UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
x		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 2013

TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to _____________

Commission File Number: 0-30810

ELECTRONIC CONTROL SECURITY INC.

(Exact name of registrant as specified in its charter)

New Jersey	22-2138196
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)

790 Bloomfield Avenue, Clifton, New Jersey	07012
(Address of Principal Executive Offices)	(Zip Code)

Registrant's telephone number, including area code: (973) 574-8555

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

$0.001 Par Value Common Stock

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. oYes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. oYes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	o		Smaller reporting company	x

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x

As of October 11, 2013, there were 15,867,146 outstanding shares of the registrant's common stock. The aggregate market value of the shares of the registrant's common stock held by non-affiliates was $502,973 on December 31, 2012. Such market value was calculated using the closing price of the common stock as quoted on the OTC Bulletin Board on such date.

DOCUMENTS INCORPORATED BY REFERENCE

Information required by Part III of Form 10-K is incorporated by reference to portions of the registrant’s definitive proxy statement for its 2013 annual meeting of stockholders, which will be filed on or before October 28, 2013.

TABLE OF CONTENTS

			Page
PART I

	Item 1.	Business	1
	Item 1A.	Risk Factors	10
	Item 1B.	Unresolved Staff Comments	17
	Item 2.	Properties	17
	Item 3.	Legal Proceedings	17
	Item 4.	Mine Safety Disclosures	17

PART II

	Item 5.	Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
	Item 6.	Selected Financial Data	18
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	26
	Item 8.	Financial Statements and Supplementary Data	26
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26
	Item 9A.	Controls and Procedures	26
	Item 9B.	Other Information	27

PART III

	Item 10.	Directors, Executive Officers and Corporate Governance	27
	Item 11.	Executive Compensation	27
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	27
	Item 13.	Certain Relationships and Related Transactions and Director Independence	27
	Item 14.	Principal Accountant Fees and Services	27
	Item 15.	Exhibits, Financial Statement Schedules	27

FORWARD LOOKING STATEMENTS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-K. CERTAIN STATEMENTS MADE IN THIS DISCUSSION ARE “FORWARD LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS “MAY”, “WILL”, “SHOULD”, “EXPECTS”, “INTENDS”, “ANTICIPATES”, “BELIEVES”, “ESTIMATES”, “PREDICTS”, OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY'S INTENDED BUSINESS PLANS; EXPECTATIONS FOR CONTINUING IN BUSINESS; EXPECTATIONS AS TO PRODUCT PERFORMANCE; EXPECTATIONS AS TO MARKET ACCEPTANCE OF THE COMPANY'S TECHNOLOGY; ONGOING DELAYS BY FEDERAL AGENCIES OF APPROVED PROJECTS; CASH FLOW IMPACT ARISING FROM DISPUTE WITH PRIME CONTRACTOR; AND BELIEF IN THE SUFFICIENCY OF CASH RESERVES. BECAUSE FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.

iii

PART I

Item 1. Business

Overview

Electronic Control Security Inc. (“ECSI” or the “Company” or “we” or “us”) designs, manufactures and supplies stand-alone and fully integrated state-of-the-art entry control and perimeter intrusion detection systems for the Department of Defense, Department of Energy, nuclear power stations, and various international customers. We offer U.S. Air Force certified technology and a comprehensive services portfolio that includes: site survey/risk assessment, design & engineering, systems manufacturing and integration, factory acceptance testing, installation supervision, commissioning, operations and maintenance training.

We work closely with architects, engineers, systems integrators, construction managers and owners in the development and design of security monitoring and control systems that will afford a normative but secure environment for management, staff and visitors. To support such efforts, ECSI’s team of key personnel are technically accomplished and fully familiar with advances in planning, programming and designing systems utilizing standard peripheral components, mini/micro architecture, user friendly software/firmware selection and application.

Strategic Positioning / Competitive Advantage

ECSI’s design experts are experienced in the various technologies (both mature and emerging) being applied to security challenges in the U.S. and world-wide because they have been intimately involved in developing “turnkey” security systems for U.S. Government facilities (Department of Defense (DoD), Department of Energy (DoE), and Nuclear Regulatory Commission-licensed nuclear facilities.

We believe that our company is strategically positioned to leverage our experience and expertise because of the following:

38+ year track record with high customer retention rate;

U.S. Air Force certified technology;

Best industry warranty – 10 Years on select equipment;

General Services Administration (GSA) contract valid through July 2014, which is renewable year to year;

SeaPort-e contract valid through July 2014;

Competitive Small Business (SB) capable of taking advantage of government solicited Small Business Set-Aside contract opportunities;

Strong teaming arrangements with large systems integrators to supply technology and offer design and engineering support services to on multiple current and pending contracts;

Award by Space and Naval Warfare Systems Command (“SPAWAR”) on May 2, 2012 affords ECSI a five-year multi-million dollar contract vehicle for DoD project procurement; Separate award by SPAWAR on July 19, 2012, affords ECSI another five-year multi-million dollar contract vehicle for DoD project procurement;

$162,750,000; of these, other bidders were awarded $16.0 million and we have been awarded, as the prime contractor or as a subcontractor, contracts with an approximate value of $35.0 million over five years. We anticipate decisions relating to the remainder of these proposals during fiscal 2014; and

World-wide implementation and support through robust domestic and international marketing and distribution network with multiple direct and indirect distribution channels and strategic partnerships.

We believe that our competitive advantages include the following:

providing the highest level of perimeter protection;

offering supporting technologies and systems to enable total systems integration;

delivering systems that are easy to operate and maintain while providing superior life cycle cost performance;

solid credentials in protecting high value targets;

best industry warranty

superior technologies — technologies targeted to the specific protected environment, and

Interoperability Device Management System (IDMS) offering situational awareness and total system management.

Corporate Mission:

We believe that we have built a solid reputation as a provider of leading-edge, high technology security solutions and services. Our view is shared and supported by the many international government sectors and commercial clients that engage our services and products on a continuing basis.

Our mission is to establish ourselves as a Small Business (SB) prime contractor to take advantage of the small business opportunities that exist today and in the forseeable future. According to published government reports, approximately $2.9 billion was spent last year for small business in the government market. We project that this market sector will continue to grow in the years ahead, and we plan to be an integral part of this program.

To achieve that end we have formed a team of both small and large corporation agreements to support our company in the pursuit of this market. We believe that our past performance and in depth experience as well as that of our teaming partners will place us in a lead position to capture a good share of this market.

Based of this effort, ECSI is confident in the government sector over the next five years based on the contracts that have been awarded and now appear to be finally moving forward, with recent results described below.

On July 10, 2013, ECSI received notice that its prime contractor, ITSI Gilbane Company, on an Access Control Point (ACP) Design-Build bid was awarded a prime contract by the U.S. Army Corps of Engineers valued up to $230 million. The prime contract includes a 24 month base period of performance and three 12-month options. ECSI is awaiting subsequent task orders. As a small business, ECSI will have the opportunity to bid on a small business percentage goal of 51.43% of planned subcontracting dollars that the prime contractor has allocated under this contract. During the base period, $7,200,000 is planned to be subcontracted to ECSI and the other small business on the team. For Option Year 1, 2 and 3 respectively, $3,600,000 is planned to be subcontracted to ECSI and the other small business on the team. ECSI’s performance scope, dependent on task orders, will include site surveys, design and engineering, procurement and fabrication, integration, factory acceptance testing, installation supervision, commissioning, training, and depot level support.

On July 19, 2012, VT Milcom was awarded a prime contract under the SPAWAR National Capital Region (NCR) Security Engineering Support contract. ECSI is a subcontractor to VT Milcom on this contract.

Prior to the NCR award, ECSI was awarded a SeaPort-e prime contract for a wide range of engineering, technical and programmatic services and solutions. Functional areas may include: Engineering, System Engineering and Process Engineering Support; Prototyping, Pre-Production, Model-Making, and Fabrication Support; System Design Documentation and Technical Data Support; Configuration Management (CM) Support; Quality Assurance (QA) Support.

On October 24, 2012, ECSI received a contract worth up to $7.8 million to supply security systems and support services for the U.S. Navy. The contract includes a 5-year period of performance. Anticipated task orders include requirements for electronic security systems (access control systems, intrusion detection systems, surveillance systems, command and control equipment) and support services (design and engineering, fabrication and assembly, systems integration, testing and training, logistics and maintenance support).

As previously announced on February 22, 2013, ECSI was awarded a U.S. Navy prime contract with a contract ceiling of $249,590,000 over a five year period of performance. There are 13 awardees under the contract. While no assurance can be provided, ECSI anticipates capturing at least 10% of the task orders to be issued under this contract. The scope of this contract covers the entire spectrum of non-inherently governmental services and solutions (equipment and services) associated with the full system lifecycle support including research, development, test, evaluation, production and fielding of sustainable, secure, survivable, and interoperable Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance, Reconnaissance (C5ISR), information operations, Enterprise Information Services (EIS) and space capabilities.

Integration Support Services

ECSI has worked with system integrators on various high-threat projects including the World Trade Center in New York City after the first bombing in 1993, Rocky Flats, Golden, CO., Pantex, Amarillo, TX, naval facilities in Washingon, D.C. and Maryland, as well as UNECA’s facility in Addis Ababa, Ethopia. Each of these projects utilized different hardware and software platforms for the Central Alarm Station (CAS) and Secondary Alarm Station (SAS) including Livermore Argus System at the Pantex Facility.

It is imperative for a facility to have remote devices and subsystems integrated with the hardware and software at the CAS and SAS. The inherent design of an interoperable device management system (IDMS) lends itself to integrate with any of the remote devices and sub-systems that will be selected for a Perimeter Intrusion Detection and Assessment System (PIDAS). Based on our experience in system design, application, commissioning, training and operation, the integration of the various technologies proceeds in a seamless manner.

Consulting Support Services

The consulting support services we provide our dealers/installers and system integrators are an integral part of the security solution. Effective and efficient use of technology can be achieved only if properly utilized. Toward that end, we assist our customers in conducting risk assessment and vulnerability/criticality studies to ascertain their security requirements and develop a comprehensive risk management and mitigation program; and provide security system design support services.

Our support services generally represent the first steps in assisting the dealer/installer or systems integrator to develop a security solution. The risk assessment, threat, vulnerability and criticality analyses that the system integrator utilizes allows us to develop effective responses necessary to address and mitigate the threat.

Our design personnel are expert in their knowledge of the various technologies (mature and emerging) and their application to security challenges, both in the United States and abroad, because they continue to be intimately involved in developing security systems for government facilities in the United States and overseas.

Security Industry Overview

The Security Institute of America estimates that the worldwide market for security products and services in 2013 will exceed $9.5 billion. The industry encompasses a wide ranging, highly fragmented group of products and service providers which includes entities that market comprehensive security systems and offer security consulting services, such as dealers/installers, small single product companies, equipment manufacturers, and large systems integrators. We believe the security industry will continue to grow rapidly because:

	•	western nations have been the target of high profile terrorist attacks over the last several years that have squarely focused attention on security and threat issues;
	•	perimeter security for airports, maritime, chemical, transportation, energy and pharmaceutical facilities has been mandated by Homeland Security;
	•	newer, more effective and efficient security equipment incorporating advancements in security technology is replacing obsolete equipment; DoD & DoE are upgrading their facilities to enhance security while reducing manpower;
	•	nuclear power stations both in the United States and overseas have increased the level of security based on recent NRDC security requirements; and
	•	private industry is operating in more remote geographic locations and higher risk environments.

Product Design

We design and develop new products based upon market requirements and as deemed necessary to meet clients' specific needs. We research and assess threat and vulnerability issues and design and engineer our products in-house, with outside consultants as needed, and in conjunction with joint venture partners to meet the requirements of clients based upon the results of such research. We investigate new and emerging technologies that have application in the security industry and seek to license these technologies which we may incorporate into our product line.

Products, Systems and Technologies

The services and technologies required to create a secure environment must address the entire range of security concerns that challenge government and commercial institutions, including the protection of personnel and physical assets.

Our Integrated Security Solutions are comprised of one or more subsystems and components that perform a variety of security functions for a facility with a single Command and Control Center and, in certain cases, a back up Command & Control Center that incorporates many of our systems integrated with legacy and Government or owner furnished technologies.

Product Focus

Automated Entry Control System (AECS) automated vehicle/personnel gate system consisting of Radio Frequency Identification (RFID) to read vehicle tags, license plate cameras (front & rear), personnel card readers (e.g., proximity, barcode) and keypad, intercom and camera, anti-tailgating sensors, electric gates. Integrated system interfaced with facility’s databases for rapid identification of vehicles/personnel for reasonable traffic flow.

Infrared Perimeter Intrusion Detection(IPIDÒ) U.S. Air Force Certified. Standard with Deparment of Energy and Nuclear Regulatory Commission power stations. System offers an undefeatable barrier of pulsed infrared beams to create multiple intrusion detection zones, each with a range of up to 330 feet. Modular design can be stacked to form an invisible wall that cannot be penetrated without detection.

