-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UncPxsgTj2omt+H0TYNPOSUqsygZUFESu/YnAkpDkDWc0I+EHEDtUaY0dha0V+BM o3GkDKysK3C6CuurjkHApQ== 0001158957-05-000010.txt : 20050214 0001158957-05-000010.hdr.sgml : 20050214 20050214163149 ACCESSION NUMBER: 0001158957-05-000010 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050214 DATE AS OF CHANGE: 20050214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SECURITY SYSTEMS INC CENTRAL INDEX KEY: 0000741114 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 752422983 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11900 FILM NUMBER: 05611020 BUSINESS ADDRESS: STREET 1: 8200 SPRINGWOOD DR STE 230 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 9724448280 MAIL ADDRESS: STREET 1: 8200 SPRINGWOOD DR SUITE 230 CITY: IRVING STATE: TX ZIP: 75063 10QSB 1 form10qsb021405.txt INTEGRATED SECURITY SYSTEMS 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- Form 10-QSB --------------- |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2004. | | 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) (IRS Employer Identification No.) 8200 Springwood Drive, Suite 230, Irving, Texas 75063 ----------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (972) 444-8280 --------------------------- (Issuer's telephone number) Check whether the issuer (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 [ ] As of January 31, 2005, 85,056,612 shares of the Registrant's common stock were outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] INTEGRATED SECURITY SYSTEMS, INC. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at December 31, 2004 (unaudited) and June 30, 2004 3 Consolidated Statements of Operations (unaudited) for the three and six months ended December 31, 2004 and 2003 4 Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2004 and 2003 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis or Plan of Operation 13 Item 3. Controls and Procedures 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits 17 SIGNATURES 19 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements.
INTEGRATED SECURITY SYSTEMS, INC. Consolidated Balance Sheets December 31, June 30, 2004 2004 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,422,816 $ 172,688 Accounts receivable, net of allowance for doubtful accounts of $98,964 and $109,527, respectively 2,531,081 1,904,285 Inventories 2,130,352 1,272,532 Other current assets 149,625 75,020 ------------ ------------ Total current assets 6,233,874 3,424,525 Property and equipment, net 608,597 681,168 Goodwill 3,714,491 3,547,162 Other assets 415,386 59,956 ------------ ------------ Total assets $ 10,972,348 $ 7,712,811 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 1,890,778 $ 2,029,963 Accrued liabilities 531,378 708,610 Current portion of long-term debt 4,082,632 1,845,949 ------------ ------------ Total current liabilities 6,504,788 $ 4,584,522 ------------ ------------ Long-term debt 5,090,690 2,956,341 Stockholders' equity (deficit): 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; 84,906,612 and 84,298,984 shares issued, 849,066 842,990 respectively Additional paid in capital 31,938,512 31,627,086 Accumulated deficit (33,292,966) (32,180,386) Treasury stock, at cost - 50,000 common shares (118,750) (118,750) ------------ ------------ Total stockholders' equity (deficit) (623,130) 171,948 ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 10,972,348 $ 7,712,811 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3
INTEGRATED SECURITY SYSTEMS, INC. Consolidated Statements of Operations (Unaudited) For the Three Months Ended For the Six Months Ended December 31, December 31, ---------------------------- ---------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Sales $ 3,134,131 $ 3,367,883 $ 6,530,845 $ 5,087,780 Cost of sales 2,468,066 2,263,003 4,566,339 3,322,051 ------------ ------------ ------------ ------------ Gross profit 666,065 1,104,880 1,964,506 1,765,729 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 1,286,365 1,012,037 2,463,876 1,696,971 Research and product development 128,445 187,557 251,748 326,513 ------------ ------------ ------------ ------------ 1,414,810 1,199,594 2,715,624 2,023,484 ------------ ------------ ------------ ------------ Loss from operations (748,745) (94,714) (751,118) (257,755) Interest expense (212,004) (411,587) (360,505) (664,272) ------------ ------------ ------------ ------------ Net loss (960,749) (506,301) (1,111,623) (922,027) Preferred dividends (41,400) (41,400) (82,800) (82,800) ------------ ------------ ------------ ------------ Net loss allocable to common stockholders $ (1,002,149) $ (547,701) $ (1,194,423) $ (1,004,827) ============ ============ ============ ============ Weighted average common shares outstanding - basic and diluted 84,663,078 73,595,757 84,481,031 52,127,485 ============ ============ ============ ============ Net loss per share - basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.02) ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 4
