Allied Security Innovations 10Q 2009 Q1 Quarterly report

Washington, D.C. 20549

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-21384

Allied Security Innovations Inc.

(Exact name of registrant as specified in its charter)

Delaware		23-2770048
(State or other jurisdiction of organization)		(I.R.S. employer Identification no.)

1709 Route 34

Farmingdale, New Jersey 07727

Telephone Number (732) 751-1115

Indicate by checkmark 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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer Accelerated filer Non-accelerated filer X

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 30, 2009
Common stock, $.001 par value per share		3,261,653,393 shares

Allied Security Innovations, Inc. and Subsidiary

Formerly Digital Descriptor Systems, Inc.

Condensed Consolidated Financial Statements

March 31, 2009

Condensed Consolidated Unaudited Financial Statements:	1

Condensed Consolidated Balance Sheets at March 31, 2009 (Unaudited) and December 31, 2008 (Audited)	2
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2009 and 2008 (Unaudited)	3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2009 and 2008 (Unaudited)	4

Notes to Condensed Consolidated Financial Statements	6

ALLIED SECURITY INNOVATIONS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			December 31,
	2009			2008
ASSETS

Current Assets:
Cash and cash equivalents	$	315,411		$	213,513
Accounts receivable, net of allowance		471,109			537,223
Inventory		200,066			238,123
Other Current Assets		8,110			9,346

Total Current Assets		994,696			998,205

Property and equipment, net		253,067			267,594

Other Assets:
Deposits		12,896			12,896
Goodwill		2,054,998			2,054,998
Intangible assets, net		134,177			137,969

Total Other Assets		2,202,071			2,205,863

TOTAL ASSETS	$	3,449,834		$	3,471,662

LIABILITIES AND STOCKHOLDERS' DEFICIT

LIABILITIES
Current Liabilities:
Accounts payable	$	182,638		$	142,865
Accrued expenses		344,721			339,079
Accrued payroll		42,980			114,923
Accrued interest		918,697			711,684
Deferred income		11,284			10,098
Convertible debentures, net of debt discount		36,507			39,078
Derivative liabilities		17,387,523			17,356,901

Total Current Liabilities		18,924,350			18,714,628

Long Term Liabilities:

Note payable		4,000,000			4,000,000
Convertible debentures, net of debt discount		14,017,378			14,028,077
Total Long Term Liabilities		18,017,378			18,028,077

Total Liabilities		36,941,728			36,742,705

STOCKHOLDERS' DEFICIT
Preferred stock, $.001 par value: authorized shares -
1,000,000; issued and outstanding shares - none		-			-
Common stock, par value $.001; 9,999,000,000 shares
authorized:
3,261,653,393 and 2,970,592,594 issued and outstanding at
March 31, 2009 and December 31, 2008, respectively		3,261,653			2,970,593
Additional paid in capital		16,654,087			16,916,041
Accumulated deficit		(53,407,634	)		(53,157,677	)

Total Stockholders' Deficit		(33,491,894	)		(33,271,043	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	3,449,834		$	3,471,662

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

ALLIED SECURITY INNOVATIONS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(UNAUDITED)

	2009			2008
INCOME
Net Sales	$	1,138,882		$	994,054
Cost of Revenue		411,329			305,432
Gross Profit		727,553			688,622

OPERATING EXPENSES
General and administrative		534,220			647,311
Sales and marketing		130,028			95,301
Research and development		21,471			22,698
Total Operating Expenses		685,719			765,310

INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE)		41,834			(76,688	)

OTHER INCOME (EXPENSE)

Interest expense		(280,183	)		(176,192	)
Beneficial interest from conversion		(8,922	)		(83,525	)
Amortization of debt discount		(3,744	)		(54,231	)
Change in fair value of derivative liability		19,378			7,965,587
Depreciation and Amortization		(18,319	)		(24,064	)

Total Other Income (Expense)		(291,790	)		7,627,575

Income (Loss) before provision for income taxes	$	(249,956	)	$	7,550,887
`
Provision for income taxes		-			-