Fiber Optic Intelligence Detection System FOIDSÒ Standard with Department of Energy and several international oil & gas companies. Most advanced fiber optic sensor technology available for fence/wall line perimeter monitoring and intrusion detection. FOIDS® uses single mode fiber optic cable and highly sensitive interferometry technology for intrusion detection along fences and walls up to a zone length of 3.5 miles. The system detects climbing, cutting, and pulling along the fence/wall line. Technology does not use electronics in the field, has a range of over 60km, and uses single mode fiber optic cable.

PTZ Cameras The view of PTZ cameras can be adjusted a number of ways: Human manipulation, motion detection, door contact signals or automatically to a preset pattern. The use of PTZ cameras to automatically track an intruder based on an alarm from another technology provides the best solution.

Day/Night & Thermal Imaging Cameras Highest Rated, all weather environmental enclosures (-40°F to +149°F). High resolution sensor for clear, sharp imagery. Uniformity of picture (no white or dark borders found in other cameras). Smooth transition between extreme temperature differences. No “residue” trailing in picture when camera shifts positioning. Range up to 21Km (13 miles). Built-in video “trip-wire” intelligent motion detection. Full service support, including Maintenance and Repair

ECSI Long Range Day / Night CCTV ECSI’s Long Range Day/Night camera offers imaging systems for any security application where lighting is impractical, too expensive or where long-range performance is required. For border security, port security, and critical infrastructure applications, the system has proven vital to threat detection initiatives.

Vehicle Gate Automation ECSI’s smart gate consists of Radio Frequency Identification (RFID) equipment to read vehicle tags, personnel card readers (e.g., proximity cards, bar-coded information on identification cards and the Access Control Card (ACC), biometric validation, etc.), visual and acoustic devices supplying the Human-Machine Interface to alert the Security Force (SF) team to identification and threat assessment results, a computer-based access control system interfacing with the facility databases.

ECSI Long Range Radar Potential intruders entering oil fields, refineries, bases, or crossing borders can now be detected and monitored remotely using an innovative radar design. The radar systems, named “Area Intrusion Monitoring System” (AIMS) operate with uniquely low power and light weight solid state components.

Water Infrastructure Sensing Equipment (WISE®) Proprietary real-time, on-Line bio/chemical detection and reporting system. Continually monitors water flow for chemical and biological contaminants. Immediately reports out-of-parameter conditions (via e-mail or SCADA) to any number of recipients. Draws sample of contaminated water for further analysis. Offers capability of bypassing of shutting down flow of contaminated water. DoD/EPA tested.

Interoperable Device Management System (IDMS)

Comprehensive interoperability platform for total system management capability. IDMS delivers comprehensive integration of security systems (transparent to the end user); single view of events and incidents (via customized role-specific graphical user interfaces and dashboards); process-driven event management (via graphical workflow tools, response plans and customized alarm stack design); analysis, status and management information (built-in report designers to provide timely and effective reports and statistics on compliance to security policies). Open architecture allows integration of new and legacy systems – ability to monitor and control systems simultaneously through one easy-to-use interface (automated entry control systems, intrusion detection systems, day/night & thermal imaging cameras, etc.) This technology permits the Command Control Communication and Computer (CCC&C) center to operate as the custodial and security nerve center where officers in the center have the ability to perform the IDMS monitoring and control process on one new network.process.

Emergency Response Stations:

The Emergency Response Stations provide the immediate response to potential security incursions. The surveillance system is monitored by sensor technology supplemented by CCTV cameras. The ERS is networked to the surveillance system and other sensor nodes through a redundant fiber optic network. The optical cameras provide immediate assessment of any potential target in the operational sector.

We believe that the technology we offer is qualitatively comparable to or more effective than those offered by our competitors because our products:

provide low nuisance and false alarm rates;

are reliable in virtually any environmental condition;

in many cases can be user specified and adapted to their environment; and

are subject to low installation and maintenance costs.

Markets for Our Products

We have identified a number of markets for our products and have developed programs to gain access to those target markets. The U.S. Government, along with many of its agencies and departments, represents a significant market for our products. We are now implementing a proactive marketing program to increase sales of our products to the following U.S. Government agencies, all of which have purchased our products in the past and will continue to be among our top customers. Further, in many instances, laws have been enacted and mandates decreed for compliance with some minimum-security standards. Airport security is a prime example. We target these entities as well as entities where we can demonstrate the need for security measures.

Primary markets that we target include:

	•	the U.S. Government, its agencies and departments, including the Department of Defense and the Department of Energy;
	•	large industrial facilities, including pharmaceutical companies and major office complexes;
	•	energy facilities, including nuclear power stations, utilities, chemical-petrochemical pipelines;
	•	foreign/export opportunities in all of the above-noted target markets.

Our open-ended contract with the General Services Administration (GSA), which has been extended through July 31, 2014 and which is renewable year to year, authorizes the U.S. Government and a network of eligible sources to purchase materials and services from us on negotiated and approved prices without having to undergo a full competitive bid. The Company is a technology supplier to the three large system integrators selected for the FPS² program addressing United States Air Force Bases over the next four years.

Foreign/Export Opportunities. Government operations and private industries in foreign countries are all subject to the same security issues that challenge similar entities in the United States. We, along with our strategic teaming partners and international sales representatives, continue to seek penetration of these major market opportunities, i.e. Kingdom of Saudi Arabia, Qatar, Egypt, Uganda, Ethiopia and Chile.

Marketing

We have developed a multi-tiered marketing plan, allowing us to effectively market products to each of the separate government and industry segments identified as target markets both in the United States and internationally. Our marketing strategy highlights product and support service strengths as they apply to each particular industry.

The primary goals of our marketing strategy are to:

•

Broaden the base of potential clients, domestically and internationally, and

•

Demonstrate the efficacy of our products and support services.

We entered into strategic partnerships, teaming, and representative relationships with major multi-national corporations in each of the industries that comprise our target markets. These companies generally enjoy a strong market presence in their respective industries and we believe that our teaming agreements with these entities afford us added credibility. These entities frequently subcontract our services and purchase our products in connection with larger projects and, in turn, support the company on projects we are pursuing as the prime contractor. During fiscal 2011 through 2013, we entered into teaming and marketing agreements with ITSI, SAIC, Fortis, Calnet, Honeywell, Culmen, ERIS, and Boeing.

During fiscal 2013, we submitted proposals on projects for Department of Defense facilities and certain nuclear power stations in the United States and Southeast Asia valued at approximately $162,750,000. We anticipate decisions relating to these proposals during fiscal 2014.

Members of our management team have many years of experience in the security industry. Each member is assigned a corporate account and thereby establishes relationships with government and commercial organizations in a specific market.

We are projecting our international business to develop through a network of independent sales representatives. Agreements are in place with various entities that allow us to maintain a presence in 11 countries worldwide. These agreements generally extend for a period of two years and provide the dealer/installer with price discounts from current price schedules as an incentive to market our products in their geographic area.

A presence is maintained at the major trade conferences that address our target markets and we advertise in the relevant conference publications.

Business Growth Strategy

Our mission is to establish ourselves as a Small Business (SB) prime contractor to take advantage of the small business set-aside opportunities that exist today and in the foreseeable future.

In order to achieve a sustainable and continuous growth rate, we believe that we must devote additional resources to marketing and product development. Specifically, we have or intend to:

Dedicate the necessary resources for research and development and explore opportunities for our currently certified systems to be tested and certified by additional government sponsored agencies in order to open additional markets for these products. We will also explore opportunities for our other (non-certified) systems to be tested and certified by specific government sponsored agencies in order to open new markets for these particular products.

•

Expand our global presence. We entered into sales agreements with a number of multi-national companies to represent and support our products in Chile, Kingdom of Saudi Arabia, Africa, India, China, and other Middle East countries.

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Design and develop new systems. We will continue to develop new security systems to expand our portfolio of proprietary products. We believe that this will help us to open new markets and retain our position as a leading edge provider of technology based security equipment.

•

License new and emerging technologies. We will continue to identify, analyze and acquire new and emerging technologies for application in the security industry. We will seek to acquire technologies that will enhance our existing systems and develop new products.

•

Upgrade existing products. We have and will continue to upgrade existing products by taking advantage of technological advancements to ensure that they remain state-of-the-art.

Customers

We provide products and services to certain customers who maintain their own integration engineering and installation departments. During the past five years we have provided products to approximately 50 nuclear power stations, Department of Energy and other government agencies covering over 220 projects.

Under usual business conditions, given the nature of our customers, products, and support services, we receive relatively large orders for products and services from a relatively small number of customers during any one period. We are committed to expanding our business with each existing customer as well as broadening our customer base. During the fiscal year ended June 30, 2013, there were four customer groups which comprised a significant portion of our revenues. For Fiscal Year 2013, the Department of Defense accounted for 45% of our net revenues, nuclear power stations for 10%, Department of Energy for 28%, and foreign customers for 15%. For Fiscal Year 2012, the Department of Defense accounted for 65% of our net revenues, nuclear power stations, 25%; and the Department of Energy 5 %.

Competition

Competition for U.S. government contracts is intense. We compete against a large number of established multi-national corporations as well as smaller, more specialized companies that concentrate their resources in particular areas. As a result of the diverse requirements of the U.S. Government and our commercial customers, we frequently collaborate with other companies to compete for large contracts and bid against these team members in other situations.

Competition is intense among a fragmented and wide ranging group of product and service providers, including security equipment manufacturers, providers of integrated security systems, systems integrators, consulting, engineering and design firms and others that provide individual elements of a system, in the future against existing or potential competitors.

We believe we are able to sustain our competitive position in the industry because:

	•	our principal officers, security analysts, design personnel and sales people have an aggregate of over 250 years of experience in the security industry;
	•	we have the ability to analyze security risks, design, engineer and manufacture products customized to a client's requirements;
	•	our products address a wide range of security requirements;
	•	our products are among the most technologically advanced and the highest quality available;
	•	our products are reliable, and relatively easy and inexpensive to install and maintain; and
	•	we have been successful in teaming with large multinational companies to market and incorporate our products into their product offerings, thereby contributing to the credibility and efficacy of our products.

Manufacturing

Manufacturing operations are maintained at our facility in Clifton, New Jersey. ECSI operates in a facility having Department of Defense Secret Clearance. The premises consist of 12,200 square feet, including 2,200 administrative and design & engineering, 2,000 inventory, and 8,000 for purchasing, configurable and custom manufacturing (both hardware and software), testing, and quality assurance. ECSI is registered to the ISO 9001:2008 Quality Management System, based on its scope of supply including design, development, commissioning, and servicing of physical security and data communications systems. Activities include the procurement of materials, product assembly and component integration, product assurance, quality control and final testing.

Individual components that we purchase comprise some of our products or we subcontract the manufacture of specific subsystems to third parties. We believe that we are not overly dependent on any one supplier for the components of our products. In the event of any disruption in supply or discontinuation of production by any of our present suppliers, we believe that the components used in our products are available from numerous sources at competitive prices. Various aspects of the software programming required in connection with our computer products are designed and written by in-house personnel or are subcontracted to third parties.

We have not entered into any long-term contracts for the purchase of components but rather rely on rolling forecasts to determine the number of units we will sell and the components required. We maintain an inventory of certain long-lead items required in the manufacture of our products, as reflected in our balance sheet. To date, we have been able to obtain supplies of these components and we believe that adequate quantities are available to meet our needs.

To date, compliance with environmental laws has not impacted our manufacturing or other operations, although there can be no assurance that this will continue to be the case.

Intellectual Property and Other Proprietary Rights

Proprietary protection for our technological expertise, products and product candidates are important to our business. Currently, we rely upon trade secrets, application experience and continuing technological innovation to develop and maintain our competitive position. We also rely on a combination of trade secret protection and non-disclosure agreements to establish and protect our proprietary rights.

Our success is dependent to a great extent on our proprietary knowledge, innovative skills, technical expertise and marketing ability. Our intention is not to rely primarily on patents or other intellectual property rights to protect or establish our market position.

We obtained trademarks in the United States, South Korea, United Kingdom and Saudi Arabia for “FOIDS®” (Fiber Optic Intelligent Detection System); “IPID®” (Infrared Perimeter Intrusion Detection); “RDIDS®” (Rapid Deployment Intrusion Detection System); “IDMS®” (Intrusion Detection & Monitoring System); “LanDataSecure®” (LAN and WAN Security Monitoring); “WISE®” (Water Infrastructure Sensing Equipment), “Vacusonic®” (a water purification process), and “Gamma Shark®” (a water radiation detection system). We have also filed for trademarks in other countries.

We require all employees, consultants and contractors to execute non-disclosure agreements as a condition of employment with or engagement by our company. We cannot be certain, however, that we can limit unauthorized or wrongful disclosures of unpatented trade secret information.

Although we continue to implement protective measures and intend to defend our proprietary rights, policing unauthorized use of our technology or products is difficult and we cannot be certain that these measures will be effective or successful.

Research and Development

The forces that drive the design and development of new products include the need to meet new security threats, incorporate newly developed technologies and satisfy a client's unique security requirements. We research and assess threat and vulnerability issues at selected facilities within our target markets and design and engineer products in-house with outside consultants as necessary and in conjunction with joint venture partners to meet the needs of clients based upon the results of such research. We investigate new and emerging technologies in the security industry and seek to license certain technologies which we then incorporate into our products.

