010 Period. For the three months ended March 31, 2011, there was income of $17,471 compared to income of $201,651 in the corresponding period in 2010. The decrease in income is directly related to the previously-noted delays in the Navy/Lockheed Martin project and lower gross margin purchase orders as well as a less profitable mix of support services billings.

DIVIDENDS RELATED TO PREFERRED STOCK.

We recorded dividends totaling $110,139 on our Series B Convertible Preferred Stock in the 2011 Period as compared to $99,781 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 twelve 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 commitments or assurances of additional revenue beyond the firm purchase orders we have received. However, in March 2011, we entered into, through our wholly owned subsidiary, ECSI International Inc., a credit facility with a New Jersey based commercial bank enabling us to borrow up to $475,000 for working capital purposes on an as needed basis. Additionally, a leading provider of receivables-based financing has advised us that it is affording us a $3.5 million (or more as our business grows) line of credit for large government and/or private sector contracts which we used previously during the Integrated Base Defense Security System (IBDSS) program. The line of credit has been reaffirmed (on an informal basis).

At March 31, 2011, we had working capital of approximately $1,500,000 compared to approximately $1,300,000 at June 30, 2010. Net cash provided by operating activities for the 2011 period was $523,115 as compared to $292,653 for the 2010 period.

Inventory increased by $261,265 during the nine months ended March 31, 2011 over the corresponding nine months in 2010. Inventories have still remained relatively high due to an increase of our work in process in preparation for shipments on our committed projects.

Accounts receivable have decreased by $1,406,939 to $525,971 for the nine months ended March 31, 2011 over the corresponding nine months in 2010. The decrease is due to a change in our payment terms and conditions and to more vigorous collection efforts.

Accounts payable and accrued expenses have decreased by $1,247,285 to $1,195,398 for the nine months ended March 31, 2011 over the corresponding nine months in 2010. Included in accrued expenses are accrued salaries to officers and other key employees in the amount of $550,553. The increased collection of accounts receivable allowed us to pay down our trade payables and reduce the accrued salaries due to officers and other key employees.

We purchased equipment in the aggregate of $387,515 during the nine months ended March 31, 2011. This equipment was directly related to our new integrated entry control systems and to the WISE® Water Infrastructure Sensing Equipment, both of which will generate significant sales in the years ahead. We do not have any 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 were no changes in our internal control 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 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS -

Exhibit No.		Title

10.1		Business Loan Agreement dated as of March 15, 2011 between ECSI International, Inc. and Atlantic Stewardship Bank

10.2		Commercial Security Agreement dated as of March 15, 2011 between ECSI International, Inc. and Atlantic Stewardship Bank

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

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: May 3, 2011	By: /s/ Arthur Barchenko

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

EXHIBIT INDEX

Exhibit No.		Description

10.1		Business Loan Agreement dated as of March 15, 2011 between ECSI International, Inc. and Atlantic Stewardship Bank

10.2		Commercial Security Agreement dated as of March 15, 2011 between ECSI International, Inc. and Atlantic Stewardship Bank

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

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