NET INCOME (LOSS) APPLICABLE TO COMMON SHARES	$	(249,956	)	$	7,550,887

NET INCOME (LOSS) PER BASIC SHARES	$	-		$	0.01

NET INCOME (LOSS) PER DILUTED SHARES	$	-		$	-

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC		3,106,474,402			976,690,778

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-DILUTED		9,999,000,000			9,999,000,000

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

ALLIED SECURITY INNOVATIONS, INC AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(UNAUDITED)

	2009			2008

Cash Flows from Operating Activities:
Net Income (Loss)	$	(249,956	)	$	7,550,887
Adjustments to reconcile net income (loss) to net cash
used in provided by operating activities:
Depreciation and amortization		18,319			24,064
Amortization of debt discount		3,744			54,231
Beneficial interest		8,922			83,525
Change in fair value of derivative liability		(19,378	)		(7,965,587	)
Bad debt expense		(32,468	)		37,500
Changes in operating assets and liabilities:
Accounts receivable		98,582			49,433
Inventory		38,055			(20,664	)
Prepaid expenses, deposits and other assets		1,236			(19,314	)
Accounts payable		39,773			17,461
Accrued expenses		(66,299	)		19,939
Accrued interest		210,182			74,378
Deferred Income		1,186			(16,215	)

Net Cash Provided by (Used In) Operating Activities		51,898			(110,362	)

Cash Flows from Investing Activities:
Purchase of equipment		-			(10,526	)

Net Cash Used in Investing Activities		-			(10,526	)

Cash Flows from Financing Activities:
Cash received from note		50,000			-

Net Cash provided by Financing Activities		50,000			-

Net Increase (Decrease) in Cash		101,898			(120,888	)
Cash at Beginning of Period		213,513			386,628

Cash at End of Period	$	315,411		$	265,740

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

ALLIED SECURITY INNOVATIONS, INC AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(UNAUDITED)

	2009		2008
Supplemental Disclosure of Cash Flow Information:

Cash Paid For:
Interest Expense	$	-	$	-
Income Taxes	$	-	$	-

Supplemental Disclosure of Non-Cash Investing and
Financing Activities:

Common stock issued in conversion of convertible
debentures	$	291,061	$	572,863

Beneficial interest in conjunction with issuance of
convertible debentures	$	8,922	$	83,525

Common stock issued in conversion of accrued interest	$	3,170	$	2,615

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

Allied Security Innovations, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

March 31, 2009 and 2008

Note 1 - Organization and Basis of Presentation

The unaudited condensed interim financial information included has been prepared by Allied Security Innovations, Inc. (the “Company” or “ASII”) without audit, pursuant to the rules and regulations of the Security and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as allowed by such rules and regulations, and the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2008 audited consolidated financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

The management of the Company believes that the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the operations for the periods presented.

Note 2 - Description of Business

CGM-AST is a manufacturer and distributor of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products. Focused primarily on “deterrent technologies,” CGM-AST designs and develops customized tamper evident devices which when integrated into a security protocol; provide chain of custody and/or proof of tampering for targeted assets.

The primary factors behind the need for CGM-AST’s products are: (i) the escalation of cargo theft and tampering, (ii) the need for enhanced cargo security because of the fear of terrorism, (iii) damage control of freight and cargo, (iv) the need for security products, (v) brand protection and authentication requirements and (vi) governmental and regulatory requirements.

CGM-AST products are certified by the Customs-Trade Partnership Against Terrorism ("C-TPAT"), a joint initiative between government and business designed to protect the security of cargo entering the United States while improving the flow of trade. C-TPAT requires importers to take steps to assess, evolve and communicate new practices that ensure tighter security of cargo and enhanced security throughout the entire supply chain. In return, their goods and conveyances will receive expedited processing into the United States. Many of our products are also ISO 17712 compliant, which is a standard for international shipping and container security.