During the years ended June 30, 2013 and 2012, we expended $82,065 and $139,322, respectively, on research and development activities.

Product Warranty

IPID® sensors are warranted for ten years, under normal use, against defects in workmanship and material from date of installation of the system on the customer's premises. All other components are warranted to the extent of the warranty given by the actual manufacturer. FOIDS® processors are warranted for a ten year period. For the years ended June 30, 2013 and 2012, net expenses attributable to warranties were well below the amounts accrued.

Technology Licensing Arrangements

As we endeavor to design and manufacture the most effective and efficient technology based security solutions, we review and investigate new and emerging technologies that have application in the security industry. Frequently, we seek to incorporate these technologies into our systems. We are party to agreements to use certain proprietary IT and security systems including Meridian Technologies Inc. (for fiber optic networking affording video voice and data over single fiber), You Tech (for day/night pan/tilt/zoom long range infrared/laser illumination with video motion detection capability from two to 20 kilometers), a magnetic fence and/or in-ground sensor system, and Vindicator/Honeywell for data acquisition.

Employees

As of June 30, 2013, we had 15 employees, of whom 14 were full-time employees.

We have relationships with 13 independent sales representative and/or dealer-installer organizations covering specific regions in the U.S.A., Central America, South America, United Kingdom, Africa, the Middle East, and Southeast Asia.

Based on our teaming agreements with large system integrators, we are able to address large projects by utilizing the technical expertise of these teaming partners in support our factory engineering and/or in-field personnel requirements on any given project.

None of our employees are covered by a collective bargaining agreement or represented by a labor union. We consider our relationship with our employees to be satisfactory.

Item 1A. RISK FACTORS

Our business, financial condition and results of operations could be materially adversely affected by various risks, including, but not limited to the principal risks noted below.

Risks Relating to Our Business

Because we depend on U.S. Government contracts, a delay in the completion of the U.S. Government’s budget process could delay procurement of the products, services and solutions we provide and have an adverse effect on our future revenues.

The funding of U.S. Government programs is subject to an annual congressional budget authorization and appropriation process. In years when the U.S. Government does not complete its budget process before the end of its fiscal year on September 30, government operations are typically funded pursuant to a “continuing resolution,” which allows federal government agencies to operate at spending levels approved in the previous budget cycle, but does not authorize new spending initiatives. When the U.S. Government operates under a continuing resolution, delays can occur in the procurement of the products, services and solutions that we provide and may result in new initiatives being cancelled. We have from time to time experienced a decline in revenues as a result of this annual budget cycle, and we could experience similar declines in revenues from future delays in the budget process. In years when the U.S. Government fails to complete its budget process or to provide for a continuing resolution, a federal government shutdown may result. This could in turn result in our incurrence of substantial labor or other costs without reimbursement under customer contracts, or the delay or cancellation of key programs, which could have a negative effect on our cash flows and adversely affect our future results. In addition, when supplemental appropriations are required to operate the U.S. Government or fund specific programs and passage of legislation needed to approve any supplemental appropriation bill is delayed, the overall funding environment for our business could be adversely affected.

We derive a substantial amount of our revenues from the sale of our solutions either directly or indirectly to U.S. government entities pursuant to government contracts, which differ materially from standard commercial contracts and may be subject to cancellation or delay without penalty, any of which may produce volatility in our revenues and earnings.

We derived approximately 72% and 70% of our revenues for each of the years ended June 30, 2013 and 2012, respectively, from government related contracts on which we serve as a subcontractor.

Government contracts frequently include provisions that are not standard in private commercial transactions, and are subject to laws and regulations that give the federal government rights and remedies not typically found in commercial contracts, including provisions permitting the federal government to:

terminate our existing contracts;

reduce potential future income from our existing contracts;

modify some of the terms and conditions in our existing contracts;

suspend or permanently prohibit us from doing business with the federal government or with any specific government agency;

impose fines and penalties;

subject us to criminal prosecution;

suspend work under existing multiple year contracts and related task orders if the necessary funds are not appropriated by Congress;

decline to exercise an option to extend an existing multiple year contract; and

claim rights in technologies and systems invented, developed or produced by us.

In addition, government contracts are frequently awarded only after formal competitive bidding processes, which have been and may continue to be protracted and typically impose provisions that permit cancellation in the event that necessary funds are unavailable to the public agency. Competitive procurements impose substantial costs and managerial time and effort in order to prepare bids and proposals for contracts that may not be awarded to us. In many cases, unsuccessful bidders for government agency contracts are provided the opportunity to formally protest certain contract awards through various agencies, administrative and judicial channels. The protest process may substantially delay a successful bidder's contract performance, result in cancellation of the contract award entirely and distract management. We may not be awarded contracts for which we bid, and substantial delays or cancellation of purchases may follow our successful bids as a result of such protests.

Because our sales tend to be concentrated among a small number of customers during any period, our operating results may be subject to substantial fluctuations. Accordingly, our revenues and operating results for any particular quarter may not be indicative of our performance in future quarters, making it difficult for investors to evaluate our future prospects based solely on the results of any one quarter.

Given the nature of our customers and products, we receive relatively large orders for products from a relatively small number of customers. Consequently, a single order from one customer may represent a substantial portion of our sales in any one period and significant orders by any customer during one period may not be followed by further orders from the same customer in subsequent periods. Our sales and operating results are subject to very substantial periodic variations. Since quarterly performance is likely to vary significantly, our results of operations for any quarter are not necessarily indicative of the results that we might achieve for any subsequent period. Accordingly, quarter-to-quarter comparisons of our operating results may not be meaningful.

We rely on rolling forecasts when ordering components and materials for the manufacture of our products which could cause us to overestimate or underestimate our actual requirements. This may result in an increase in our costs or prevent us from meeting customer demand.

We use rolling forecasts based on anticipated orders to determine component requirements. Lead times for materials and components vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for such components. As a result, our component requirement forecasts may not be accurate. If management overestimates our component requirements, we may have excess inventory, which would increase our costs. If management underestimates component requirements, we may have inadequate inventory, which could interrupt manufacturing and delay delivery of product to customers. Any of these occurrences would negatively impact our business and results of operations.

Our product offerings involve a lengthy sales cycle, and management may not anticipate sales levels appropriately, which could impair profitability.

Our products and services are designed for medium to large commercial, industrial and government facilities, such as military installations, office buildings, nuclear power stations and other energy facilities, airports, correctional institutions and high technology companies desiring to protect valuable assets and/or prevent intrusion into high security facilities. Given the nature of our products and customers, sales cycles can be lengthy as customers conduct intensive investigations of specific competing technologies and providers. Moreover, orders received from governments may be subject to funding appropriations, which may not be approved. For these and other reasons, the sales cycle associated with our products is typically lengthy and subject to a number of significant risks over which we have little or no control.

During fiscal 2012 and 2013, we submitted proposals on projects for Department of Defense facilities and certain nuclear power stations in the United States and Southeast Asia valued at approximately $162,750,000. Of these, other bidders were awarded $16.0 million and we have been awarded, as the prime contractor or as a subcontractor, contracts with an approximate value of $35.0 million over five years. We anticipate decisions relating to the remainder of these proposals during fiscal 2014.

We anticipate that business from projects outside the United States will comprise an increasing part of our business and, accordingly, we are subject to risks associated with doing business outside the United States.

During the fiscal years ended June 30, 2013 and 2012, we generated approximately 15% and 7%, respectively, of our business from projects outside the United States. We anticipate that the revenue portion from overseas operations will increase significantly during Fiscal 2014 as a percentage of sales. Our international business operations are subject, generally, to the financial and operating risks of conducting business internationally, including, but not limited to:

	•	unexpected changes in or impositions of legislative or regulatory requirements;
	•	potential hostilities and changes in diplomatic and trade relationships; and
	•	political instability.

One or more of these or other factors not referenced herein or now known to us could materially impact our business and results of operations could suffer.

We depend on our relationships with strategic partners as a source of business and our business and results of operations could suffer if these relationships are terminated.

We have entered into strategic partnerships or teaming arrangements with several large multinational corporations that promote our products and services and incorporate our products into their projects. In the event that we are unable to maintain these strategic relationships for any reason, our business, operating results and financial condition could be adversely affected.

We compete against entities that have significantly greater name recognition and resources than we do, enabling them to respond more quickly to changes in customer requirements and allocate these resources to marketing efforts.

The security industry is highly competitive and continues to become increasingly so as security issues and concerns have become a primary consideration at both government and private facilities worldwide. Competition is intense among a wide ranging and fragmented group of product and service providers, including security equipment manufacturers, providers of integrated security systems, systems integrators, consulting firms, engineering and design firms and others that provide individual elements of a system, some of which are larger than we are and possess significantly greater name recognition, assets, personnel, sales and financial resources. These entities may be able to respond more quickly to changing market conditions by developing new products that meet customer requirements or are otherwise superior to our products and may be able to more effectively market their products than we can because of the financial and personnel resources. We cannot assure investors that we will be able to distinguish ourselves in a competitive market. To the extent that we are unable to successfully compete against existing and future competitors, our business, operating results and financial condition would be materially and adversely affected.

We rely on third parties for key components used in our products.

We rely on suppliers for several key components utilized in the manufacture of our products. Our reliance on suppliers involves certain risks, including a potential inability to obtain an adequate supply of required components, price increases, timely delivery and component quality. We cannot assure you that there will not be additional disruptions of our supplies in the future. Disruption or termination of the supply of components could delay shipments of products and could have a material adverse affect on our business, operating results and financial condition.

If our subcontractors fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted.

Some of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services that we must provide to our customers. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor. A failure by one or more of our subcontractors to satisfactorily perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as the prime contractor. Subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders.

Our services and reputation may be adversely affected by product defects or inadequate performance.

In the event our products do not perform to specifications or are defective in any way, our reputation may be adversely affected and we may suffer a loss of business and a corresponding loss in revenues.

If we are unable to retain key executives or hire new qualified personnel, our business will be adversely affected.

Our success greatly depends on our ability to retain existing management and attract key technical, sales, marketing, information systems, and financial and executive personnel. We are especially dependent on the continued services of our senior management team and our key marketing personnel. The loss of any of these people could have a materially detrimental effect- on our business. We have not entered into employment agreements with any of these people. We do not maintain key person life insurance on any of our personnel. In addition, we are seeking to engage senior sales staff and if we fail to attract, hire or retain the necessary personnel, or if we lose the services of any member of our senior management team, our business could be adversely affected.

If we are unable to obtain additional funds when needed, we may not be able to fulfill large orders or take advantage of any unforeseen opportunities that may arise.

Management believes that our currently available cash resources, as well as anticipated revenue from firm purchase orders will allow us to meet our operating requirements through fiscal 2014. However, it is conceivable that we may raise additional funds to support strategic acquisitions and/or joint venture opportunities, and/or to satisfy any additional significant purchase orders that it may receive. If and or when additional capital is required there are no assurances that we will be successful in obtaining additional required capital on reasonable terms and conditions.

Risks Relating to Our Common Stock

We have outstanding two classes of preferred stock which have preference over the common stock as to dividends and liquidation distributions, among other preferential rights.

As of the date hereof, we have issued and outstanding 300,000 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) and 645 shares of Series B Preferred Stock (which together with the Series A Preferred Stock is referred to as the “Preferred Stock”). The Preferred Stock affords holders a preference to assets upon liquidation, a cumulative annual dividend and is convertible into shares of common stock, all of which rights impact the outstanding shares of common stock. The Preferred Stock's right to annual dividends makes less likely the possibility that we will declare dividends on the common stock. In the event of a liquidation of the Company's assets, holders of Preferred Stock will have a right to receive as a liquidation payment any remaining assets of the Company prior to any distributions to holders of the common stock and the holders of the Preferred Stock may be able to block actions otherwise approved by the holders of the common stock if such action is adverse to their rights. In addition, holders of common stock will suffer dilution upon any conversion of the Preferred Stock which could reduce the market value of the common stock.

Our common stock price has fluctuated considerably and may not appreciate in value.

Prices for our common stock have in the past, and could continue to, fluctuate significantly and will be influenced by many factors, including the liquidity of the market for the common stock, investor perception of the industry in which we operate and our products, and general economic and market conditions. Factors which could cause fluctuation in the price of our common stock include:

	•	conditions or trends in the industry,
	•	failure to keep pace with changing technology,
	•	costs associated with developing new products and services,
	•	costs associated with marketing products and services may increase significantly,
	•	the timing of sales and the recognition of revenues from them,
	•	government regulations may be enacted which affect how we do business and the products which may be used at government facilities,
	•	downward pressure on prices due to increased competition,
	•	changes in our operating expenses,
	•	sales of common stock,
	•	actual or anticipated variations in quarterly results, and
	•	changes in financial estimates by securities analysts.

The stock market in general has experienced extreme price and volume fluctuations. The market prices of shares of security-related companies experienced fluctuations that often have been unrelated or disproportionate to the operating results of these companies. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility might be worse if the trading volume of our common stock is low.

