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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

________


Form 10-Q

________



ý

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 1-11900


Integrated Security Systems, Inc.

(Exact name of registrant as specified in its charter)


Delaware

75-2422983

(State of incorporation)

(IRS Employer Identification No.)

 

 

2009 Chenault Drive, Suite 114, Carrollton, TX

75006

(Address of principal executive offices)

(Zip Code)


(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  ý    No  ¨


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 October 26, 2011, 5,607,315 shares of the registrant’s common stock were outstanding.



Page 1 of 12





INTEGRATED SECURITY SYSTEMS, INC.

INDEX



 

Page

PART I.  FINANCIAL INFORMATION

 

 

 

Item 1.   Financial Statements

 

Consolidated Balance Sheets at September 30, 2011 (unaudited) and June 30, 2010

3

Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2011 and 2010

4

Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, 2011 and 2010

5

Notes to Consolidated Financial Statements

6

Item 2.   Management’s Discussion and Analysis or Plan of Operation

9

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

9

Item 4.   Controls and Procedures

9

 

 

PART II.  OTHER INFORMATION

 

 

 

Item 1.   Legal Proceedings

10

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

10

Item 3.   Defaults upon Senior Securities

10

Item 4.   (Removed and Reserved)

10

Item 5.   Other Information

10

Item 6.   Exhibits

10

 

 

SIGNATURES

11




Page 2 of 12





PART I.  FINANCIAL STATEMENTS


Item 1.  Financial Statements


INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Balance Sheets


 

 

 

 

 

 

 

September 30,

 

June 30,

 

2011

 

2011

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

3,794,521 

 

$

3,767,427 

Restricted cash (note 3)

 

275,093 

 

 

275,058 

Short term investments

 

25,146 

 

 

25,146 

Other current assets

 

51,757 

 

 

87,937 

Assets related to discontinued operations

 

9,040 

 

 

81,585 

Total current assets

 

4,155,557 

 

 

4,237,153 

 

 

 

 

 

 

Other assets

 

900,000 

 

 

900,000 

 

 

 

 

 

 

Total Assets

$

5,055,557 

 

$

5,137,153 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

 

$

736 

Accrued liabilities

 

85,928 

 

 

104,180 

Liabilities related to discontinued operations

 

 

 

2,961 

 Total current liabilities

 

85,928 

 

 

107,877 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Convertible preferred stock, $0.01 par value, 750,000 shares authorized; 22,500 shares issued and outstanding ($450,000 of liquidation value)

 

225 

 

 

225 

Common stock, $0.01 par value, 56,250,000 shares authorized; 5,610,100 shares issued

 

56,101 

 

 

56,101 

Treasury stock, at cost; 2,785 common shares

 

(125,606)

 

 

(125,606)

Additional paid in capital

 

43,587,842 

 

 

43,584,771 

Accumulated deficit

 

(38,504,434)

 

 

38,441,716)

Accumulated other comprehensive loss (available for sale security)

 

(44,499)

 

 

(44,499)

Total stockholders’ equity

 

4,969,629 

 

 

5,029,276 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

5,055,557 

 

$

5,137,153 


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




Page 3 of 12






INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Operations


 

For the Three Months Ended

September 30,

 

2011

 

2010

Revenue

$

 

$

 

 

 

 

 

 

General and administrative expenses

 

90,450 

 

 

177,605 

 

 

 

 

 

 

Loss from operations

 

(90,450)

 

 

(177,605)

 

 

 

 

 

 

Interest income

 

11,622 

 

 

5,483 

Other income

 

18,536 

 

 

Interest expense

 

 

 

(13,704)

 

 

 

 

 

 

Loss from continuing operations

 

(60,292)

 

 

(185,826)

 

 

 

 

 

 

(Loss) income from discontinued operations (Note 8)

 

(2,426)

 

 

424,824 

 

 

 

 

 

 

Net (loss) income

 

(62,718)

 

 

238,998 

 

 

 

 

 

 

Income from discontinued operations attributable to the noncontrolling interest

 

 

 

(92,271)

 

 

 

 

 

 

Net (loss) income attributable to common stockholders

$

(62,718)

 

$

146,727 

 

 

 

 

 

 

Net (loss) income per common share (basic and diluted):

 

 

 

 

 

From continuing operations

$

(0.01)

 

$

(0.03)

From discontinued operations

 

 

 

0.06 

Net (loss) income per common share (basic and diluted)

$

(0.01)

 

$

0.03 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

5,607,315 

 

 

5,589,150 

Assuming dilution

 

5,607,315 

 

 

5,594,300 


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




Page 4 of 12






INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Cash Flows


 

For the Three Months

Ended

September 30,

 

2011

 

2010

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

$

(62,718)

 

$

146,727 

Loss (income) from discontinued operations (note 8)

 

2,426 

 

 

(424,824)

Income from discontinued operations attributable to the non-controlling interest

 

 

 

92,271 

Loss from continuing operations

 

(60,292)

 

 

(185,826)

Adjustments to reconcile loss from continuing operations to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

 

 

655 

Stock option expense

 

3,071 

 

 

17,461 

Changes in assets and liabilities:

 

 

 

 

 

Other assets

 

36,145 

 

 

(29,268)

Accounts payable

 

(736)

 

 

(18,381)

Accrued liabilities

 

(18,252)

 

 

(15,075)

Net cash used in operating activities

 

(40,064)

 

 

(230,434)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net cash provided by investing activities

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net payments of debt

 

 

 

125,939 

Net cash provided by financing activities

 