INTEGRATED SECURITY SYSTEMS, INC. Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended December 31, --------------------------- 2004 2003 ----------- ----------- Cash flows from operating activities: Net loss $(1,111,623) $ (922,027) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 109,694 79,665 Amortization 11,266 -- Provision for bad debt 4,749 15,500 Provision for warranty reserve 160,000 30,000 Provision for inventory reserve -- 1,000 Amortization of debt discount -- 300,032 Expenses paid with stock, warrants and options 229,690 237,047 Changes in operating assets and liabilities, net of effects of acquisition: Accounts receivable (490,380) (808,874) Inventories (734,058) 115,568 Other assets (441,301) 29,329 Accounts payable (198,870) 582,590 Accrued liabilities (337,357) 39,789 ----------- ----------- Net cash used in operating activities (2,799,190) (300,381) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (37,125) (111,347) Purchase of businesses, net of cash acquired (255,528) (733,134) ----------- ----------- Net cash used in investing activities (292,653) (844,481) ----------- ----------- Cash flows from financing activities: Employee stock option exercise -- 48,125 Payments on debt and other liabilities (156,708) (371,354) Proceeds from notes payable and long-term debt 4,498,679 1,591,498 ----------- ----------- Net cash provided by financing activities 4,341,971 1,268,269 ----------- ----------- Increase in cash and cash equivalents 1,250,128 123,407 Cash and cash equivalents at beginning of period 172,688 177,078 ----------- ----------- Cash and cash equivalents at end of period $ 1,422,816 $ 300,485 =========== =========== Supplemental disclosure of noncash financing activities: Conversion preferred stock $ -- $ 7,495,052 Issuance of company common stock in payment of preferred stock dividends $ -- $ 1,043,830
The accompanying notes are an integral part of the consolidated financial statements. 5 INTEGRATED SECURITY SYSTEMS, INC. Notes to Consolidated Financial Statements (Unaudited) Six Months Ended December 31, 2004 and 2003 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, 2005. 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 2004 Annual Report on Form 10-KSB filed on October 13, 2004 with the Securities and Exchange Commission. Note 2 - Stock Options The Company accounts for stock-based compensation to employees using the intrinsic value method. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock. In December 2004, the Financial Accounting Standards Board issued a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123R"). SFAS No. 123R supercedes 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 is effective for the first interim or annual period beginning after June 15, 2005 and the Company will begin recognizing option expense July 1, 2005. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123R to stock-based employee compensation:
For the Three Months Ended For the Six Months Ended December 31, December 31, -------------------------- -------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Net loss, as reported $ (960,749) $ (506,301) $(1,111,623) $ (922,027) Deduct: Total stock-based employee compensation expense determined under fair value based method (56,135) (144,638) (112,271) (335,614) ----------- ----------- ----------- ----------- Pro forma net loss $(1,016,884) $ (650,939) $(1,223,894) $(1,257,641) =========== =========== =========== =========== Earnings per share: Basic and Diluted-as reported $ (0.01) $ (0.01) $ (0.01) $ (0.02) =========== =========== =========== =========== Basic and Diluted-pro forma $ (0.01) $ (0.01) $ (0.01) $ (0.03) =========== =========== =========== ===========
6 The fair value of these options was estimated at the date of grant using the Black-Sholes option pricing model with the following weighted average assumptions used for grants in fiscal 2004 and 2003, respectively: no dividend yield, expected lives of three and five years, respectively, with expected volatility and risk-free interest rates as outlined in the following table:
For the Three Months Ended For the Six Months Ended December 31, December 31, -------------------------- -------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Expected volatility 107.85% 108.34% 107.85% 108.31% Risk-free interest rate 3.33% 3.31% 3.33% 3.30%
Note 3 - Reclassifications Certain reclassifications of prior year amounts have been made to conform to the current period presentation. Note 4 - Accounts Receivable The majority of the Company's 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 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. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. December 31, --------------------------- 2004 2003 ----------- ----------- Accounts receivable: Trade receivables $ 2,630,045 $ 2,531,372 Less: allowance for doubtful receivables (98,964) (104,417) ----------- ----------- $ 2,531,081 $ 2,426,955 =========== =========== For the Six Months Ended December 31, --------------------------- 2004 2003 ----------- ----------- Allowance for doubtful receivables: Beginning Balance $ 109,527 $ 64,183 Bad debt expense 4,749 15,500 Accounts written-off (15,312) (28,827) ARMR Services Corporation merger -- 53,561 ----------- ----------- Ending Balance $ 98,964 $ 104,417 =========== =========== 7 Note 5 - 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: December 31, ----------------------- 2004 2003 --------- --------- Liability, beginning