Our common stock is considered a “penny stock” and may be difficult to trade.

The SEC has adopted regulations that generally define “penny stock” as an equity security with a market or exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is less than $5.00 per share, and therefore may be designated as a “penny stock” according to SEC rules. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:

	•	make a special written suitability determination for the purchaser,
	•	receive the purchaser's written agreement to a transaction prior to sale,
	•	provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser's legal remedies, and
	•	obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.

Under these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and it may be more difficult to sell our securities. In addition, you may find it difficult to obtain accurate quotations of our common stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price.

Our common stock is traded over the counter, which may result in higher price volatility and less market liquidity for our common stock.

Our common stock is quoted on the OTC Bulletin Board. As such, our common stock may have fewer market makers, lower trading volume and a larger spread between bid and asked prices than securities listed on an exchange such as the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market. These factors may result in higher price volatility and less market liquidity for our common stock.

Our principal stockholders have significant voting power and may take actions that may not be in the best interest of other stockholders.

Our executive officers, directors and principal stockholders control approximately 47% of our currently outstanding shares of common stock. If these stockholders act together, they may be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.

We do not anticipate paying cash dividends on our common stock in the near future, and the lack of dividends may have a negative effect on our stock price.

We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the near future.

A significant number of our shares will be eligible for sale, and their sale could depress the market price of our common stock.

Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock.

There is an approximate aggregate of 16.0 million shares of our common stock outstanding, some or all of which may also be offered from time to time in the open market pursuant to Rule 144, and these sales may have a depressive effect on the market for our shares of common stock. In general, a non-affiliated person who has held restricted shares for a period of six months may, under Rule144, sell into the market shares of our common stock. Such sales may be repeated once every three months, and any of the restricted shares may be sold by a non-affiliate after they have been held for two years.

We could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their voting rights.

Our Certificate of Incorporation authorizes the issuance of up to approximately an additional 3,898,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue a series of preferred stock with dividends, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our Company.

The liability of our directors is limited under State of New Jersey corporate law.

As permitted by the corporate laws of the State of New Jersey, our Certificate of Incorporation includes a provision that eliminates the personal liability of our directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to certain exceptions. In addition, our by-laws provide that we are required to indemnify our officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and we are required to advance expenses to our officers and directors as incurred in connection with proceedings against them for which they may be indemnified.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Our corporate headquarters are located at 790 Bloomfield Avenue, Clifton, New Jersey where we lease approximately 12,200 square feet of space divided among administrative (2,600 square feet) and manufacturing (9,600 square feet) space. We have renewed our lease for this space through April 30, 2018 at a rent of $7,098 per month with an option to renew through April 30, 2028.

Item 3. Legal Proceedings

ECSI International, Inc. v. Lockheed Martin Global Training and Logistics. On March 7, 2012, we, through our wholly-owned subsidiary, ECSI International, Inc. filed a lawsuit in the United States District Court for the District of New Jersey against Lockheed Martin Global Training and Logistics (“Lockheed Martin”). The lawsuit, as detailed in the First Amended Complaint and Demand for Trial by Jury (the “Amended Complaint”) dated March 29, 2012, alleges breach of contract and tortious interference by Lockheed Martin and seeks actual damages of approximately $978,000, as well as punitive damages, costs and such further relief as the Court deems equitable and proper. In addition, the Amended Complaint seeks payment under Lockheed Martin’s payment bonds required by the United States Navy Facilities Engineering Command. In Fiscal 2013, Lockheed Martin was granted a motion to have the matter moved from New Jersey to Maryland. We had been aggressively pursuing our claim against Lockheed Martin. However, due to cash flow constraints, we have not pursued our claims against Lockheed Martin in Maryland.

We are not involved in any other legal proceedings that we anticipate would result in a material adverse effect on our business or operations.

Item 4. Mine Safety Disclosures

Not Applicable.

PART II

The Common Stock of the Company trades on the OTC Bulletin Board under the trading symbol EKCS. Although trading in our Common Stock has occurred on a relatively consistent basis, the volume of shares traded has been sporadic. There can be no assurance that an established trading market will develop, that the current market will be maintained or that a liquid market for our Common Stock will be available in the future. Investors should not rely on historical stock price performance as an indication of future price performance.

The following table shows the quarterly high and low bid prices for our Common Stock over the last two completed fiscal years as quoted on the OTC Bulletin Board. The prices represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commission and may not represent actual transactions.

	Closing Bid
	High		Low
Fiscal 2013
April 1 – June 30, 2013	$	0.17	$	0.05
January 1 – March 31, 2013	$	0.18	$	0.05
October 1 – December 31, 2012	$	0.15	$	0.04
July 1 – September 30, 2012	$	0.12	$	0.07

Fiscal 2012
April 1 – June 30, 2012	$	0.20	$	0.06
January 1 – March 31, 2012	$	0.16	$	0.08
October 1 – December 31, 2011	$	0.27	$	0.15
July 1 – September 30, 2011	$	0.26	$	0.17

As of October 3, 2013, we had 187 holders of record of common stock. This number of holders of record does not include beneficial owners of the Company's common stock whose shares are held in the names of various security holders, dealers, and clearing agencies.

Dividend Policy

The Company has not paid any cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. The Company intends to retain any earnings to finance the growth of its business. There can be no assurance that the Company will ever pay cash dividends.

Issuer Purchases of Equity Securities

We do not have a stock repurchase program for our common stock.

Item 6. Selected Financial Data

Not applicable.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We design, develop, manufacture and market stand-alone and fully integrated state-of-the-art entry control and perimeter intrusion detection systems for Department of Defense, Department of Energy, nuclear power stations, and various international customers. We offer U.S. Air Force certified technology and a comprehensive services portfolio that includes: site survey/risk assessment, design & engineering, systems manufacturing and integration, factory acceptance testing, installation supervision, commissioning, operations and maintenance training.

Our mission is to establish ourselves as a Small Business (SB) prime contractor to take advantage of the small business opportunities that exist today and in the foreseeable future. To achieve that end we have formed a team of both small and large corporation agreements to support our company in the pursuit of this market. We believe that our past performance and in depth experience as well as that of our teaming partners will place us in a lead position to capture a good share of this market.

We entered into strategic partnerships, teaming, and representative relationships with major multi-national corporations in each of the industries that comprise our target markets. These companies generally enjoy a strong market presence in their respective industries and we believe that our teaming agreements with these entities afford us added credibility. These entities frequently subcontract our services and purchase our products in connection with larger projects and, in turn, support the company on projects we are pursuing as the prime contractor. During fiscal 2011-2013, we entered into teaming and marketing agreements with ITSI, SAIC, Fortis, Calnet, Honeywell, Culmen, ERIS, and Boeing.

Recent Developments

Our revenues and results from operations for the years ended June 30, 2013 and 2012 continue to be negatively impacted by the ongoing delays by agencies of the U.S. Government in proceeding with approved projects, funding projects already awarded, and in awarding new contracts. We have invested significant time and personnel resources in fiscal 2013 and 2012 in providing proposals on future projects, both as a prime contractor (Small Business) and as a subcontractor. We are awaiting the results of the bidding process. Our cash flow and liquidity continue to be severely impacted with the refusal by Lockheed Martin to pay us for the accounts receivable due from them totaling almost $1 million. These amounts are the subject of litigation, as described in Item 3 of this Annual Report on Form 10-K.

On June 28, 2013, one of our wholly-owned subsidiaries amended its previous line of credit agreement with Atlantic Stewardship Bank (“ASB”). Under the terms of the amended loan agreement, the principal balance outstanding on June 28, 2013 will be paid in monthly installments of $5,000 including interest, beginning July 15, 2013 and continuing through May 15, 2015. The remaining outstanding balance is due on June 15, 2015. Under the terms of the amended agreement, the variable interest rate increased to the prime rate plus 1%, with a minimum of 5.875%. The prior line of credit agreement had carried an interest rate of the prime rate plus .25%, with a minimum rate of 4.5%. The previous covenant requiring a minimum debt service coverage ratio was eliminated in the amended agreement.

The above term loan is collateralized by the subsidiary’s accounts receivable, inventories, equipment and general intangibles. As part of the amended agreement, our President and Chief Executive Officer provided a personal guaranty of the amounts due to ASB, up to a maximum of $250,000. Three of our officers executed subordination agreements which subordinated a combined total of $848,040 of amounts due to those officers to amounts due by the subsidiary to ASB. Because these subordinated amounts are not to be paid until ASB has been repaid, the subordinated amounts have been classified as noncurrent liabilities.

Contract Awards

In Fiscal 2013 we were awarded, as the prime contractor or as a subcontractor, several contracts from units of the Department of Defense. These contracts awarded provide that task orders under the contracts will require competitive bids to be submitted by us as those task orders are issued. Through Fiscal 2012 and 2013, we have sought to expand our business both domestically and internationally by continuing to submit proposals in response to Request for Proposals (“RFP’s”).

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates its estimates, including those related to inventory reserves, allowance for doubtful accounts and deferred taxes. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies and the related judgments and estimates affect the preparation of our financial statements.

Inventory Valuation — Inventories are valued at lower of cost or market. We routinely evaluate the composition of our inventory to identify obsolete or otherwise impaired inventories. Inventories identified as impaired are evaluated to determine if reserves are required.

Allowance for Doubtful Accounts — The allowance for doubtful accounts is comprised of two parts, a specific account analysis and a general reserve. Accounts where specific information indicates a potential loss may exist are reviewed and a specific reserve against amounts due is recorded. As additional information becomes available such specific account reserves are updated. Additionally, a general reserve is applied to the aging categories based on historical collection and write-off experience.

Accounting for Income Taxes — We record a valuation allowance to our deferred tax assets for the amount that is more likely than not to be realized. While we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net amount recorded, an adjustment to the deferred tax asset would increase income in the period such determination has been made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged against income in the period such determination was made. A valuation allowance in the amount of $2,416,226 has been recorded against our deferred tax assets at June 30, 2013.

We account for stock-based compensation in accordance accounting guidance now codified as Financial Accounting Standards Board (FAS) Accounting Standards Codification (ASC) Topic 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of FAS ASC Topic 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period of the individual equity. We use the Black-Scholes option-pricing model to estimate the fair value of options. In order to calculate the fair value of the options, assumptions are made for certain components of the model, including risk-free interest rate, volatility, expected dividend yield rate and expected option life. Although we use available resources and information when setting these assumptions, changes to the assumptions could cause significant adjustments to the valuation.

Results of Operations

Year Ended June 30, 2013 (“Fiscal 2013 Period”) Compared to Year Ended June 30, 2012 (“Fiscal 2012 Period”)

Revenues. We had net revenues of $981,700 for the Fiscal 2013 Period, as compared to revenues of $2,216,082 for the Fiscal 2012 Period, representing a decrease of approximately 56%. Of the revenues reported in the Fiscal 2013 period, approximately 85% are attributable to domestic projects and 15% are attributable to international projects. The decrease in revenues in the Fiscal 2013 Period is attributable to the delays encountered by the Government related contract awards, Requests for Proposals (“RFP’s”) and task order awards. The Government has delayed the review and approval process which has had a further negative impact on sales for Fiscal 2013.

Gross Margins. Gross margins for the Fiscal 2013 Period were 17% of revenue as compared to 9% of revenue for the Fiscal 2012 Period. The increase in gross margins is primarily attributable to reductions in costs, primarily personnel costs, in the Fiscal 2013 Period and to a change in the order mix of equipment sales and support services the reduction in the revenues in the Fiscal 2013 Period, partially offset by the lower revenues. We experienced a decrease in proposal, design and engineering support service costs as a percentage of revenues due primarily to the reductions in personnel costs in the Fiscal 2013 Period.

Research and Development. Research and development expenses were $82,065 in the Fiscal 2013 Period as compared to $139,322 in the Fiscal 2012 Period. Research and development expenses were reduced with lower personnel costs during this period.

Selling, General and Administrative (SG&A). Selling, general and administrative expenses decreased in the Fiscal 2013 Period to $1,149,050 from $1,525,988 in the Fiscal 2013 Period primarily because of reductions in personnel costs. Both the Fiscal 2013 Period and the Fiscal 2012 Period included an allowance for doubtful accounts in the amount of $200,000.

Write-off of Goodwill. The Company wrote off goodwill in the Fiscal 2013 Period totaling $196,962.

Stock Based Compensation. In the Fiscal 2012 Period, we granted stock options to directors and employees that were valued at $96,815 and granted restricted stock to employees valued at $24,850. In the 2013 Period, we did not issue stock options to our directors or employees. The value of options is amortized over the vesting period of the underlying award. Stock-based compensation is non-cash and, therefore, has no impact on cash flow or liquidity.

Interest Expense. Interest expense in the Fiscal 2013 Period was $84,032 as compared to $72,998 for the Fiscal 2012 Period.

Other (Income) Expense, Net. Other, Net in the Fiscal Period 2013 included the results of litigation, related to an employment matter incidental to our business, of $20,000, along with $42,398 in legal fees awarded to the plaintiff’s attorney.