It is estimated that losses from cargo theft each year reach 30-50 billion dollars globally and 12 billion dollars in the US, and that these numbers will continue to rise. Figures taken from L.H. Gray entitled Facing the Growing Problem of Loss and Theft.

Note 3 - Summary of Significant Accounting Policies

Significant accounting policies followed by the Company in the preparation of the accompanying condensed consolidated financial statements are summarized below:

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Revenue Recognition

The Company derives revenue from the sale of hardware, software, post customer support, and other related services. Post customer support includes telephone support, bug fixes, and rights to upgrades. Other related services include basic training. The CGM-AST subsidiary derives its’ revenue from the sale of its tape, labels and other security devices.

The Company recognizes revenue upon delivery of the product to the end-user, when the fee is determinable and collectability is probable. Revenue allocable to post customer support is recognized on a straight-line basis over the period which the service is to be provided.

Deferred Income

Revenue allocable to post customer support is recognized on a straight-line basis over the period which the service is to be provided. Revenue collected for future services is recorded as deferred income. Deferred revenue for the three months ended March 31, 2009 was $11,284 and at December 31, 2008 was $10,098. Revenue allocable to other services is recognized as the services are provided. The CGM-AST subsidiary recognizes it revenue upon shipment of the product to the customer.

Software Development Costs

All costs incurred in the research and development of new software products and costs incurred prior to the establishment of a technologically feasible product are expensed as incurred. Research and development of software costs were $21,471 and $22,698, respectively, for the three months ended March 31, 2009 and 2008, respectively.

Cash and Cash Equivalents

For the purpose of the statement of cash flows, cash and cash equivalents include time deposits, certificates of deposits, restricted cash, and all highly liquid debt instruments with original maturities or three months or less.

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. No interest is charged on any past due accounts. Accounts receivable are stated at the amount billed to the customer. Accounts receivable, net of allowance was $471,109 on March 31, 2009 and $537,223 at December 31, 2008.

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management's best estimate of the amount that will not be collected. Management reviews all accounts receivable balances that exceed 90 days from invoice date and based on assessment of current creditworthiness, estimates the portion, if any that will not be collected. The allowance for doubtful accounts is $116,038 on March 31, 2009 and $148,506 at December 31, 2008.

Fixed Assets

Fixed assets are stated at cost. Depreciation is computed primarily using the straight-line method over the estimated useful life of the assets.

Machinery and equipment	7 years
Furniture and fixtures	7 years
Computers	3 years
Leasehold improvements	39 years

Income Taxes

The Company provides for income taxes under the liability method. Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Such differences result from differences in the timing of recognition by the Company of net operating loss carry forwards, certain expenses, and differences in the depreciable lives and depreciation methods for certain assets.

Accounting for Stock Options

The Company determines stock-based compensation expense under Financial Accounting Standards Board issued Statement No. 123R (SFAS 123R), "Accounting for Stock-Based Compensation."

Net Loss Per Common Share

Basic loss per share is calculated by dividing the net loss by the weighted average common shares outstanding for the period. Diluted loss per share is calculated by dividing the net loss by the weighted average common shares outstanding of the period plus the dilutive effect of common stock equivalents. Common stock equivalents were not included in the computation of diluted earnings per share for the quarter ended March 31, 2009 because to do so would be antidilutive for the period presented.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash and accounts receivable. Concentration of credit risk, with respect to accounts receivable, is limited due to the Company's credit evaluation process. The Company does not require collateral from its customers. The Company sells its principal products to end users and distributors principally in the United States.

The Company maintains cash and cash equivalents in various financial institutions that, in the aggregate, exceed the limit insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures cash deposits up to $250,000 per bank. Any amounts over $250,000 represent an uninsured risk to the Company.

Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and CGM-AST. All inter-company accounts have been eliminated.

Inventory

Inventories consist principally of inks, adhesives, film and finished goods held in the Company’s warehouse. Inventory is stated at the lower of cost or market, utilizing the first-in, first-out method. The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor and other indirect manufacturing costs. On a quarterly basis, management reviews inventory for unsalable or obsolete inventory. Obsolete or unsalable inventory write-offs have been immaterial to the financial statements.