of year $ 94,157 $ 135,471 Expense for new warranties issued 160,000 30,000 Warranty Claims (218,291) (55,853) --------- --------- Liability, end of period $ 35,866 $ 109,618 ========= ========= Note 6 - Preferred Stock Dividend Arrearage At December 31, 2004, the Company had dividends in arrears in the amount of $328,913 related to its outstanding Series A and Series D preferred stock, which consists of the following: ------------------------------ Shares Dividends Outstanding In Arrears ------------------------------ Series A $20 9,500 $ -- Series D $20 91,250 328,513 ------------------------------ 100,750 $ 328,513 ============================== Note 7 - Net Loss Per Share The Company computes basic loss per common share using the weighted average number of common shares. At December 31, 2004 and 2003, there were 18,915,450 and 15,094,125 shares, respectively, of in-the-money potentially dilutive common shares outstanding, which were not included in weighted average shares outstanding because their effect is antidilutive due to the Company's reported net loss. At December 31, 2004 and 2003, the Company had approximately 110,294,424 and 100,288,021 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the Company's outstanding equity instruments. Note 8 - Financing The Company received a $500,000 cash investment on October 27, 2004 from BFS US Special Opportunities Trust PLC ("BFS"). This investment by BFS was included as a part of the Company's placement of subordinated 10% convertible promissory notes on November 30, 2004 (see Note 10 - Financing Agreement - Placement of Subordinated 10% Convertible Promissory Notes). 8 Note 9 - Financing Arrangement - Asset Based Lending Facility On November 10, 2004, the Company's wholly-owned subsidiary, B&B ARMR Corporation ("B&B ARMR"), entered into a loan agreement with Briar Capital L.P. ("Briar") to provide a $3,000,000 discretionary demand asset based lending facility. Under the terms of the loan agreement, working capital advances are made available to B&B ARMR based on the value of its accounts receivable and inventory. Although payable on demand, the loan agreement has a stated three (3) year term. In connection with the loan agreement, B&B ARMR issued a revolving promissory note dated November 10, 2004 to Briar in the principal amount of $3,000,000. The note has an annual interest rate of two percent above the prime rate, but in no event will interest exceed the maximum nonusurious interest rate allowable under applicable law. In connection with the loan agreement between B&B ARMR and Briar, the Company, B&B ARMR, and Intelli-Site, Inc. ("Intelli-Site"), another wholly-owned subsidiary of the Company, also entered into a subordination agreement, dated November 10, 2004, with Briar, Renaissance Capital Growth & Income Fund III, Inc. ("RENN III"), Renaissance US Growth Investment Trust PLC ("RUSGIT"), and BFS (together with RENN III and RUSGIT, collectively, the "Subordinated Lenders"). Pursuant to the terms of the subordination agreement, the Subordinated Lenders agreed to subordinate their indebtedness, liens and other obligations to Briar's indebtedness, liens and other obligations. Also in connection with the loan agreement between B&B ARMR and Briar, the Company and Intelli-Site unconditionally guaranteed the obligations of B&B ARMR pursuant to the terms of separately executed guaranty agreements, dated November 10, 2004. The Company's and Intelli-Site's guaranty obligations to Briar are secured by a first priority security interest in the Company's and Intelli-Site's personal property pursuant to the terms of a guarantor security agreement, dated November 10, 2004. Note 10 - Financing Agreement - Placement of Subordinated 10% Convertible Promissory Notes On November 30, 2004, the Company entered into a Loan Agreement ("Loan Agreement") with several purchasers (the "Investors") of the Company's Subordinated 10% Convertible Promissory Notes (individually, a "Note" and collectively the "Notes"). The Company issued $4,118,000 in Notes to the Investors and others (as payment of fees) who effected the placement of the Notes. Each of the Investors is an accredited investor. Pursuant to the terms of the Loan Agreement: (i) the Company was authorized to sell to the Investors an aggregate principal amount of up to $6,000,000 in Notes and (ii) the Notes could have been sold by the Company to the Investors in multiple closings so long as the final closing was consummated no later than the fifteenth day following the initial closing. Each Note sold by the Company to each Investor: (i) is subordinated to certain other indebtedness of the Company, (ii) is due and payable on November 30, 2009, (iii) provides interest to the holder thereof at a rate of 10% per annum and (iv) is convertible into the Company's Common Stock, par value $0.01 per share, at the conversion rate of $0.38 per share of Common Stock. Each share of Common Stock that the Investor receives as a result of the conversion of the Notes shall be registered with the Securities and Exchange Commission. As a part of this transaction, BFS exchanged a promissory note in the amount of $1,000,000, originally issued on August 5, 2004, as a part of the placement of the Notes. In