INTEGRATED SECURITY SYSTEMS, INC.

10-Q 1 f10q033109.htm 10-Q INTEGRATED SECURITY SYSTEMS, INC.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

Form 10-Q

______________

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2009.

TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)


Delaware		75-2422983
(State of Incorporation)		(I.R.S. Employer Identification No.)


2009 Chenault Drive, Suite 114, Carrollton, TX		75006
(Address of principal executive offices)		(Zip Code)

(972) 444-8280

(Issuer’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 x No o

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 o No o

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

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

As of April 30, 2009, 138,173,383 shares of the registrant’s common stock were outstanding.

INTEGRATED SECURITY SYSTEMS, INC.

INDEX


	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2009 (unaudited) and June 30, 2008	3
Consolidated Statements of Operations (unaudited) for the three and nine months ended March 31, 2009 and 2008	4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended March 31, 2009 and 2008	5
Notes to Financial Statements	6
Item 2. Management’s Discussion and Analysis or Plan of Operation	13
Item 4. Controls and Procedures	15

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3. Defaults upon Senior Securities	16
Item 4. Submission of Matters to a Vote of Security Holders	16
Item 5. Other Information	16
Item 6. Exhibits	16

SIGNATURES	17

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Balance Sheet


	March 31,		June 30,
	2009		2008
ASSETS		(Unaudited)
Current assets:
Cash and cash equivalents	$	93,345	$	169,056
Short term investments		68,000		-
Accounts receivable, net of allowance for doubtful accounts of $297,210 and $250,406, respectively		2,076,626		1,855,365
Inventory, net of reserves		437,302		511,457
Other current assets		352,096		118,103
Assets related to discontinued operations		-		115,007
Total current assets		3,027,369		2,768,988

Property and equipment, net		34,289		63,909
Goodwill		1,707,953		1,707,953
Other assets		240,098		116,818
Total assets	$	5,009,709	$	4,657,668

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,645,495	$	993,708
Accrued liabilities		831,685		1,006,134
Accrued interest		1,367,332		1,314,861
Demand note payable		357,809		684,596
Current portion of long-term debt		13,513,862		1,235,791
Liabilities related to discontinued operations		-		7,110
Total current liabilities	$	17,716,183	$	5,242,200

Long-term debt		17,283		12,068,548

Minority interest		65,448		149,807

Stockholders’ deficit:
Convertible preferred stock, $.01 par value, 750,000 shares authorized; 100,750 shares issued and outstanding (liquidation value of $2,015,000)		1,008		1,008
Common stock, $.01 par value, 150,000,000 shares authorized; 137,178,383 and 104,962,212 shares issued, respectively		1,371,784		1,049,622
Treasury stock, at cost – 278,522 and 50,000 common shares, respectively		(125,606)		(118,750)
Additional paid in capital		35,874,337		35,241,778
Accumulated deficit		(49,910,728)		(48,976,545)
Total stockholders’ deficit		(12,789,205)		(12,802,887)
Total liabilities and stockholders’ deficit	$	5,009,709	$	4,657,668

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

INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Operations

(Unaudited)


	For the Three Months Ended March 31,				For the Nine Months Ended March 31,
	2009		2008		2009		2008
Sales	$	2,354,825	$	2,476,799	$	6,431,771	$	8,034,175
Cost of sales		1,497,261		1,714,068		4,121,888		5,255,382
Gross profit		857,564		762,731		2,309,882		2,778,792

Selling, general and administrative		792,042		1,033,284		2,308,196		2,926,709

Income from operations		65,522		(270,553)		1,686		(147,916)

Interest expense		(294,587)		(287,234)		(983,343)		(854,376)
Gain on sale of assets		354,012		-		243,471		-
Amortization of debt discount		-		14,217		(8,435)		(155,036)
Extinguishment of liability		-		-		-		241,152

Loss before minority interest		124,948		(543,570)		(746,620)		(916,176)

Minority interest – loss		(28,476)		(73,180)		(86,544)		(149,611)

Net gain (loss) from continuing operations		96,471		(616,750)		(833,164)		(1,065,786)