Income Tax Benefit. We recognized a net $194,681 deferred income tax benefit in Fiscal 2013 and a $130,000 deferred tax benefit Fiscal 2012. The deferred income tax benefits were recorded based on expectations of that we will utilize a portion of our existing net operating loss carryforwards with future operating earnings. The Company and its subsidiaries have net operating loss carryforwards for federal income tax purposes of about $6.4 million, of which about $120,000 expire in 2017 – 2021, $1.5 million expire in 2022 – 2025, and $4.8 million expire in 2026 – 2033, and about $3.5 million for state income tax purposes expiring in 2014 – 2033.

Net Loss. Net loss before dividends for the Fiscal 2013 period was $1,221,153 as compared to a net loss before dividends of $1,531,773 in Fiscal 2012.

Dividends Related to 10% Series B Convertible Preferred Stock.

We recorded dividends totaling $147,641 on our Series B Convertible Preferred Stock in Fiscal 2013 and $149,506 in Fiscal 2012. In lieu of a cash payment, we have elected, under the terms of the agreement whereby these securities were sold, to add this amount to the stated value of the Series B Convertible Preferred Stock. These dividends are non-cash and, therefore, have no impact on our net worth or cash flow.

Liquidity and Capital Resources

The consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We incurred losses before dividends of $1,221,153 and $1,531,773 in the years ended June 30, 2013 and 2012, respectively. Our cash flow and liquidity have been severely impacted by the refusal by Lockheed Martin to pay us for the accounts receivable due from them totaling nearly $1 million. Atlantic Stewardship Bank (the “Bank”) has converted the prior line of credit to a term loan, and no further borrowings are available under the agreement (refer to note 6 below). Through the years ended June 30, 2013 and 2012, the principal source of funds used to finance the Company’s operations has been advances from officers, shareholders and affiliates and accrued costs due to those parties. There is no assurance that those parties will continue to provide the operating funds. Through Fiscal 2012 and 2013, there were continuing delays in release of funding at the Department of Defense and Department of Energy on projects where we serve as a prime contractor and as a subcontractor. The budget constraints and budget uncertainty at the U.S. government agencies have significantly reduced the issuance of orders and delayed projects for all participants in our industry. These factors raise concern about the Company’s ability to continue as a going concern.

We have working capital of approximately $1.003 million and stockholders’ equity of approximately $1.422 million as of June 30, 2013. In June 2013, the Bank converted the prior line of credit into a term loan, due in installments from July 2013 through June 2015. In connection with this agreement with the Bank, three of the Company’s officers agreed to subordinate a total of $848,040 of amounts due to those officers to amounts due by a subsidiary of the Company to the Bank (refer to Notes 6 and 7 below). The classification of the portion of the Bank loan due after June 30, 2014 and the amounts subordinated by the officers resulted in increased the Company’s working capital by $1,288,637. Officers, shareholders and affiliates provided funds in the form of cash advances and deferral of accrued costs and expenses due to them during Fiscal 2013 of $524,412. If we should require financing of our future accounts receivable, we have access to a secured accounts receivable line of credit with Amerisource of approximately $3 million.

Our ability to continue operations is dependent upon our ability to generate sufficient cash flow either from operations, from continued funds from officers and shareholders or from additional financing. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Our cash flow has been adversely impacted by the refusal of Lockheed Martin to forward to us proceeds of accounts receivables payable to us. This matter is currently the subject matter of litigation initiated by us and discussed further above in Item 3 of this Annual Report in From 10-K. Nonetheless, we believe that cash on hand, together with anticipated collection of accounts receivable during the short term, will be sufficient to provide for our working capital needs for the next twelve months. However, we may need to raise funds in order to allow for shortfalls in anticipated revenue or to expand existing capacities and/or to satisfy any additional significant purchase order that we may receive. At the present time, we have no commitments or assurances of additional revenue beyond the firm purchase orders we have received. We have held discussions with various parties in order to raise additional funds through debt or equity issuance; to date we have not entered into any agreements.

Inventory decreased by $118,464 in Fiscal 2013 due to utilization of inventory on hand to fill orders received in Fiscal 2013. We anticipate a further decrease during the first half of Fiscal 2014 for shipments to be released.

Accounts receivable, net of the allowance for doubtful accounts decreased to $586,319 at June 30, 2013, as compared to $875,896 at June 30, 2012. The reduction was primarily due to an increase in the allowance for doubtful accounts of $200,000 due to amounts not yet collected on the receivable from Lockheed Martin, which is subject to legal proceedings described further below, and to the lower revenues in Fiscal 2013.

On June 28, 2013, one of our wholly-owned subsidiaries amended its previous line of credit agreement with Atlantic Stewardship Bank (“ASB”). Effective May 15, 2013, under the terms of the amended loan agreement, the principal balance outstanding on June 28, 2013 will be paid in monthly installments of $5,000 including interest, beginning July 15, 2013 and continuing through May 15, 2015. The remaining outstanding balance is due on June 15, 2015. Under the terms of the amended agreement, the variable interest rate increased to the prime rate plus 1%, with a minimum of 5.875%. The prior line of credit agreement had carried an interest rate of the prime rate plus .25%, with a minimum rate of 4.5%. The previous covenant requiring a minimum debt service coverage ratio was eliminated in the amended agreement.

The above term loan is collateralized by Subsidiary’s accounts receivable, inventories, equipment and general intangibles. As part of the amended agreement, the Company’s President and Chief Executive Officer provided a personal guaranty of the amounts due to ASB, up to a maximum of $250,000. Three of the Company’s officers executed subordination agreements which subordinated a combined total of $848,040 of amounts due to those officers to amounts due by the Subsidiary to the ASB. Because these subordinated amounts are not to be paid until ASB has been repaid, the subordinated amounts have been classified as noncurrent liabilities.

Accounts payable and accrued expenses have increased by $110,193 in the Fiscal 2013 Period. This increase in accounts payable and accrued expenses is directly related to the timing of payments due to the delays in collecting the receivable from Lockheed Martin and to the lower revenues.

Investing activities, acquisitions of property, plant and equipment, for Fiscal 2013 were further reduced to $9,000 from an already reduced amount of $24,800 in Fiscal 2012 in order to conserve cash. We do not have any material commitments for capital expenditures going forward.

In Fiscal 2008, the Company financed the purchase of equipment from a vendor in the amount of $101,762, evidenced by a bearing interest at the rate of 8% per annum. As the Company purchased product from the vendor a portion of each invoice will be charged to reduce the note balance. The note was repaid in Fiscal 2013.

In October 2012, $160,000 of amounts due to officers was converted into 2 million shares of common stock. In March 2013, an additional $100,000 of amounts due to officers was converted into 2 million shares of common stock. In June 2013, in connection with the amendment of the loan agreement with ASB, three of the Company’s officers agreed to subordinate a total of $848,080 of amounts due to those officers to amounts due by the subsidiary to ASB. During Fiscal 2013, the total of the amounts due to officers, shareholders and affiliates and subordinated liabilities to officers and shareholders increased to $1,289,851 at June 30, 2013 from $1,025,439 at June 30, 2012. This increase of $264,412 in the amounts due to officers and the conversion of $260,000 into common stock resulted in additional funds provided to the Company totaling about $524,412.

Discussion of Results, Business Outlook and Identifiable Industry Trends

Spending in the security industry has decreased over the last year as the U.S. Congress has continued to reduce funding homeland security initiatives, including Department of Energy and Department of Defense programs. We expect this trend will continue for the foreseeable future. The Company has pursued more Small Business and international opportunities to offset this reduction. As a result, the level of new proposals continues and our committed backlog, including awards for the U.S. Navy, U.S. Air Force, nuclear power stations, and international projects is one of the largest in our history. We cannot, however, assure you that we will complete any or all of the orders comprising our backlog within the anticipated time frame. Our experience has taught us that all of these anticipated releases and new contracts are subject to cancellation or delay, thus we cannot be certain of the total revenue to be realized from our present backlog or submitted proposals.

During the Fiscal 2013 period, we submitted bids on 21 new projects for work to be performed at our Clifton, New Jersey facilities. We cannot be certain that we will be successful in winning any of the bids tendered. Even if we do receive orders, contracts are subject to cancellation by customers upon short notice with little or no penalty, as is typical in our industry.

We are committed to offering our customers comprehensive, integrated security system solutions that employ the latest technologies and address the most critical security requirements. The security industry continues to evolve rapidly as new technologies are developed specifically to meet security challenges and existing technologies are being adapted for new uses. In addition, the public and private sectors continue to analyze and distinguish new security risks and industry participants seek to develop technologies and products to fill these newly discerned requirements. We remain committed to pursuing teaming and OEM agreements that may add to our revenues and enhance both our product line and, ultimately, our ability to compete in our industry.

Business Outlook

As global economic prospects changed during 2013, proposals and commitments increased due to the need for improved security levels while reducing manpower and maintenance costs. Currently, proposals for new orders continue to grow. However, our historical results have taught us that the release of funds that support proposals may never be forthcoming. Furthermore, as is customary in the security industry, our contracts are subject to cancellation or delay at any time with little notice or penalty. Government based purchase orders which are subject to legislative appropriations are particularly sensitive to economic and political conditions. Thus, we cannot be certain of the total realized value and revenue which we will generate from proposals and committed orders. We expect to receive releases and task orders for a significant portion of our contract commitments within the next twelve months, although we cannot be certain that we will complete any or all of such orders within the anticipated time frame.

The security industry as a whole has changed. The security market historically has been a product oriented opportunity for manufacturers, both within the United States and internationally. The difficulty the industry traditionally faced has been the ability to develop a standard security platform that would permit systems integrators to design a seamless interface between the multiple products and subsystems required to address threats in high-security environments. We have developed a platform that addresses seamless integration of multiple technologies including legacy and government-furnished equipment. We expect this trend to continue for the foreseeable future, since the demand for integrated platforms has become a necessity.

Business Approach

Over the last several years we have tried to develop contacts and relationships through our marketing programs and staff with clearly defined and targeted potential strategic partners. The strategic relationship framework provides a comprehensive and thorough mechanism for developing and implementing corporate strategy. Our advisory board determined early in our existence that, given our size and the criticality of our business situation, the strategic relationship framework would provide us with a non-resource exhaustive and more expedient and efficient means of entering new markets. This approach has met with considerable success and we continue to seek strategic alliances.

Recently Issued Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes, which applies to all entities that have unrecognized tax benefits when a net operating loss, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (our Fiscal 2015). We do not expect the adoption of this amendment to have a material impact on our consolidated financial statements.

In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters, which applies to the release of the cumulative translation adjustment into net income, when a parent either sells a part or all of its investment in a foreign entity. The amendments in this update are effective for public companies prospectively beginning after December 15, 2013 (our Fiscal 2015) and interim and annual periods thereafter. We do not expect the adoption of this amendment to have a material impact on our consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income, which contains amendments to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. For public entities, the amendments are effective prospectively, for reporting periods beginning after December 15, 2012 (our interim period beginning January 1, 2013). The adoption of this amendment did not have a material impact on our consolidated financial statements.

In October 2012, the FASB issued ASU 2012-04, Technical Corrections and Improvement, which contains amendments to make technical corrections, clarifications, and limited-scope improvements to various topics throughout the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. For public entities, the amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012 (our Fiscal 2014). We do not expect the adoption of this amendment to have a material impact on our consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. This update amends ASC 350, Intangibles – Goodwill and Other to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test. Under that option, an entity would no longer be required to calculate the fair value of the intangible asset unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (our Fiscal 2014). This update does not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, on comprehensive income presentation to allow an entity the option to present the total of comprehensive income, the components of net income, and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This update should be applied retrospectively. The adoption of this amendment resulted in the addition of the Consolidated Statements of Comprehensive Income (Loss) to our consolidated financial statements.

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 8. Financial Statements

The information called for by this Item 8 is included following the “Index to Financial Statements” contained in this Annual Report on Form 10-K.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A Controls and Procedures.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

We 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 time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer (our principal financial and accounting officer) to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e).

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our President and Chief Executive Officer (who also serves as our principal executive officer) and our Chief Financial Officer (our principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our President and Chief Executive Officer and Chief Financial officer have concluded that our disclosure controls and procedures were effective.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

The Company’s management, including our principal executive officer and our principal financial and accounting officer, does not expect that our disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Our management, including our principal executive officer and our principal financial and accounting officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under the framework in Internal Control - Integrated Framework , our management concluded that our internal control over financial reporting was effective as of June 30, 2013.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the fourth quarter ended June 30, 2013, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

The information called for by Items 10, 11, 12, 13 and 14 will be contained in the Company's definitive proxy statement which the Company intends to file within 120 days after the end of the Company's fiscal year ended June 30, 2013 and such information is incorporated herein by reference.