 

 

125,939 

 

 

 

 

 

 

Cash flows from discontinued operations:

 

 

 

 

 

Operating activities

 

67,158 

 

 

223,395 

Investing activities

 

 

 

(4,691)

Financing activities

 

 

 

23,150 

Net cash provided by discontinued operations

 

67,158 

 

 

241,854 

 

 

 

 

 

 

Net increase in cash

 

27,094 

 

 

137,359 

 

 

 

 

 

 

Cash at beginning of period

 

3,767,427 

 

 

22,690 

Cash at end of period

$

3,794,521 

 

$

160,049 


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




Page 5 of 12





INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended September 30, 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 September 30, 2011, the consolidated statements of operations for the three months ended September 30, 2011 and 2010, and the consolidated statements of cash flows for the three months ended September 30, 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 three months ended September 30, 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 September 30, 2011 are primarily 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.  The equity investment is carried at cost as fair value is not readily determinable and the Company does not have significant influence over B&B Roadway Holdings, LLC.


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.




Page 6 of 12





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 B&B ARMR.  B&B ARMR’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.


Changes in noncontrolling interest in discontinued operations for the three months ended September 30, 2011 and 2010 were as follows:


 

For the Three Months

Ended

September 30,

 

2011

 

2010

Beginning balance

$

 

$

(63,610)

Income from discontinued operations attributable to noncontrolling interest

 

 

 

(92,271)

Distributions paid to noncontrolling interest

 

 

 

50,050 

Ending balance

$

 

$

(105,831)


Note 7:  Comprehensive (Loss) Income


The following table provides a summary of total comprehensive (loss) income for the three months ended September 30, 2011 and 2010:


 

September 30

 

2011

 

2010

Consolidated net (loss) income

$

(62,718)

 

$

146,727 

Other comprehensive income:

 

 

 

 

 

Unrealized holding loss

 

 

 

(12,296)

Total comprehensive (loss) income

$

(62,718)

 

$

134,431 


Note 8:  Discontinued Operations


The Company’s wholly-owned subsidiary, B&B ARMR Corporation (“B&B ARMR”) sold substantially all of the assets of B&B ARMR on January 31, 2011. Such assets included, but were not limited to, the accounts receivable, fixed assets and intellectual property constituting B&B ARMR’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 B&B ARMR and B&B Roadway have been aggregated and reported as discontinued operations in the Consolidated Statement 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.




Page 7 of 12





Income from discontinued operations:


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


 

For the Three Months

Ended

September 30,

 

2011

 

2010

Revenue:

 

 

 

 

 

Sales

$

 

$

2,506,800 

Other revenue

 

 

 

48,674 

Total Revenue

 

 

 

2,555,474 

Cost of sales

 

 

 

1,659,947 

 

 

 

 

 

 

Gross profit

 

 

 

895,527 

 

 

 

 

 

 

Selling, general and administrative

 

2,426 

 

 

457,094 

 

 

 

 

 

 

(Loss) income from discontinued operations

 

(2,426)

 

 

438,433 

 

 

 

 

 

 

Interest expense

 

 

 

(13,609)

 

 

 

 

 

 

Net (loss) income from discontinued operations

 

(2,426)

 

 

424,824 

 

 

 

 

 

 

Income from discontinued operations attributable to the non-controlling interest

 

 

 

(92,271)

 

 

 

 

 

 

(Loss) income from discontinued operations attributable to common stockholders

$

(2,426)

 

$

332,553 


Assets related to discontinued operations of $9,040 and $81,585 at September 30 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 is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. At September 30, 2011 and 2010 there were 5,150 shares of in-the-money potentially dilutive common shares outstanding. These shares were not included in weighted average shares outstanding for the three months ended September 30, 2011 because their effect is antidilutive due to the Company’s reported net loss.  


At September 30, 2011 and 2010, we had 6,771,320 and 6,709,033 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


During the three months ended September 30, 2011 and 2010, the Company had the following transactions with Causey Lyon Enterprises:


 

For the Three Months

Ended

September 30,

 

2011

 

2010

Purchases

$

 

$

1,135,726

Management fee expense

 

 

 

140,460

Rent expense

 

 

 

16,245




Page 8 of 12





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 $0.09 million for the quarter ended September 30, 2011 compared to the quarter ended September 30, 2010 due to decreased headcount and operating expenses from transitioning to a shell company.  


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


Interest expense: Interest expense decreased $0.01 million for the quarter ended September 30, 2011 compared to the quarter ended September 30, 2010 due to the elimination of debt.  


Liquidity and Capital Resources


Our cash position increased $.03 million during the three months ended September 30, 2011 to $3.79 million and is expected to be sufficient to cover ongoing operating costs for the foreseeable future.


Our operating activities used $0.04 million of cash for the three months ended September 30, 2011.


Item 3. Quantitative and Qualitative Disclosures About Market Risk.


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




Page 9 of 12





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 September 30, 2011.  Based on that evaluation, we have concluded that, as of September 30, 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 September 30, 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 September 30, 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+

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

________________________

+

Filed herewith.




Page 10 of 12





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.


Date:

October 28, 2011

 

/s/ Russell Cleveland

 

 

 

Russell Cleveland

 

 

 

Chairman of the Board, Chief Executive Officer

 

 

 

 

Date:

October 28, 2011

 

/s/ Sharon T. Doherty

 

 

 

Sharon T. Doherty

 

 

 

Chief Financial Officer





Page 11 of 12





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

________________________

+

Filed herewith.





Page 12 of 12