Loss from discontinued operations		(30,012)		(39,979)		(101,020)		(146,858)

Net gain (loss)	$	66,460	$	(656,729)	$	(934,183)	$	(1,212,644)

Preferred dividends		(40,500)		(41,400)		(123,300)		(124,200)

Net gain (loss) allocable to common stockholders	$	25,960	$	(698,129)	$	(1,057,483)	$	(1,336,844)

Weighted average common shares outstanding – basic and diluted		137,178,383		104,962,212		119,162,422		103,485,801

Net loss per share – basic and diluted	$	(0.01)	$	(0.01)	$	(0.01)	$	(0.01)

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

INTEGRATED SECURITY SYSTEMS, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	March 31, 2009		March 31, 2008
Cash flows from operating activities:
Net loss	$	(934,183)	$	(1,212,644)
Loss from discontinued operations		101,020		146,858
Loss from continuing operations		(833,163)		(1,065,786)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		22,480		68,323
Gain on sale of assets		(243,471)		-
Amortization		58,269		124,131
Provision for bad debt		9,133		146,494
Provision for inventory reserve		-		23,510
Stock option expense		37,024		33,630
Extinguishment of liability		-		(241,152)
Amortization of debt discount		8,435		155,036
Expenses paid with stock		827,697		327,213
Minority interest		86,544		149,611
Changes in assets and liabilities:
Accounts receivable		(420,228)		(670,738)
Inventory		60,547		(65,401)
Other assets		(4,495)		(6,618)
Accounts payable		635,505		(247,561)
Accrued liabilities		(138,525)		906,078
Net cash provided by (used in) operating activities		105,752		(363,230)

Cash flows from investing activities:
Purchase of property and equipment		-		-
Net cash used in investing activities		-		-

Cash flows from financing activities:
Net borrowings (payments) of debt		(108,417)		308,211
Proceeds from notes payable and long-term debt		-		327,171
Proceeds from issuance of stock		90,000		-
Distribution to minority interest		(170,903)		(103,741)
Net cash (used in) provided by financing activities		(189,320)		531,641

Cash flows from discontinued operations:
Operating activities		7,857		(257,295)
Investing activities		-		(67,109)
Net cash provided by (used in) discontinued operations		7,857		(324,404)

Net decrease in cash		(75,711)		(155,993)

Cash at beginning of period		169,056		217,954
Cash at end of period	$	93,345	$	61,961

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

INTEGRATED SECURITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Nine Months Ended March 31, 2009 and 2008

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (all of which are normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2009.

The accompanying financial statements include the accounts of Integrated Security Systems, Inc. (the “Company”) and all of its subsidiaries, with all significant intercompany accounts and transactions eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s fiscal 2008 Annual Report on Form 10-KSB filed on October 14, 2008 with the Securities and Exchange Commission.

Note 2 – Stock Options

In December, 2004, the Financial Accounting Standards Board (“FASB”) issued a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123R”). SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and recognize that cost over the vesting period. SFAS No. 123R was effective for fiscal years beginning after December 15, 2005 and therefore we began recognizing option expense as of July 1, 2006. In implementing FAS 123R, we have adopted the “modified prospective approach” under which options which were unvested at July 1, 2006 will continue to be accounted for under FAS 123, except that the expense will be recorded in the statement of operations. Our forfeiture rate is a graded 20% rate, which averages out to an overall forfeiture rate of 48.8%. An expense of $37,024 was recorded in the nine months ended March 31, 2009 as compared to $33,630 in the nine months ended March 31, 2008. The known amount of compensation expense to be recognized in future periods through fiscal 2012 is $152,422.

Three million options were granted in the nine months ended March 31, 2009. There were no grants made in the nine months ended March 31, 2008.