addition, BFS included an investment made in the Company on October 27, 2004 (see Note 8 - Financing) as a part of this placement. Also included with this placement of the Notes, C. A. Rundell, Jr., Chairman and Chief Executive Officer of the Company, exchanged a $150,000 promissory note with an annual interest rate of 9%, originally issued on July 28, 2004 to B&B ARMR for a $150,000 Note. 9 The Company paid fees in this transaction to Roth Capital Partners, LLC ("Roth") in the form of a Note in the amount of $168,000 with the same general terms and conditions as the other participants in the transaction discussed above. As further consideration, the Company also issued a stock purchase warrant dated November 30, 2004 with a five year life and an exercise price of $0.38 per share to Roth for the purchase of 276,316 common shares of the Company's $0.01 par value common stock. Note 11 - Debt As of December 31, 2004, the Company's current and long-term debt consisted of the following:
Current Long-term Total ---------- ---------- ---------- Notes payable to stockholders; interest at 8% due in monthly installments of $11,333; principal and accrued unpaid interest due September 30, 2005................. $2,400,000 $ -- $2,400,000 Asset based lending facility with a financing company. The loan with the asset based lending facility is a demand loan, but has a three-year term expiring November 10, 2007; interest at 2% above the prime rate; secured by accounts receivable and inventory of B&B ARMR Corporation....................................... 1,201,330 -- 1,201,330 Convertible note payable to stockholder; interest at 7% due in monthly installments of $2,917; principal and accrued unpaid interest due September 5, 2008; 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 Note payable to bank and secured by a letter of credit in the amount of $500,000 from Chief Executive Officer; interest at the prime rate of Bank One, N.A. (4.25% as of June 30, 2004); principal and accrued unpaid interest due January 26, 2005........................ 330,000 -- 330,000 Term note payable to a bank; due in monthly principal and interest installments of $10,500; interest at 10.5% and 10% at June 30, 2004 and 2003, respectively; secured by first mortgage on real estate and equipment; maturity date of February 26, 2006................... 76,091 427,852 503,943 Convertible notes payable; interest at 10% due in semi-annual installments of $205,900; 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 note at $0.60 per share (based on certain restrictions)........................ -- 4,118,000 4,118,000 Other.................................................. 75,211 44,838 120,049 ---------- ---------- ---------- $4,082,632 $5,090,690 $9,173,322 ========== ========== ==========
10 Note 12 - Acquisition On December 15, 2004, the Company acquired all of the issued and outstanding shares of Common Stock of DoorTek Corporation ("DoorTek"), a manufacturer of access control systems and other physical security system products. In exchange for all of the outstanding shares of DoorTek, the Company issued 228,572 shares of its $0.01 par value Common Stock, which has been preliminarily valued at approximately $87,000. The Company also paid $120,000 in cash to DoorTek's former stockholders. In addition, the Company and the sellers executed an earn-out agreement for maximum additional payments of approximately $100,000 based on net profits over the next two years. Any additional consideration will increase the recorded goodwill. The Company entered into this acquisition seeing it as an opportunity to significantly enhance its services, allow it to expand its product offering and customer base in conjunction with the Company's strategic growth plans. The acquisition of DoorTek was accounted for using the purchase method of accounting. As such, the assets and liabilities of DoorTek were recorded at their estimated fair value and the results of operations have been included in the Company's consolidated results of operations from the date of acquisition. To date, the purchase price paid in excess of the estimated fair value of the net assets acquired has been allocated to goodwill, which is not deductible for federal income tax purposes. A preliminary assessment of the other identifiable intangible assets related to this acquisition transaction yielded no assignment of value thereto. The Company is in the process of finalizing the allocation of the purchase price to the assets acquired. Any adjustment resulting form this allocation will reduce the amount of goodwill and any required amortization will be recorded. It is expected this allocation will be competed by the end of fiscal 2005. The table below summarizes the current allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed: Estimated Values --------- Cash and cash equivalents $ 29,000 Accounts receivable 141,000 Inventories 124,000 Accounts payable (60,000) Accrued liabilities (1,000) Long-term debt (29,000) Goodwill 22,000 --------- Purchase price $ 226,000 ========= The following unaudited pro forma consolidated statement of operations information has been prepared as if the acquisition discussed above had occurred at the beginning of each period presented.