Item 15. Exhibits

Exhibit No.	Description	Location Reference
3.1	Certificate of Incorporation of Electronic Control Security Inc.	1
3.2	Certificate of Amendment to Certificate of Incorporation of Electronic Control Security Inc.	2
3.3	Certificate of Amendment to Certificate of Incorporation	3
3.4	By-Laws of Electronic Control Security Inc.	1
3.5	Certificate of Incorporation of SEM Consultants III, Inc.	1

3.6	By-Laws of SEM Consultants III, Inc.	1
3.7	Certificate of Incorporation of ECSI International, Inc.	1
3.8	By-Laws of ECSI International, Inc.	1
3.9	Certificate of Incorporation of ECSI FOIDS, Inc.	1
3.10	By-Laws of ECSI FOIDS, Inc.	1
3.11	Certificate of Incorporation of ECSI-DSA, Inc.	1
3.12	By-Laws of ECSI-DSA, Inc.	1
3.13	Memorandum of Association of ECSI Security Communications, Inc., a Middle East Corporation	2
3.14	Articles of Association of ECSI Security Communications, Inc., a Middle East Corporation	2
10.1	Lease Agreement with 580 Brighton Road Associates for space in Clifton, New Jersey.	1
10.2	Securities Purchase Agreement dated June 30, 2004.	3
10.3	Securities Purchase Agreement dated as of January 11, 2006, by and among Electronic Control Security Inc. and the purchasers named therein.	4
10.4	Business Loan Agreement dated as of March 15, 2011 between ECSI International, Inc. and Atlantic Stewardship Bank	5
10.5	Commercial Security Agreement dated as of March 15, 2011 between ECSI International, Inc. and Atlantic Stewardship Bank	5
10.6	Change in Terms Agreement executed on June 28, 2013 and dated as of May 15, 2013 between ECSI International, Inc. and Atlantic Stewardship Bank	6
10.7	Commercial Security Agreement executed on June 28, 2013 and dated as of May 15, 2013 between ECSI International, Inc. and Atlantic Stewardship Bank	6
14.1	Code of Ethics and Business Conduct	4
23.1	Consent of Demetrius Berkower LLC	7
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.	7
31.2	Certifications of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.	7
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	7
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	7

* * * *

1.	Incorporated by reference to such exhibit filed with Electronic Control Security Inc.'s Registration Statement on Form 10-SB filed with the Commission on February 16, 2001.
2.	Incorporated by reference to such exhibit filed with Electronic Control Security Inc.'s Registration Statement on Form SB-2 filed with the Commission on June 6, 2002.
3.	Incorporated by reference to such exhibit filed with Electronic Control Security Inc.'s Current Report on Form 8-K filed with the Commission on July 1, 2004.
4.	Incorporated by reference to such exhibit filed with Electronic Control Security Inc.'s Current Report on Form 8-K filed with the Commission on January 18, 2006
5.	Incorporated by reference to such exhibit filed with Electronic Control Security Inc.'s Quarterly Report on Form 10-Q filed with the Commission on May 3, 2011.
6.	Incorporated by reference to such exhibit filed with Electronic control Security Inc.’s Current Report on Form 8-K filed with the Commission on July 9, 2013
7.	Filed as an Exhibit hereto.

SIGNATURES

Pursuant to the requirements of The Exchange Act of 1934 as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ELECTRONIC CONTROL SECURITY INC.
(Registrant)

By:	/s/ Arthur Barchenko	By:	/s/ Daryl K. Holcomb
	Arthur Barchenko		Daryl K. Holcomb
	Chief Executive Officer		Chief Financial Officer
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)

Date:	October 15, 2013	Date:	October 15, 2013

Person	Capacity	Date
/s/ Arthur Barchenko	President, Chief Executive Officer	October 15, 2013
Arthur Barchenko	and Director

/s/ Natalie Barchenko	Treasurer and Director	October 15, 2013
Natalie Barchenko

/s/ Daryl K. Holcomb	Chief Financial Officer and Director	October 15, 2013
Daryl Holcomb

/s/ Edward Snow	Director	October 15, 2013
Edward Snow

/s/ Stephen Rossetti	Director	October 15, 2013
Stephen Rossetti

/s/ Gordon E. Fornell	Director	October 15, 2013
Gordon E. Fornell

/s/ Ronald Thomas	Director	October 15, 2013
Ronald Thomas

/s/ Norman Barta	Director	October 15, 2013
Norman Barta

ELECTRONIC CONTROL SECURITY INC.

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

With Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm	31

Consolidated Balance Sheets	32

Consolidated Statements of Operations	33

Consolidated Statements of Comprehensive Income	34

Consolidated Statements of Cash Flow	35

Consolidated Statement of Changes in Shareholders’ Equity	36

Notes to Consolidated Financial Statements	37 - 50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Electronic Control Security Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Electronic Control Security, Inc. and Subsidiaries as of June 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for each of the two years in the period ended June 30, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Electronic Control Security, Inc. and Subsidiaries as of June 30, 2013 and 2012, and the consolidated results of their operations and cash flows for each of the two years in the period ended June 30, 2013, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Demetrius Berkower LLC

Wayne, New Jersey

October 15, 2013

Electronic Control Security Inc.

Consolidated Balance Sheets

	June 30,			June 30,
	2013			2012

ASSETS
Current assets
Cash and cash equivalents	$	556		$	1,403
Accounts receivable, net of allowance of $425,000 and $225,000		586,319			875,896
Inventories		1,842,203			1,960,667
Current portion of deferred income taxes		167,499			143,784
Other current assets		22,828			116,730
Total current assets		2,619,405			3,098,480

Property, equipment and software development costs - net		219,402			295,687
Intangible assets - net		798,932			874,667
Goodwill		-			196,962
Deferred income taxes		678,981			508,016
Other assets		17,643			7,263
	$	4,334,363		$	4,981,075
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	1,142,391		$	1,032,198
Due to officers, shareholders and affiliates		441,771			1,025,439
Line of credit		-			537,500
Current maturities of long-term debt		32,418			2,639
Total current liabilities		1,616,580			2,597,776

Noncurrent liabilities
Long-term debt		440,557			-
Subordinated liabilities to officers and shareholders		848,080			-
Other		7,000			-

Total liabilities		2,912,217			2,597,776

Shareholders' equity
Series A Convertible Preferred stock, cumulative, $.01 par value; $2.00 liquidation preference; 5,000,000 shares authorized, 300,000 and 300,000 shares issued and outstanding, respectively		3,000			3,000
Series B 10% Convertible Preferred stock, cumulative, $.001 par value; $2,434 and $2,205 per share liquidation preference; 2,000 shares authorized, 645 shares issued and outstanding		1			1
Common Stock, $.001 par value; 30,000,000 shares authorized; 15,967,146 and 11,967,146 shares issued; 15,867,146 and 11,867,146 shares outstanding		15,967			11,967
Additional paid-in capital		14,119,909			13,716,268
Accumulated deficit		(12,711,521	)		(11,342,727	)
Accumulated other comprehensive income		4,790			4,790
Treasury stock, at cost, 100,000 shares		(10,000	)		(10,000	)
Total shareholders' equity		1,422,146			2,383,299

	$	4,334,363		$	4,981,075

See Notes to Consolidated Financial Statements.

Electronic Control Security Inc.

Consolidated Statements of Operations

	Year
	Ended
	June 30,
	2013			2012

Revenues	$	981,700		$	2,216,082
Cost of revenues		815,948			2,008,421

Gross profit		165,752			207,661

Research and development		82,065			139,322
Selling, general and administrative expenses		1,149,050			1,525,988
Write-off of goodwill		196,962			-
Stock based compensation		-			121,665

Loss from operations		(1,262,325	)		(1,579,314	)

Other expenses (income)
Interest expense		84,032			72,998
Other, net		63,398			-

Total other expenses (income)		147,430			72,998

Loss before income taxes		(1,409,755	)		(1,652,312	)

Income tax benefits		(188,602	)		(120,539	)

Loss before dividends		(1,221,153	)		(1,531,773	)

Dividends related to convertible preferred stock		147,641			149,506

Net loss attributable to common shareholders	$	(1,368,794	)	$	(1,681,279	)


Net loss per share:
Basic	$	(0.10	)	$	(0.15	)
Diluted	$	(0.10	)	$	(0.15	)

Weighted average number of common shares and equivalents:
Basic		13,927,420			11,123,708
Diluted		13,927,420			11,123,708

See Notes to Consolidated Financial Statements.

Electronic Control Security Inc.

Consolidated Statements of Comprehensive Income (Loss)

	Year
	Ended
	June 30,
	2013			2012

Loss before dividends	$	(1,221,153	)	$	(1,531,773	)

Other comprehensive income, net of tax:
Foreign currency translation adjustments		-			-

Comprehensive loss	$	(1,221,153	)	$	(1,531,773	)

See Notes to Consolidated Financial Statements.

Electronic Control Security Inc.

Consolidated Statements of Cash Flows

	Year
	Ended
	June 30,
	2013			2012

DECREASE IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net loss before dividends	$	(1,221,153	)	$	(1,531,773	)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation and amortization		161,018			192,940
Deferred income taxes		(194,681	)		(130,000	)
Increase in allowance for doubtful accounts		200,000			200,000
Write-off of goodwill		196,962			-
Stock based compensation		-			121,665
Increase (decrease) in cash attributable to changes in
Accounts receivable		89,577			(12,394	)
Inventories		118,464			(16,991	)
Other current assets		93,904			9,216
Accounts payable and accrued expenses		110,193			647,272
Other assets		(3,378	)		(60	)

Net cash used in operating activities		(449,094	)		(520,125	)

Cash flows from investing activities:
Acquisition of property plant and equipment		(9,000	)		(24,800	)

Net cash used in investing activities		(9,000	)		(24,800	)

Cash flows from financing activities:
Proceeds from short-term debt		-			112,500
Payments on short-term debt		(64,525	)		-
Payments on long-term debt		(2,639	)		(11,598	)
Increase (decrease) in due to officers		524,412			438,385

Net cash provided by financing activities		457,248			539,287

Net decrease in cash and cash equivalents		(846	)		(5,638	)

Cash and cash equivalents at beginning of period		1,402			7,040

Cash and cash equivalents at end of period	$	556		$	1,402

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	25,077		$	24,164
Taxes	$	-		$	4,894

Supplemental disclosures of noncash financing activities:
Conversion of amounts due to officers and shareholders into common stock	$	260,000		$	109,000

See Notes to Consolidated Financial Statements.

Electronic Control Security Inc.

Consolidated Statements of Changes in Shareholders Equity

	Series A Convertible				Series B 10% Convertible									Additional						Other
	Preferred Stock				Preferred Stock					Common Stock				Paid-in			Accumulated			Comprehensive		Treasury
	Shares		Amount		Shares			Amount		Shares		Amount		Capital			Deficit			Income		Stock			Total

Balances at July 1, 2011		300,000	$	3,000		791		$	1		10,529,911	$	10,530	$	13,337,534		$	(9,661,448	)	$	4,790	$	(10,000	)	$	3,684,407

Conversion of preferred stock into common stock						(146	)				410,014		410		(410	)										-

Stock issued in lieu of amounts payable											672,221		672		108,328											109,000

Dividend on preferred stock															149,506			(149,506	)							-

Stock based compensation											355,000		355		121,310											121,665

Net loss																		(1,531,773	)							(1,531,773	)

Balances at June 30, 2012		300,000		3,000		645			1		11,967,146		11,967		13,716,268			(11,342,727	)		4,790		(10,000	)		2,383,299

Stock issued in lieu of amounts payable											4,000,000		4,000		256,000											260,000

Dividend on preferred stock															147,641			(147,641	)							-

Net loss																		(1,221,153	)							(1,221,153	)

Balances at June 30, 2013		300,000	$	3,000		645		$	1		15,967,146	$	15,967	$	14,119,909		$	(12,711,521	)	$	4,790	$	(10,000	)	$	1,422,146

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Nature of Operations

Electronic Control Security, Inc. (the “Company”) is engaged in the design, development, manufacture and marketing of technology-based integrated security solutions. The Company also performs support services consisting of risk assessment and vulnerability studies to ascertain a customer's security requirements in developing a comprehensive risk management and mitigation program as well as product design and engineering services in support of the systems integrators and dealers/installers providing these services to a client.

The Company’s office and manufacturing facilities are located in Clifton, New Jersey. Products and services are marketed domestically and internationally to national and local government entities, chemical and petrochemical facilities, energy facilities, commercial transportation centers, border security, and water and agricultural resources.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred losses before dividends of $1,221,153 and $1,531,773 in the years ended June 30, 2013 and 2012, respectively. Our cash flow and liquidity have been severely impacted by the refusal by Lockheed Martin to pay us for the accounts receivable due from them totaling nearly $1 million. Atlantic Stewardship Bank (the “Bank”) has converted the prior line of credit to a term loan, and no further borrowings are available under the agreement (refer to note 6 below). Through the years ended June 30, 2013 and 2012, the principal source of funds used to finance the Company’s operations has been advances from officers, shareholders and affiliates and accrued costs due to those parties. There is no assurance that those parties will continue to provide the operating funds. Through Fiscal 2012 and 2013, there were continuing delays in release of funding at the Department of Defense and Department of Energy on projects where we serve as a prime contractor and as a subcontractor. The budget constraints and budget uncertainty at the U.S. government agencies have significantly reduced the issuance of orders and delayed projects for all participants in our industry. These factors raise concern about the Company’s ability to continue as a going concern.