Note 3 – Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines Fair Value, establishes a framework for measuring Fair Value and expands disclosures about Fair Value measurements, but does not change existing guidance as to whether or not an instrument is carried at Fair Value. In February 2008, the FASB released a FASB Staff Position, which delayed the effective date of SFAS No. 157 for all non financial assets and liabilities, except those that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis. SFAS No. 157 was first effective for the Company on July 1, 2008. The impact of the adoption of SFAS No. 157 on our financial assets and liabilities did not have a significant impact on their Fair Value measurements or require expanded disclosures.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities. SFAS No. 159 permits all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157. The Company elected not to adopt the fair value option for valuation of those assets and liabilities which are eligible; therefore, there is no impact on our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160"). SFAS No. 160 requires (a) that noncontrolling (minority) interest be reported as a component of shareholders' equity; (b) that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations; (c) that changes in a parent's ownership interest while the parent retains its controlling interest be accounted for as equity transactions; (d) that any retained noncontrolling equity investment upon the deconsolidation of the subsidiary be initially measured at fair value; and (e) that sufficient disclosures are provided that clearly identify and distinguish between the interest of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will apply to the Company starting in its 2010 fiscal year. The Company anticipates a revision to its disclosures regarding minority interest, but there should be no material effect from the adoption of SFAS No. 160.

Note 4 – Discontinued Operations

On July 31, 2008, we sold the operations of DoorTek, our wholly-owned subsidiary. On March 25, 2009, we sold the operations of Intelli-Site, Inc., our wholly-owned subsidiary. In accordance with United States generally accepted accounting principles, the results of operations for both DoorTek and Intelli-Site are reported as discontinued operations in the statement of operations and the associated assets and liabilities are classified separately in the balance sheet. The operating results of both DoorTek and Intelli-Site have been aggregated and reported on the Consolidated Statements of Operations as Income (Loss) from Discontinued Operations. Prior periods have been reclassified to conform to the current-period presentation. For additional information relative to the sale of DoorTek and Intelli-Site, refer to Note 12 – Sales of DoorTek and Intelli-Site.

Loss from Discontinued Operations reported in the Consolidated Statements of Operations consists of the following:


	For the nine months ended
	March 31, 2009		March 31, 2008
Sales	$	407,483	$	894,665
Cost of sales		32,691		304,454
Gross margin		374,792		590,210

Operating expenses:
Selling, general and administrative		471,487		488,144
Research and product development		4,282		248,574

Loss from operations		(100,977)		(146,508)

Interest expense		(43)		(350)
Net loss	$	(101,020)	$	(146,858)

Assets and liabilities of DoorTek reported in the Consolidated Balance Sheets as discontinued operations consist of the following:


	March 31, 2009		June 30, 2008
Cash and cash equivalents	$	-	$	4,645
Inventories		0		110,362
Total assets		0		115,007

Accrued liabilities		0		7,110
Total liabilities	$	-	$	7,110

Note 5 – Accounts Receivable

The majority of our accounts receivable are due from companies in the perimeter security and road and bridge industries. Credit is extended based on evaluation of a customer's financial condition and credit history and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customer’s current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are debited to the allowance for doubtful accounts, credited to accounts receivable, debited to cash and credited to other income.

Note 6 – Inventory

Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out (“FIFO”) method of valuation. The establishment of inventory allowances for excess and obsolete inventories is based on estimated exposure on specific inventory items.

At March 31, 2009 and June 30, 2008, respectively, inventories were comprised of the following:


	For the nine months ended
	March 31, 2009		June 30, 2008
Inventories:
Work in process	$	406,242	$	478,934
Finished goods		31,060		32,523
	$	437,302	$	511,457

Note 7 – Product Warranties

The Company offers one-year, two-year and five-year warranties on products it manufactures. The length of the warranty is dictated by competition. The Company provides for repair or replacement of components and/or products that contain defects of material or workmanship. When the Company uses other manufacturers’ components, the warranties of the other manufacturers are passed to the dealers and end users.

The Company records a liability for an estimate of costs that it expects to incur under its basic limited warranty when product revenue is recognized. Factors affecting the Company’s warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim. The Company periodically assesses the adequacy of its warranty liability based on changes in these factors.