For the Three Months Ended For the Six Months Ended December 31, December 31, ---------------------------- ---------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Sales $ 3,281,491 $ 3,547,083 $ 6,955,808 $ 5,400,948 Net loss allocable to common stockholders $ (993,591) $ (565,246) $ (1,164,861) $ (1,029,348) Net loss per share allocable To common stockholders, basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.02) Weighted average shares outstanding, basic and diluted 84,849,414 73,824,329 84,574,199 52,356,057
11 Note 13 - Business Segments Information for the Company's reportable segments for the three and six months ended December 31, 2004 and 2003 is as follows:
For the Three Months Ended For the Six Months Ended December 31, December 31, -------------------------- -------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Sales B&B ARMR Corporation $ 2,942,566 $ 3,293,548 $ 6,123,051 $ 4,921,534 Intelli-Site, Inc. 160,111 74,335 376,340 166,246 DoorTek Corporation (1) 31,454 -- 31,454 -- ----------- ----------- ----------- ----------- $ 3,134,131 $ 3,367,883 $ 6,530,845 $ 5,087,780 =========== =========== =========== =========== Income (loss) from operations B&B ARMR Corporation $ (590,214) $ 74,113 $ (598,244) $ 84,747 Intelli-Site, Inc. (46,644) (89,325) (35,467) (184,027) DoorTek Corporation (1) 1,010 -- 1,010 -- Corporate (112,897) (79,502) (118,417) (158,475) ----------- ----------- ----------- ----------- $ (748,745) $ (94,714) $ (751,118) $ (257,755) =========== =========== =========== ===========
(1) Includes only data since acquisition date. 12 Item 2. Management's Discussion and Analysis or Plan of Operation. Forward Looking Statements This quarterly report on Form 10-QSB 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-QSB, including the statements under "Part I. --Item 2. Management's Discussion and Analysis or Plan of Operation" and located elsewhere in this quarterly report on Form 10-QSB regarding the financial position and liquidity of the Company are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it 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 the Company's expectations, are disclosed in this quarterly report on Form 10-QSB. The Company does not undertake any obligation to publicly revise its forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report on Form 10-QSB. Important factors that could cause actual results to differ materially from those in the forward-looking statements in this quarterly report on Form 10-QSB 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 customers, access to capital, casualty to or other disruption of the Company's production facility and equipment, delays and disruptions in the shipment of the Company's products, government regulations and the ability of the Company to meet its stated business goals. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Company's cautionary statements. Results of Operations Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003 Sales. The Company's total sales decreased by $0.2 million, or 7%, to $3.1 million during the quarter ended December 31, 2004 from $3.3 million during the quarter ended December 31, 2003. This decrease is due to an overall reduction in sales volume at the Company's B&B ARMR subsidiary. Gross Margin. Gross profit decreased by approximately $0.4 million during the quarter ended December 31, 2004, or 40%, compared to with the same the same quarter a year ago due to a less favorable product mix at the Company's B&B ARMR subsidiary. Selling, General and Administrative. Selling, general and administrative expenses increased by approximately $0.3 million or 27% during the quarter ended December 31, 2004 compared to the quarter ended December 31, 2003. This increase is primarily due to an increase in the professional staffing levels at the Company's B&B ARMR subsidiary. Research and Product Development. Research and product development expenses decreased by approximately 2% during the quarter ended December 31, 2004 compared to the quarter ended December 31, 2003. This decrease is primarily due to a reduction in research and product development expenditures Company-wide, which the Company expects will continue at these lower levels through fiscal 2005. Interest Expense. Interest expense decreased by approximately $0.2 million during the quarter ended December 31, 2004 compared to the quarter ended December 31, 2003. This decrease is due to the Company no longer accreting to interest expense the value of warrants issued in conjunction with securing additional debt during the quarter ended December 31, 2003. This approximately $0.3 million decrease was offset by an increase of approximately $0.1 million of interest on additional debt that was obtained to meet working capital needs during the quarter ended December 31, 2004, coupled with the Company's placement of $3.8 million in subordinated 10% convertible promissory notes (see Note 10 to the Company's Consolidated Financial Statements in Item 1 above). 