The Company has working capital of about $1.003 million and shareholders’ equity of about $1.422 million as of June 30, 2013. In June 2013, the Bank converted the prior line of credit into a term loan, due in installments from July 2013 through June 2015. In connection with this agreement with the Bank, three of the Company’s officers agreed to subordinate a total of $848,040 of amounts due to those officers to amounts due by a subsidiary of the Company to the Bank (refer to Notes 6 and 7 below). The classification of the portion of the Bank loan due after June 30, 2014 and the amounts subordinated by the officers resulted in increased the Company’s working capital by $1,288,597. Officers, shareholders and affiliates provided funds in the form of cash advances and deferral of accrued costs and expenses due to them during Fiscal 2013 of $524,412. If the Company should require financing of its future accounts receivable, the Company has access to a secured accounts receivable line of credit with Amerisource of approximately $3 million.

In Fiscal 2013 the Company was awarded, as the prime contractor or as a subcontractor, several contracts from units of the Department of Defense. These contracts awarded provide that task orders under the contracts will require competitive bids to be submitted by the Company as those task orders are issued. Through Fiscal 2012 and 2013, the Company has sought to expand its business both domestically and internationally by continuing to submit proposals in response to Request for Proposals (“RFP’s”).

The Company’s ability to continue its operations is dependent upon our ability to generate sufficient cash flow either from operations, from continued funds from officers and shareholders or from additional financing. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Principles of Consolidation

The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Accounts Receivable

Trade accounts receivable are recorded net of an allowance for expected losses. The allowance is estimated from historical performance and projections of trends.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. A reserve for potentially obsolete or slow-moving inventory is provided based on management’s analysis of inventory aging, inventory levels and future sales forecasts. The Company has provided a reserve for obsolescence of $80,000 of finished goods inventory at June 30, 2013 and 2012.

Property and Equipment and Depreciation

Depreciation is provided for by the straight-line method over the estimated useful lives of the assets, which vary from three to ten years. Cost of repairs and maintenance are charged to operations in the period incurred.

Software Development Costs

Software development costs are expensed as incurred until technological feasibility is established. Software development costs incurred subsequent to establishing technological feasibility are capitalized and amortized. Amortization is provided based on the greater of the ratios that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight-line method over the estimated useful life of the product. The estimated useful life for the straight-line method is determined to be five years. There were no software development costs capitalized in the year ended June 30, 2013.

Earnings per Share

Basic earnings per share is computed based on the weighted-average number of shares of the Company's common stock outstanding. Diluted earnings per share are computed based on the weighted-average number of shares of the Company's common stock, including common stock equivalents outstanding.

Certain common shares consisting of stock options and convertible preferred stock that would have an anti-dilutive effect were not included in the diluted earnings per share attributable to common stockholders for the years ended June 30, 2013 and 2012.

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

	Year Ended June 30,
	2013		2012
Denominators:
Weighted-average shares outstanding used to compute basic earnings per share		13,927,420		11,123,708
Effect of dilutive stock options		—		—

Weighted-average shares outstanding and dilutive securities used to compute dilutive earnings per share		13,927,420		11,123,708

For the year ended June 30, 2013, there were outstanding potential common equivalent shares of 3,829,006 compared to 3,957,153 for the year ended June 30, 2012, which were excluded from the computation of diluted earnings per share because the effect would have been anti-dilutive. These potential dilutive common equivalent shares may be dilutive to future diluted earnings per share.

Foreign Currency Translation

The functional currency of the Company's foreign subsidiaries is the local currency. Accordingly, the Company translates all assets and liabilities into U.S. dollars at current rates. Revenues, costs, and expenses are translated at average rates during each reporting period. Gains and losses resulting from the translation of the consolidated financial statements are excluded from results of operations and are reflected as a translation adjustment and a separate component of stockholders' equity.

Gains and losses resulting from foreign currency transactions are recognized in the consolidated statement of operations in the period they occur.

Cash and Cash Equivalents

The Company considers all deposits with an original maturity of three months or less to be cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Long-lived assets

The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.

Revenue Recognition

The Company recognizes product revenue at the time of shipment. Revenues from consulting and design services are recognized at the time the services are rendered. Revenue under contracts with periods of performance of greater than one year is recognized utilizing the percentage of completion method. The Company had no contracts at June 30, 2013, with durations of more than one year.

The Company also provides professional and technical services under specific contracts, based on a time and material plus fixed profit basis. Revenue on these contracts are recognized to the extent of costs incurred plus a proportionate amount of profit earned. Contract costs including indirect costs are subject to audit by agencies of the United States Government. Management believes future adjustments, if any, from government cost audits will not have a material effect on the financial statements.

Warranty Reserve

All of the Company’s products carry a warranty and the Company maintains a reserve for warranty work based on historical experience and anticipation of possible warranty work. IPID® sensors are warranted for ten years, under normal use, against defects in workmanship and material from date of installation of the system on the customer's premises. All other components are warranted to the extent of the warranty given by the actual manufacturer. FOIDS® processors are warranted for a ten year period. For the years ended June 30, 2013 and 2012, net expenses attributable to warranties were well below the amounts accrued.

Research and Development

Research and development expenditures are expensed as incurred. Research and development costs for the years ended June 30, 2013 and 2012 amounted to $82,065 and $139,322, respectively.

Income Taxes

The Company accounts for income taxes in accordance with accounting guidance now codified as Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

Effective July 1, 2007, the Company adopted the provisions of FASB ASC 740-10-05, “Accounting for Uncertainties in Income Taxes.” The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company is no longer subject to federal or state and local income tax examinations by tax authorities for years before 2007.

Intangible Assets

The cost of licenses, patents, and trademarks are being amortized on the straight-line method over their useful lives, ranging from five to 20 years.

Advertising Costs

Advertising costs are reported in selling, general and administrative expenses, and include advertising, marketing and promotional programs. These costs are charged to expense in the year in which they are incurred. The Company, and did not incur advertising costs for the year ended June 30, 2013, and incurred $4,800 in advertising costs for the year ended June 30, 2012.

Shipping and Handling

Shipping and handling costs are recorded as costs of revenues and are approximately $14,272 and $25,700 for the years ended June 30, 2013 and 2012, respectively.

Stock Based Compensation

The Company accounts for stock-based compensation in accordance with accounting guidance now codified as FASB ASC Topic 718, “Compensation – Stock Compensation.” Under the fair value recognition provision of FASB ASC Topic 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option pricing model.

Fair Value of Financial Instruments

Substantially all of the Company's financial instruments, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and other current liabilities, are carried at, or approximate, fair value because of their short-term nature or because they carry market rates of interest.

Recent Pronouncements

In July 2013, the FASB issued ASU 2013-11, Income Taxes, which applies to all entities that have unrecognized tax benefits when a net operating loss, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (our Fiscal 2015). We do not expect the adoption of this amendment to have a material impact on our consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income, which contains amendments to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. For public entities, the amendments are effective prospectively, for reporting periods beginning after December 15, 2012 (our interim period beginning January 1, 2013). The adoption of this amendment did not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, on comprehensive income presentation to allow an entity the option to present the total of comprehensive income, the components of net income, and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This update should be applied retrospectively. The adoption of this amendment resulted in the addition of the Consolidated Statements of Comprehensive Income (Loss) to our consolidated financial statements.

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

Reclassifications

Certain items in prior year’s information have been reclassified to conform to the current year’s presentation.

Note 3 - Inventories

Inventories at June 30, 2013 and 2012 consisted of the following:

	2013			2012
Raw materials	$	228,553		$	281,021
Work-in-process		323,836			277,570
Finished goods		1,369,814			1,482,076
Subtotal		1,922,203			2,040,667
Allowance		(80,000	)		(80,000	)
	$	1,842,203		$	1,960,667

Note 4 – Property, Equipment and Software Development Costs

Property, equipment and software development costs at June 30, 2013 and 2012 consisted of the following:

	2013		2012
Furniture and fixtures	$	54,032	$	54,032
Machinery and equipment		1,064,183		1,064,182
Improvements		23,008		23,008
Software		125,914		116,914
Software development costs		163,896		163,896
		1,431,033		1,422,032
Less: accumulated depreciation and amortization		1,211,631		1,126,345
	$	219,402	$	295,687

Depreciation and amortization expense was $85,285 and $117,204 for the years ended June 30, 2013 and 2012, respectively.

Note 5 – Intangibles

	June 30, 2013				June 30, 2012
	Gross Carrying		Accumulated		Gross Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Amortized intangible assets:
Licenses	$	50,000	$	50,000	$	50,000	$	50,000
Patent		852,793		390,598		852,793		343,726
Trademarks		577,263		240,526		577,263		211,663
Other		8,881		8,881		8,881		8,881

	$	1,488,937	$	690,005	$	1,488,937	$	614,270

Amortization expense charged to operations was $75,735 for each of the years ended June 30, 2013 and 2012. Future annual amortization expense for the licenses and other intangible assets is expected to be approximately $75,700 each year for the patents and trademarks through 2022, their estimated remaining useful lives.

In January 2009, the Company agreed to release the minority shareholders of its Middle East subsidiary of all claims, including amounts receivable from them in the amount of $146,962 in exchange for their shares in the subsidiary. The Company recorded this additional investment in the subsidiary to goodwill. This goodwill was written off in Fiscal 2013.

Note 6 – Short-Term and Long-term Debt

On June 28, 2013, ECSI International, Inc., (the “Subsidiary”), one of the wholly-owned subsidiaries of the Company, and Atlantic Stewardship Bank (the “Bank”) amended the terms of the credit line established in March 2011 (the “Amendment”), such that, effective May 15, 2013, the agreement became a term loan. Under the terms of the Amendment, the principal amount outstanding of $472,975 under the credit line is to be paid in monthly installments of $5,000, including interest, beginning July, 15, 2013 and continuing through May 15, 2015. The variable interest rate has been increased to the prime rate plus 1%, with a minimum interest rate of 5.875%. The interest rate under the line of credit, prior to the Amendment, had been prime plus .25%, with a minimum of 4.5%.

On March 15, 2011, the Company, through the Subsidiary, had entered into a revolving line of credit agreement with the Bank which allowed for borrowings up to $475,000. The line of credit had included a Minimum Debt Service Coverage Ratio, as defined in the agreement, of 1.1. This requirement was eliminated in the Amendment.

The above term loan is collateralized by Subsidiary’s accounts receivable, inventories, equipment and general intangibles. As part of the Amendment, the Company’s President and Chief Executive Officer provided a personal guaranty of the amounts due to the Bank, up to a maximum of $250,000. Three of the Company’s officers executed subordination agreements which subordinated a combined total of $848,040 of amounts due to those officers to amounts due by the Subsidiary to the Bank. Because these subordinated amounts are not to be paid until the Bank has been repaid, the subordinated amounts have been classified as noncurrent liabilities.

On June 21, 2012, the Subsidiary entered into a loan agreement with the Bank for a loan of $62,500 due on July 5, 2012. The loan bore interest at the rate of 5.5%. It was repaid in July 2012.

In fiscal 2008, the Company financed the purchase of equipment from a vendor in the amount of $101,762, evidenced by a note bearing interest at the rate of 8%. As the Company purchases product from the vendor a portion of each invoice will be charged to reduce the note balance. Management expects that the note will be repaid over the next 12 months. Collateral for the note is the underlying equipment. The balance on the note at June 30, 2012 of $2,639 was paid in the year ended June 30, 2013.

Note 7 – Due to Officers, Shareholders and Affiliates and Subordinated Liabilities to Officers and Shareholders

These amounts are composed of the following at June 30, 2013 and 2012:

	2013		2012
Interest bearing advances, due on demand	$	19,021	$	197,756
Other advances		181,200		—
Accrued compensation and other costs		241,550		827,683
Current liabilities to officers, shareholders and affiliates		441,771		1,025,439
Subordinated liabilities to officers and shareholders		848,080		—
	$	1,289,851	$	1,025,439

Related to the Amendment of the loan agreement with the Bank discussed in Note 6 above, three of the Company’s officers agreed to subordinate a total of $848,040 of amounts due to those officers to amounts due by the Subsidiary to the Bank.

Note 8 - Income Taxes

The provision for taxes for the year ended June 30, 2013 and 2012 includes the following components:

	2013			2012
Current
Federal	$	-		$	-
State		6,078			9,461
Foreign		-			-
		6,078			9,461
Deferred
Federal		(168,621	)		(188,276	)
State		(26,060	)		58,276
Foreign		-
		(194,681	)		(130,000	)

	$	(188,603	)	$	(120,539	)

The components of the deferred tax accounts as of June 30, 2013 and 2012 are as follows:

	2013			2012
Deferred tax assets
Net operating loss carryforward	$	2,644,373		$	2,421,787
Allowance for doubtful accounts		169,745			89,865
Accrued compensation and other costs		264,042			3,994
Stock based compensation		214,695			214,695
Other		49,925			49,925
		3,342,780			2,780,266
Deferred tax liabilities
Depreciation and amortization		80,073			72,645
Subtotal		3,262,707			2,707,621
Valuation allowance		(2,416,226	)		(2,055,821	)

Net deferred tax assets	$	846,481		$	651,800

The valuation allowance at June 30, 2011 was $1,566,159.