The changes in the Company’s product warranty liability are as follows:


	For the nine months ended
	March 31, 2009		June 30, 2008
Liability, beginning of year	$	68,785	$	93,448
Expense for new warranties issued		22,505		-
Warranty claims		(607)		-
Liability, end of period	$	90,683	$	93,448

Note 8 – Preferred Stock Dividend Arrearage

At March 31, 2009, we had dividends in arrears in the amount of $841,728 related to our outstanding Series A and Series D preferred stock, which consisted of the following:


	Shares Outstanding	Dividends In Arrears
Series A $20	9,500	$	-
Series D $20	91,250		841,728
	100,750	$	841,728

Note 9 – Net Loss per Share

We compute basic loss per common share using the weighted average number of common shares. At March 31, 2009 and 2008, there were 2,015,000 and 2,015,000 shares, respectively, of in-the-money potentially dilutive common shares outstanding, which were not included in weighted average shares outstanding because their effect is anti-dilutive due to our reported net loss.

At March 31, 2009 and 2008, we had approximately 340,283,356 and 182,878,116 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the our outstanding equity instruments.

Note 10 – Debt

As of March 31, 2009 and June 30, 2008, our current and long-term debt consisted of the following:


	March 31, 2009		June 30, 2008
Demand note payable:

Demand secured promissory note with a finance company to factor accounts receivable with recourse. This accounts receivable factoring facility has a factoring fee of 0.35% per 5 day period for which each invoice is outstanding	$	357,809	$	-

Convertible minimum borrowing note and revolving note secured with eligible receivables and inventory with a financial institution; interest at Wall Street Journal prime rate (5.00% as of June 30, 2008) plus 1.5%; principal and accrued unpaid interest due July 29, 2008; convertible at the option of the financial institution at $0.25 per share (net of debt discount of $5,962)		-	$	684,596
	$	357,809	$	684,596

Long-term debt:

Convertible notes payable; interest at 10% due in semi-annual installments of $192,150; principal and accrued unpaid interest due November 30, 2009; convertible at the option of the shareholder at $0.38 per share; Company may call the notes at $0.60 per share (based on certain restrictions); in default due to nonpayment of interest since May 2006; investor may require demand payment	$	3,843,000	$	3,843,000

Notes payable to stockholder; secured at issuance by first and priority security interest in substantially all of the assets of the company and by the shares of fully owned subsidiaries; interest at 8%; principal and accrued unpaid interest due September 30, 2009		1,700,000		1,700,000

Convertible notes payable to stockholder; secured at issuance by the equity interest of a majority owned joint venture; interest at 8% due in quarterly installments of $30,000; principal and accrued unpaid interest due September 30, 2009; convertible at the option of the shareholder at $0.25 per share; Company may call the note at $0.60 per share (based on certain restrictions)		1,500,000		1,500,000

Convertible notes payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $16,500; principal and accrued unpaid interest due June 16, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)		1,100,000		1,100,000

Convertible notes payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $11,250; principal and accrued unpaid interest due October 6, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)		750,000		750,000

Note 10 – Debt (continued)


	March 31, 2009		June 30, 2008
Convertible notes payable to stockholder; interest at 6%; first year interest due, and paid, at date of issuance; subsequent interest payments due in quarterly installments of $11,250; principal and accrued unpaid interest due November 23, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)		750,000		750,000

Notes payable to stockholders; secured at issuance by subordinated security interest in the capital stock of the Company’s subsidiaries; interest at 8% due in monthly installments of $4,833; principal and accrued unpaid interest due		725,000		725,000

Convertible note payable to stockholder; interest at 7%; principal and accrued unpaid interest due September 30, 2009; convertible at the option of the shareholder at $0.40 per share; Company may call the note at $0.60 per share (based on certain restrictions)		500,000		500,000

Convertible note payable to stockholder; interest at 8%; principal and accrued unpaid interest due September 30, 2009; convertible at the option of the shareholder at $0.25 per share; Company may call the note at $0.60 per share (based on certain restrictions); (net of debt discount of $0 and $2,473, respectively)		500,000		497,527

Convertible notes payable to stockholder; interest at 8% due in quarterly installments of $9,000; principal and accrued unpaid interest due September 30, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)		450,000		450,000

Notes payable to stockholder; secured at issuance by first and priority security interest in substantially all of the assets of the company and by the shares of fully owned subsidiaries; interest at 7% due in monthly installments of $2,333; principal and accrued unpaid interest due September 30, 2009		400,000		400,000