13 Six Months Ended December 31, 2004 Compared to Six Months Ended December 31, 2003 Sales. The Company's total sales increased by $1.4 million, or 28%, to $6.5 million during the six months ended December 31, 2004 from $5.1 million during the six months ended December 31, 2003. This increase is due to the inclusion of the sales of ARMR Services Corporation as a result of the merger of ARMR Services Corporation with the Company's B&B Electromatic, Inc. subsidiary in to B&B ARMR Corporation ("B&B ARMR") in September 2003. Gross Margin. Gross profit increased by $0.2 million, or 11%, to $1.9 million during the six months ending December 31, 2004 from $1.7 million during the six months ending December 31, 2003 due to higher sales volume at the Company's B&B ARMR subsidiary. Gross margin decreased to 30% from 35% for the same period due to a less favorable product mix at the Company's B&B ARMR subsidiary. Selling, General and Administrative. Selling, general and administrative expenses increased by approximately $0.8 million or 12% during the six months ended December 31, 2004 compared to the six months ended December 31, 2003. This increase is primarily due to the inclusion of ARMR Services Corporation as a result of the merger with B&B Electromatic, Inc., as well as an increase in warranty costs at the Company's B&B ARMR subsidiary due to the increased level of sales. Research and Product Development. Research and product development expenses decreased by approximately 1% during the six months ended December 31, 2004 compared to the six months ended December 31, 2003. This decrease is primarily due to a reduction in research and product development expenditures Company-wide, which the Company expects will continue at these lower levels through fiscal 2005. Interest Expense. Interest expense decreased by $0.3 million during the six months ended December 31, 2004 compared to the six months ended December 31, 2003. This decrease is due to the Company no longer accreting to interest expense the value of warrants issued in conjunction with securing additional debt during the quarter ended December 31, 2003. This approximately $0.5 million decrease was offset by an increase of approximately $0.2 million of interest on additional debt that was obtained to meet working capital needs during the quarter ending December 31, 2004, coupled with the Company's placement of $4,118,000 in subordinated 10% convertible promissory notes (see Note 10 to the Company's Consolidated Financial Statements in Item 1 above). Liquidity and Capital Resources The Company's cash position increased by $1.2 million during the six months ended December 31, 2004. At December 31, 2004, the Company had $1.4 million in cash and cash equivalents and had approximately $1.2 million outstanding under its asset based lending facility. The asset based lending facility, which is secured by accounts receivable and inventory, permits the Company to borrow up to $3.0 million, subject to availability under its borrowing base. This facility is discussed further in Note 9 to the Company's Consolidated Financial Statements in Item 1 above. 14 For the six months ended December 31, 2004, the Company's operating activities used $2.8 million of cash compared to $0.3 million of cash used in operations during the six months ended December 31, 2003, primarily due to the Company's net loss and the increased levels of accounts receivable and inventories. The Company used $37,125 for the purchase of property and equipment during the six months ended December 31, 2004, compared to $0.1 million for the six months ended December 31, 2003. The Company anticipates capital expenditures to increase through the remainder of fiscal 2005, commensurate with increased sales. The Company also used $0.3 million in cash related to the acquisition of two businesses, consisting of $146,000 related to earn-out agreements executed as a part of the B&B ARMR merger transaction and $139,000 related to the purchase of DoorTek Corporation. During the six months ended December 31, 2004, the Company financed its operations with cash flows from borrowings of $4.5 million compared to $1.6 million during the six months ended December 31, 2003. The borrowings during the first six months of fiscal 2005 consisted of an additional $4.2 million from the issuance of subordinated 10% convertible promissory notes. See Note 10 to the Company's consolidated financial statements for a detail description of this transaction. The Company also borrowed an additional $0.2 million under the Company's asset based lending facility. The Company made payments of $156,708 on debt and other liabilities during the six months ended December 31, 2004, compared to payments of $371,354 on debt and other liabilities during the six months ended December 31, 2003. The cash that the Company received from the placement of $4.2 million in subordinated 10% convertible promissory notes and availability under its asset based lending facility will be utilized to support Company-wide operations. The Company's working capital requirements will depend upon many factors, including future sales of the Company's products, the Company's operating results, the status of competitive products, and actual profits compared to the Company's business plan. The Company is currently experiencing declining