The reconciliation of estimated income taxes attributed to operations at the statutory tax rates to the reported income tax benefit is as follows:

	2013			2012
Expected federal tax at statutory rate	$	(529,077	)	$	(612,628	)
State taxes, net of federal tax effect		(84,497	)		(108,057	)
Non deductible expenses		119,255			63,685
Change in valuation allowance		360,403			489,662
Other		(54,687	)		46,789
	$	(188,603	)	$	(120,539	)

At June 30, 2013, and 2012, the Company had net operating loss carryforwards for federal and state income tax purposes of $6,445,732 and $3,521,381 respectively, expiring through 2033. The Company has foreign net operating loss carryforwards of $608,268 with no expiration date.

At June 30, 2013 and 2012, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company did not recognize any interest or penalties related to uncertain tax positions at June 30, 2013 and 2012.

The Company files U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2007 through 2013 tax years generally remain subject to examination by federal and most state tax authorities.

Note 9 - Shareholders’ Equity

Series A Convertible Preferred Stock

In January to March 2002, the Company realized gross proceeds of $2,000,000 from the private placement of 40 Units, each Unit consisting of 25,000 shares of Series A Convertible Preferred Stock (“Series A Preferred”) and 12,500 common stock purchase Warrants. The Series A Preferred provides for an annual dividend of $.20 per share, payable quarterly, (payable in cash or shares of common stock valued at $2.00 per share), when, as and if declared by the Board of Directors. Dividends will be paid on a cumulative basis. Each Series A Preferred share was initially convertible at the option of the holder into one common share, commencing 120 days after closing. The conversion ratio is subject to certain adjustments, as defined and has since been adjusted to .88 Series A Preferred shares for one common share. The Series A Preferred shares have a liquidation preference in the amount of $2.00 per share and the Company may redeem them if the common shares have traded at or above $4.00 for a period of twenty consecutive trading days. All of the Warrants issued in connection with this offering have since expired unexercised.

As of June 30, 2013, 700,000 shares of Series A Preferred had been converted into a like amount of common stock.

Cumulative but undeclared dividends at June 30, 2013 total approximately $675,000.

Series B Convertible Preferred Stock

On June 30, 2004, the Company completed a private placement of 2,000 shares of its 10% Series B Convertible Preferred Stock (“Series B Preferred”) and warrants to purchase up to 2,000,000 shares of common stock for an aggregate purchase price of $2,000,000. The Preferred Stock provides for a dividend at the rate of 10% per annum, payable quarterly, (payable in cash or by adding the dollar amount of such dividends to the Stated Value), dividends will be paid on a cumulative basis. The preferred shares have a liquidation preference in the amount of $1,000 per share and have preference to any payments to the Preferred A shareholders. Each preferred share is convertible at the option of the holder into 1,000 shares of common stock. The conversion price is subject to anti-dilution adjustments, including, among other things, in the event that the Company sells common stock during the next three years for a price of less than one dollar per share. The Company may require the conversion of all (but not less than all) of the then outstanding shares of Series B Preferred Stock, if at any time the volume weighted average trading price per share of common stock for each of 20 consecutive trading days prior to a conversion notice is greater than $2.50 (subject to adjustment), and the daily trading volume of the common stock is at least 100,000 shares. In addition all shares of common stock underlying the Series B Preferred Stock must be covered by an effective registration statement.

The Warrants were exercisable for a period of four years from the date of issuance at an exercise price per share of $1.00 per share and have similar anti-dilution privileges as the Series B Preferred Stock. All of the Warrants issued in connection with this offering have since expired unexercised.

In May 2006, in connection with the reset of the conversion and exercise price of the Debentures and Warrants discussed in Note 8 above, the conversion and exercise prices of the Series B Preferred and the accompanying warrants were reduced to $.75.

Stock Option Plans

Incentive Stock Option Plan

In 1986, the Company adopted an Incentive Stock Option Plan, which was renewed in 1996 for a second ten-year term. The Company initially had reserved 1,000,000 shares of common stock for issuance under the Incentive Stock Option Plan, which was increased to 2,000,000 shares upon the approval of the stockholders at the 2005 annual meeting. The board of directors administers the Incentive Stock Option Plan but may delegate such administration to a committee of three persons, one of whom must be a member of the board. The board or the committee has the authority to determine the number of stock options to be granted, when the stock options may be exercised and the exercise price of the stock options, provided that the exercise price may never be less than the fair market value of the shares of the common stock on the date the stock option is granted (110% in the case of any employee who owns more than 10% of the combined voting power or value of all classes of stock). Stock options may be granted for terms not exceeding ten years from the date of the grant, except for stock options granted to any person holding in excess of 5% of our common stock, in which case the stock options may not be granted for a term not to exceed five years from the date of the grant. The Incentive Stock Option Plan expired in September 2006.

Equity Incentive Plan

In October 2006, the Board adopted the Equity Incentive Plan, which was approved by the shareholders at the annual meeting of shareholders held in December 2006. The Equity Incentive Plan is intended to succeed the Incentive plan, which expired in September 2006. 2,000,000 shares were reserved for issuance under the Equity Incentive Plan. In December 2010, the Shareholders voted to increase the number of shares issuable thereunder to 4,000,000. The Equity Incentive Plan is administered by the Board of Directors or, at the discretion of the Board, by a committee consisting of at least two directors. The administrating body, whether it be the Board of Directors or a committee of the type described above, is sometimes referred to as the "Committee." The Committee is authorized from time to time to select and to grant awards under the Equity Incentive Plan to such key employees, non-employee directors, and consultants of the Company and its subsidiaries as the Compensation Committee, in its discretion, selects. The Compensation Committee is authorized to delegate any of its authority under the Equity Incentive Plan (including the authority to grant awards) to such executive officers of the Company as it thinks appropriate and is permitted by Rule 16B-3 of the Exchange Act and Section 162(m) of the Code. The Equity Incentive Plan allows for the grant of a number of different types of awards, including incentive and non-statutory stock options, stock appreciation rights, restricted stock grants, performance units, cash payments and other stock-based awards.

Non-Statutory Stock Option Plan.

The Company also adopted a Non-Statutory Stock Option Plan and have reserved 250,000 shares of common stock for issuance to directors, employees and non-employees. Stock options granted pursuant to this plan will be non-transferable and expire, if not exercised within five years from the date of the grant. Stock options will be granted in such amounts and at such exercise prices as our board of directors may determine.

Option activity for 2013 and 2012 is summarized as follows:

	Options			Weighted Average Exercise Price
Options outstanding, June 30, 2011		1,530,000		$	.63

Granted		530,000			.19
Forfeited		(260,000	)		.57
Exercised		—			—
Options outstanding, June 30, 2012		1,800,000		$	.51

Granted		—			—
Forfeited		(325,000	)		.31
Exercised		—			—
Options outstanding June 30, 2013		1,475,000		$	.55
Aggregate intrinsic value	$	—

Exercisable at June 30, 2013		1,475,000		$	.55
Shares of common stock available for future grant under the plans		2,370,000

The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market price of the Company’s common stock and the exercise price of the underlying options. No options were exercised in fiscal 2013 and fiscal 2012.

The following table summarizes information about stock options outstanding at June 30, 2013:

								Options Exercisable
				Weighted Average						Weighted
				Remaining						Average
		Number		Contractual		Exercise		Number		Exercise
Ranges of price		Outstanding		Life		Price		Exercisable		Price

$	.07		80,000		5.47	$	.07		80,000	$	.07
$	.17		190,000		6.44	$	.17		190,000	$	.17
$	.19		220,000		8.36	$	.19		220,000	$	.19
$	.21-.22		290,000		4.98	$	.22		290,000	$	.22
$	.75		295,000		3.73	$	.75		295,000	$	.75
$	1.00-1.07		175,000		1.17	$	1.02		175,000	$	1.02
$	1.20		225,000		1.53	$	1.20		225,000	$	1.20
$	.07-$1.20		1,475,000		4.47	$	.55		1,475,000	$	.55

The fair value of each option grant is estimate on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data to estimate expected volatility, the period of time that option grants are expected to be outstanding, as well as employee termination behavior. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the estimated life of the option. The following weighted-average assumptions were used to estimate the fair value of options granted during the fiscal year ended June 30, 2012, using the Black-Scholes option-pricing (no options were granted during the fiscal year ended June 30, 2013):

	2012
Risk free interest rate		0.90	%
Expected life		9.6
Expected volatility		186.3	%
Dividend yield		0	%
Weighted-average grant date fair value per share	$	0.183

As of June 30, 2013, there was no unrecognized compensation cost related to nonvested options granted because all options have vested.

Note 10 - Concentrations and Economic Dependency

The Company had four customers that accounted for 22%, 18%, 13%, and 6% of net revenues for the year ended June 30, 2013 and three customers that accounted for 63%, 7%, and 6% of net revenues for the year ended June 30, 2012. One customer accounted for approximately 93% of the accounts receivable as of June 30, 2013. At June 30, 2013 approximately 2% of accounts receivable were from foreign customers. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash in financial institutions. At June 30, 2013 and 2012, substantially all of the Company's cash was in two banks. The amount that is federally insured is subject to FDIC's limit of $250,000 per depositor per insured bank. Under the Dodd-Frank Act, beginning December 31, 2010 through December 31, 2012, all non-interest truncation accounts are fully insured, regardless of the balances of the account and the ownership capacity of the funds. The Company did not have balances that exceeded FDIC limits at June 30, 2013 and 2012.

Note 11 – Commitments and Contingencies

Lease Agreements

Future minimum annual rental payments required under non-cancelable operating leases for years after June 30, 2013 are as follows:

2014	$	74,141
2015		75,624
2016		77,137
2017		78,679
2018		66,655
	$	372,236

Rent expense under all operating leases was $95,270 and $91,213 for the years ended June 30, 2013 and 2012, respectively.

License Agreement

The Company has acquired intellectual property, equipment and a tooling license from Mason & Hanger National, Inc. and a patent license from Lucent Technologies, Inc. for the Fiber Optic Intelligence Detection Systems (FOIDSâ). In conjunction with these two license agreements whereby royalties totaling 5.4% are due on revenues from the Fiber Optic Intelligence Detection System (FOIDSâ).

Legal Proceeding

On March 7, 2012, the Company, through its wholly-owned subsidiary, ECSI International, Inc. filed a lawsuit in the United States District Court for the District of New Jersey against Lockheed Martin Global Training and Logistics (“Lockheed Martin”). The lawsuit, as detailed in the First Amended Complaint and Demand for Trial by Jury (the “Amended Complaint”) dated March 29, 2012, alleges breach of contract and tortious interference by Lockheed Martin and seeks actual damages of approximately $978,000, as well as punitive damages, costs and such further relief as the Court deems equitable and proper. In addition, the Amended Complaint seeks payment under Lockheed Martin’s payment bonds required by the United States Navy Facilities Engineering Command. At June 30, 2013, the Company has included in its accounts receivable (prior to allowances) the amount of the actual damages claimed. In Fiscal 2013, Lockheed Martin was granted a motion to have the matter moved from New Jersey to Maryland. We had been aggressively pursuing our claim against Lockheed Martin. However, due to cash flow constraints, we have not pursued our claims against Lockheed Martin in Maryland.

Loss Contingencies

During the year ended June 30, 2013, litigation incidental to the business of SEM Consultants III, Inc., a wholly-owned subsidiary of the Company resulted in an award to the plaintiff of $20,000 in damages and $42,398 in attorney fees. Plaintiff’s attorney filed an appeal requesting additional legal fees of $138,000. The Court had originally denied the request for additional legal fees, but it is possible the appeal could increase the legal fees awarded to the plaintiff’s counsel.

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements, other than the matter discussed in the paragraph above.

Note 12 – Geographic Data

The Company currently operates in the United States and the Middle East. The following is a summary of local operations by geographic area:

	U.S.			% of total			Middle East			% of total
For the year ended
June 30, 2013
Revenue	$	835,064			85.06	%	$	146,636			14.94	%
Operating income (loss)		(1,114,860	)		88.32	%		(147,465	)		11.68	%
Identifiable assets		4,226,540			97.51	%		107,821			2.49	%

For the year ended
June 30, 2012
Revenue	$	2,054,754			92.72	%	$	161,328			7.28	%
Operating income (loss)		(1,629,548	)		(103.13	)%		50,234			3.18	%
Identifiable assets		4,686,427			94.08	%		294,647			5.92	%

Note 13 – Related Party Transactions

The Company made non-interest bearing advances, due on demand, to a former officer and director of the Company. The balance outstanding at June 30, 2012 was $49,765. During the year ended June 30, 2013, the amount due from the former officer and director was offset against amounts due to the officer and director. Refer to Note 10 above for information regarding amounts due to officers and directors of the Company.

ELECTRONIC CONTROL SECURITY INC 10-K