Note payable to stockholder; interest at 10% due in monthly installments of $2,737; principal and accrued unpaid interest due September 30, 2009		328,386		328,386

Convertible note payable to stockholder; interest at 8% due in quarterly installments of $6,000; principal and accrued unpaid interest due September 30, 2009; convertible at the option of the holder at the then-current market price (subject to certain standard anti-dilution adjustments)		300,000		300,000

Line of credit with a bank secured with accounts receivable; maximum borrowing amount of $400,000; interest at Wall Street Journal prime rate (5.00% as of June 30, 2008) plus 2%; principal and accrued unpaid interest due on July 26, 2009		360,000		119,000

Note payable to stockholder; interest at 9% due in monthly installments of $750; principal and accrued unpaid interest due September 30, 2009		100,000		100,000

Note payable to stockholder; interest at 8%; principal and accrued unpaid interest due September 30, 2009		100,000		100,000

Note payable to stockholder; interest at 7%; principal and accrued unpaid interest due September 30, 2009		100,000		100,000

Other		24,759		41,426
Long-term debt		13,531,145		13,304,339
Less current portion		(13,513,862)		(1,235,791)
Long-term portion	$	17,283	$	12,068,548

Note 11 – Business Segments

Information for our reportable segments for the three and nine months ended March 31, 2009 and 2008 are as follows:


	For the Three Months Ended March 31,				For the Nine Months Ended March 31,
	2009		2008		2009		2008
Sales
B&B ARMR Corporation	$	1,419,279	$	1,079,540	$	3,615,680	$	4,352,998
B&B Roadway, LLC		935,546		1,397,259		2,816,091		3,681,177
	$	2,354,825	$	2,476,799	$	6,431,771	$	8,034,175

Income (loss) from operations
B&B ARMR Corporation	$	197,283	$	(278,543)	$	354,897	$	(9,934)
B&B Roadway, LLC		87,097		217,639		263,418		456,265
Corporate		(218,858)		(209,649)		(616,629)		(594,247)
	$	65,522	$	(270,553)	$	1,686	$	(147,916)

Note 12 – Sales of DoorTek and Intelli-Site, Inc.

In early June, the Company entered into discussions with the management of DoorTek to sell the operations of DoorTek back to management and exit the business. In late July 2008, a negotiated sales agreement was reached. The substantive details of the sale were:

Company assigned all DoorTek assets (including all inventory, fixtures, data, records and rights to the DoorTek name) to DoorTek management (the buyer).

Company retained accounts receivable.

Buyer assumed all liabilities of DoorTek after the effective date of transfer.

Buyer transferred back to the Company 228,552 shares of common stock in the Company. Such shares constituted the original purchase consideration when DoorTek was acquired.

There were no proceeds from the sale which resulted in a loss of $117,397.

The transfer was completed in mid-August following the release of assets by Laurus (see Note 13).

On March 25, 2009, the Company sold the operations of Intelli-Site, Inc. The substantive details of the sale were:

Company assigned all Intelli-Site, Inc. assets (including all fixtures, data, records, intellectual property and rights to the Intelli-Site, Inc. name) to the buyer.

Company retained some accounts receivable and accounts payable.

Buyer assumed all liabilities of Intelli-Site, Inc. after the effective date of transfer.

Buyer transferred to the Company 200,000 shares of common stock.

A receivable was recorded for cash consideration to be paid over a 24 month period.

A receivable was recorded for estimated royalty payments to be made over a 36 month period, half of which will be paid in cash and half in common stock.

Proceeds from the sale were $512,263 which resulted in a gain of $354,012.

Note 13 – Credit Facility with Laurus Master Fund

On July 29, 2005, we entered into, and, on August 3, 2005, closed a financing transaction with Laurus Master Fund, Ltd. to obtain a $3,000,000 credit facility. On June 30, 2008, the balance outstanding under the credit facility was $690,558.

The agreement with Laurus expired on July 29, 2008. At that time, we had not yet finalized the new factoring agreement with Capital Funding Solutions, and we were therefore unable to pay the balance on the due date. As a result, we were in default under the terms of this facility. Laurus added an additional penalty fee of $77,000 to our final balance of $236,673, which was paid by Capital Funding as a part of our initial factoring of receivables to them on August 15, 2008 (see Note 14).