liquidity, which makes it difficult for the Company to meet its current cash requirements and may jeopardize the Company's ability to continue as a going concern. The Company's auditor issued a going concern modification in their auditors' report for the fiscal year ended June 30, 2004. The Company intends to address its liquidity problems by controlling costs, seeking additional funding and maintaining focus on revenues and collections. In the foreseeable future, the Company will need to obtain additional financing either through equity placement or additional debt. There can be no assurance that the Company will be able to secure such financing. If the Company's liquidity does not improve by the end of fiscal 2005, it may have to seek a merger partner, limit its operations or seek protection under the federal bankruptcy laws. Any of the foregoing options may be on terms that are unfavorable to the Company or disadvantageous to the Company's stockholders. Principal payments required under long-term debt outstanding at December 31, 2004 are as follows: Year Ending June 30, ------------------------ 2005 $ 1,662,963 2006 2,869,072 2007 20,810 2008 2,477 2009 4,618,000 ----------- $ 9,173,322 The Company's backlog is calculated as the aggregate sales prices of firm orders received from customers less revenue recognized. At January 31, 2005, the Company's backlog was approximately $4.9 million. The Company expects that it will fill the majority of this backlog by March 31, 2006. 15 Item 3. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures. Based on his evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, the Company's principal executive and principal financial officer has concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. We strive to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the requirements specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for appropriate decisions regarding required disclosure. Our independent registered public accounting firm has communicated to our audit committee a reportable condition regarding our system of internal controls. They noted a reportable condition with respect to the inadequacy of staffing levels in our financial reporting function that could result in our inability to meet financial reporting objectives. The Company and audit committee is taking the steps necessary to correct this identified reportable condition. Effective January 2005, the Company has hired an experienced Chief Financial Officer at the Company's B&B ARMR subsidiary. In addition, the Company has begun an intense search for additional staffing within the finance and accounting department at the corporate office. (b) Changes in Internal Controls. There were no significant changes in the Company's internal control over financial reporting that occurred during the company's last completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, other than described above. Additionally, the Company has and will continue to improve both the quality and the quantity of staffing in order to effect significant improvements in the Company's internal control structure. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. During the six months ended December 31, 2004, the Company issued unregistered securities in connection with the transaction described below. The issuances of the convertible promissory notes were exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as transactions not involving a public offering. On November 30, 2004, the Company entered into a Loan Agreement ("Loan Agreement") with several purchasers (the "Investors") of the Company's Subordinated 10% Convertible Promissory Notes (individually, a "Note" and collectively the "Notes"). The Company issued $4,118,000 in Notes to the Investors and others (as payment of fees) who effected the placement of the Notes. Each of the Investors is an accredited investor. Pursuant to the terms of the Loan Agreement: (i) the Company was authorized to sell to the Investors an aggregate principal amount of up to $6,000,000 in Notes and (ii) the Notes could have been sold by the Company to the Investors in multiple closings so long as the final closing was consummated no later than the fifteenth day following the initial closing. Each Note sold by the Company to each Investor: (i) is subordinated to certain other indebtedness of the Company, (ii) is due and payable on November 30, 2009, (iii) provides interest to the holder thereof at a rate of 10% per annum and (iv) is convertible into the Company's Common Stock, par value $0.01 per share, at the conversion rate of $0.38 per share of Common Stock. Each share of Common Stock that the Investor receives as a result of the conversion of the Notes shall be registered with the Securities and Exchange Commission. The Company is currently in the process of preparing a Registration Statement on form SB-2 for filing with the Securities and Exchange Commission to register the shares of common stock issuable upon the conversion of the convertible promissory notes and selected other currently unregistered equity instruments. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits. 10.1 Loan Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc. and Briar Capital, L.P. (1) 10.2 Revolving Promissory Note, dated November 10, 2004, issued by B&B ARMR Corporation to Briar Capital, L.P. (1) 17 10.3 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc., Briar Capital, L.P., Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., and BFS US Special Opportunities Trust PLC. (1) 10.4 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, C. A. Rundell, Jr. and Briar Capital, L.P. (1) 10.5 Guaranty Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. (1) 10.6 Guarantor Security Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. (1) 10.7 Guaranty Agreement, dated November 10, 2004, by Intelli-Site, Inc. in favor of Briar Capital, L.P. (1) 10.8 Guarantor Security Agreement, dated November 10, 2004, by Intelli-Site, Inc. in favor of Briar Capital, L.P. (1) 10.9 Loan Agreement, dated November 30, 2004, among Integrated Security Systems, Inc. and certain Investors. (2) 10.10 Subordinated 10% Convertible Promissory Note, dated November 30, 2004, among Integrated Security Systems, Inc. and certain Investors. (2) 10.11 Registration Rights Agreement, dated November 30, 2004, among Integrated Security Systems, Inc. and certain Investors. (2) 31.1+ Officer's Certificate Pursuant to Section 302 32.1+ Officer's Certificate Pursuant to Section 906 ____________________ + Filed herewith. (1) Incorporated by reference to the Company's Form 8-K filed on November 16, 2004. (2) Incorporated by reference to the Company's Form 8-K filed on December 3, 2004. 18 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: February 14, 2005 /s/ C. A. RUNDELL, JR. ---------------------- C. A. Rundell, Jr. Director, Chairman of the Board, and Chief Executive Officer (Principal Executive and Financial Officer) Date: February 14, 2005 /s/ RICHARD B. POWELL --------------------- Richard B. Powell Vice President, Chief Accounting Officer and Secretary (Principal Accounting Officer) 19 EXHIBIT INDEX 10.1 Loan Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc. and Briar Capital, L.P. (1) 10.2 Revolving Promissory Note, dated November 10, 2004, issued by B&B ARMR Corporation to Briar Capital, L.P. (1) 10.3 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, Integrated Security Systems, Inc., Intelli-Site, Inc., Briar Capital, L.P., Renaissance US Growth Investment Trust PLC, Renaissance Capital Growth & Income Fund III, Inc., and BFS US Special Opportunities Trust PLC. (1) 10.4 Subordination Agreement, dated November 10, 2004, among B&B ARMR Corporation, C. A. Rundell, Jr. and Briar Capital, L.P. (1) 10.5 Guaranty Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. (1) 10.6 Guarantor Security Agreement, dated November 10, 2004, by Integrated Security Systems, Inc. in favor of Briar Capital, L.P. (1) 10.7 Guaranty Agreement, dated November 10, 2004, by Intelli-Site, Inc. in favor of Briar Capital, L.P. (1) 10.8 Guarantor Security Agreement, dated November 10, 2004, by Intelli-Site, Inc. in favor of Briar Capital, L.P. (1) 10.9 Loan Agreement, dated November 30, 2004, among Integrated Security Systems, Inc. and certain Investors. (2) 10.10 Subordinated 10% Convertible Promissory Note, dated November 30, 2004, among Integrated Security Systems, Inc. and certain Investors. (2) 10.11 Registration Rights Agreement, dated November 30, 2004, among Integrated Security Systems, Inc. and certain Investors. (2) 31.1+ Officer's Certificate Pursuant to Section 302 32.1+ Officer's Certificate Pursuant to Section 906 _________________ + Filed herewith. (1) Incorporated by reference to the Company's Form 8-K filed on November 16, 2004. (2) Incorporated by reference to the Company's Form 8-K filed on December 3, 2004. 20 EX-31 2 exhibit31-110qsb021405.txt EXHIBIT 31.1 OFFICER'S CERTIFICATION Exhibit 31.1 CERTIFICATION I, C. A. Rundell, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Integrated Security Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: February 14, 2005 /s/ C. A. RUNDELL, JR. ------------------------------------- C. A. Rundell, Jr., Chief Executive Officer and Principal Executive and Financial Officer EX-32 3 exhibit32-110qsb021405.txt EXHIBIT 32.1 OFFICER'S CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Integrated Security Systems, Inc. (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004 (the "Form 10-QSB") of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-QSB. February 14, 2005 /s/ C. A. RUNDELL, JR. --------------------------------- C. A. Rundell, Jr., Chief Executive Officer and Principal Executive and Financial Officer February 14, 2005 /s/ RICHARD B. POWELL --------------------------------- Richard B. Powell Principal Accounting Officer A signed original of this written statement required by section 906 has been provided to Integrated Security Systems, Inc. and will be retained by Integrated Security Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished as an exhibit to Form 10-QSB pursuant to Item 601(b)(32) of Regulation S-B and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-QSB for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. -----END PRIVACY-ENHANCED MESSAGE-----