Note 14 – Factoring and Security Agreement with Capital Funding Solutions

On August 11, 2008, we entered into, and on August 15, 2008, closed a factoring and security agreement with Capital Funding Solutions. The Factoring Agreement provides that the Company will sell to Capital Funding certain of its accounts receivable. Moreover, the factoring agreement requires that we grant to Capital Funding a continuing first priority security interest in all of our now owned and hereafter acquired accounts, chattel paper, deposit accounts receivable, inventory, equipment, instruments, investment property, documents, letter of credit rights, commercial tort claims, general intangibles and supporting obligations. The factoring agreement does not require us to grant a security interest in any of the assets of Doortek Corp. and B&B Roadway, Inc. The factoring agreement is for a one year term, which will be automatically extended for successive terms unless terminated by either party. The factoring agreement can be terminated at any time by either us or Capital Funding by giving 30 days written notice.

For each account, Capital Funding will pay to us 80% of the face amount due on such account at the time of purchase. Upon customer payment of the amount due, Capital Funding will pay to us 20% of the face amount due less the factoring fee (as defined in the factoring agreement). The factoring fee is calculated as follows: .35% of the face amount due on an account at the time of purchase for each 5 day period, computed from the end of the 5 day period following the date on which the purchase price is paid to us for such account and ending when such account is paid by the account debtor.

The factored balance outstanding under the factoring agreement as of March 31, 2009 was $357,809.

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, customer acceptance of existing and new products, anticipated development schedules of new products, anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with our customers, access to capital, casualty to or other disruption of our contracted vendor production facilities and equipment, delays and disruptions in the shipment of our products, 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

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Sales. Our total sales decreased by $0.1 million, or 4.9%, to $2.35 million during the quarter ended March 31, 2009 from $2.48 million during the quarter ended March 31, 2008. Sales at B&B ARMR Corporation (“B&B ARMR”) subsidiary increased approximately $0.3 million. The increase was offset by a decrease in overall sale volume at our B&B Roadway, LLC (“B&B Roadway”) joint venture partnership of approximately $0.4 million as state and local transportation spending remained relatively soft during the winter months.

Gross Margin. Gross margin increased by approximately $0.1 million during the quarter ended March 31, 2009 to $0.9 million. B&B ARMR experienced an increase of approximately $0.3 million in gross margin which was partially offset by a decrease of B&B Roadway of approximately $0.2 million in gross margin.

Selling, General and Administrative. Selling, general and administrative expenses decreased approximately $0.2 million for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008 primarily do to a reduction in personnel costs at B&B ARMR and B&B Roadway.

Interest Expense. Interest expense remained comparable for the quarters ended March 31, 2009 and 2008.

Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31, 2008

Sales. Our total sales decreased by $1.6 million, or 19.9%, to $6.4 million during the nine months ended March 31, 2009 from $8.0 million during the nine months ended March 31, 2008. Sales at B&B ARMR and B&B Roadway decreased approximately $.74 million and $.86 million, respectively, due to well documented slow down of the economy and lack of release of governmental funds due to the change in federal administration and reaction to economic recession.

Gross Margin. Gross margin decreased by approximately $0.5 million during the nine months ended March 31, 2009 to $2.3 million. B&B ARMR experienced a decrease of approximately $0.1 million in gross margin due to sales volume effects. Gross margin at B&B Roadway decreased by $0.3 million due to volume effects.

Selling, General and Administrative. Selling, general and administrative expenses decreased by approximately $0.6 million or 21.1% during the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008. This decrease is due to reductions in personnel.

Interest Expense. Interest expense increased by approximately $0.1 million during the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008. This increase reflects the more expensive borrowing costs the company is experiencing due to the change in financing arrangements made in August 2008.

Liquidity and Capital Resources

We have $13,873,654 in debt payments due within a year and minimal cash will be provided by operations to make these payments. Our auditor issued a going concern modification in their auditor’s report for the fiscal year ended June 30, 2008. Our liquidity depends heavily on our ability to restructure our current debt. We have delivered a proposal to the debt holders to convert their debt into common equity. If we are unsuccessful, it is possible that we will be forced into liquidation, as our liabilities far exceed our assets, and there is no guarantee that we will be able to pay any debt instruments which mature prior to a debt restructure. Ultimately, failure to restructure our debt could jeopardize our ability to continue as a going concern.

Additionally, we are currently experiencing liquidity issues related to customer payment terms, vendor payment terms and factoring agreement limitations, which may make it difficult for us to meet our current operating cash requirements and may jeopardize our ability to continue as a going concern. The cash that we receive from our factoring agreement is utilized to support all operations excluding B&B Roadway, which has a separate line of credit. Our working capital requirements will depend upon many factors, including future sales of our products, our operating results and the status of competitive products. We intend to address our liquidity problems by controlling costs, maintaining focus on revenues and collections and seeking additional financing; however, if we are unsuccessful at obtaining additional financing, it is possible that we will be forced into liquidation. Ultimately, failure to receive such financing could jeopardize our ability to continue as a going concern.

Our cash position decreased by $0.08 million during the nine months ended March 31, 2009. At March 31, 2008, we had $61,961 in cash and cash equivalents and had approximately $0.6 million outstanding under our factoring agreement. The factoring agreement, which is secured by substantially all of our assets, permits us to borrow up to $1.0 million based on eligible invoices.

For the nine months ended March 31, 2009, our operating activities provided $0.1 million of cash compared to approximately $0.1 million of cash used in operations during the nine months ended March 31, 2008. We anticipate no significant capital expenditures for the remainder of fiscal 2009. We made net payments on debt of $0.1 million during the nine months ended March 31, 2009 compared to $0.3 million of net borrowings during the nine months ended March 31, 2008.

Principal payments required under outstanding debt at March 31, 2009 are as follows:


2009	$	698,687
2010		13,174,967
2011		8,427
Thereafter		6,873
	$	13,888,954

Our backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At April 30, 2009, the Company’s backlog was approximately $2.3 million. We expect to fill the majority of this backlog by June 30, 2009.

Item 4. Controls and Procedures.

(a)

Evaluation of Disclosure Controls and Procedures. As of March 31, 2009, an evaluation was carried out under the supervision and with the participation of our senior management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness and the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This evaluation included consideration of the various processes carried out under the direction of our CEO and CFO in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosures.

Based upon this evaluation, our CEO and CFO concluded that, as of March 31, 2009, there existed a material weakness in our processes, procedures and controls related to the preparation of our quarterly and annual financial statements. However, we are making changes to resolve the significant turnover, staffing deficiencies and lack of segregation of duties throughout our financial organization. While we believe that we are taking the steps necessary to remediate this material weakness in our processes, procedures and controls related to the preparation of our quarterly and annual financial statements, we are still in the process of evaluating these controls. Accordingly, we will continue to vigorously monitor the effectiveness of these processes, procedures and controls and will make any further changes management determines appropriate.

(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, except as described above. Additionally, we have and will continue to improve both the quality and the quantity of staffing in order to effect significant improvements in our internal control structure.

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. Submission of Matters to a Vote of Security Holders.

Definitive Information Statement DEF 14C filed January 13, 2009.

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1+

Officer’s Certificates Pursuant to Section 302

32.1+

Officer’s Certificates Pursuant to Section 906

________________________

Filed herewith.

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.


		Integrated Security Systems, Inc.
		(Registrant)



Date:	May 20, 2009	/s/ BROOKS SHERMAN
		Brooks Sherman
		Chairman and Chief Executive Officer (Principal Executive Officer)

Date:	May 20, 2009	/s/ VERNON H FOERSTERLING, JR.
		Vernon H. Foersterling, Jr.
		Director and President

Date:	May 20, 2009	/s/ SHARON DOHERTY
		Sharon Doherty
		Chief Financial Officer

EXHIBIT INDEX

31.1+

Officers’ Certificate Pursuant to Section 302

32.1+

Officers’ Certificate Pursuant to Section 906

________________________

Filed herewith.