Advertising

The Company’s policy is to expense the costs of advertising as incurred. The Company had advertising expenses of $12,625 and $16,304 for the three months ended March 31, 2009 and 2008, respectively.

Fair Value of Financial Instruments

The carrying amount reported in the condensed consolidated balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for the convertible debentures and notes payable approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates.

Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142 “Goodwill and Other Intangible Assets.” This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, “Intangible Assets.” It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill was acquired upon the purchase of its wholly-owned subsidiary of CGM Security Solutions, Inc. totaling $4,054,998 (see footnote 11).

In addition, the Company has acquired licenses, which are included as other intangible assets. The licenses are being amortized over a period of 15 years based on the expected benefits to be consumed or otherwise used up. Goodwill and other intangible assets are tested annually for impairment in the fourth quarter, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The Company assesses the recoverability of its goodwill and other intangible assets by comparing the projected undiscounted net cash flows associated with the related asset, over their remaining lives, in comparison to their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

In December of 2008 the Company decreased the value of goodwill from $4,054,998 to $2,054,998.

Derivative Instruments

The Company has an outstanding convertible debt instrument that contains free-standing and embedded derivative features. The Company accounts for these derivatives in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.” In accordance with the provisions of SFAS No. 133 and EITF Issue No. 00-19, the embedded derivatives are required to be bifurcated from the debt instrument and recorded as a liability at fair value on the condensed consolidated balance sheet. Changes in the fair value of the derivatives are recorded at each reporting period and recorded in net gain (loss) on derivative, a separate component of the other income (expense). As of March 31, 2009, the fair value of derivatives was $17,387,523, an increase of $30,622 from December 31, 2008. This increase consists of the addition of $55,538 to the derivatives from the debentures issued January 8, 2009 (see note 7) and a decrease in fair market value of the derivatives in the amount of $24,916 as of March 31, 2009.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Note 4 - Impact of Recent Accounting Pronouncements

In June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive non forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008 and for interim periods within those years. The implementation of this standard did not have a material impact on the Company's condensed consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411 “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The implementation of this standard will not have a material impact on Consolidated Financial Statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities: an amendment of FASB Statement No. 133" ("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. The provisions of SFAS No. 161, is effective the first quarter of fiscal 2009. The implementation of this standard did not have a material impact on the Condensed Consolidated Financial Statements.

In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144.

The partial adoption of SFAS No. 157 on January 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis did not have a material impact on the Company's condensed financial statements. See Note 10 for the fair value measurement disclosures for these assets and liabilities. The Company adopted SFAS No. 157 on January 1, 2009.

On January 1, 2008 (the first day of fiscal 2008), the Company adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an instrument-by-instrument basis and is irrevocable. Entities electing the fair value option are required to recognize changes in fair value in earnings and to expense upfront costs and fees associated with the item for which the fair value option is elected. The new standard did not impact the Company's Condensed Consolidated Financial Statements as the Company did not elect the fair value option for any instruments existing as of the adoption date. However, the Company will evaluate the fair value measurement election with respect to financial instruments the Company enters into in the future.

Note 5 – Intangible Assets

Intangible assets consist of the following at March 31, 2009 and December 31, 2008.

	March 31, 2009		December 31, 2008
Licenses	$	222,076	$	222,076
Accumulated amortization		87,899		84,107
Total	$	134,177	$	137,969

Licenses are being amortized over its estimated useful life of 15 years. Amortization expense for the three months ended March 31, 2009 and 2008 was $3,792 and $3,792, respectively.

The following is a listing of the estimated amortization expense for the next five years:

Year ended December 31

2009			15,168
2010			15,168
2011			15,168
2012			15,168
2013			15,168

Note 6- Property and Equipment

Fixed assets consist of the following at March 31, 2009 and December 31, 2008:

	March 31, 2009			December 31, 2008

Furniture and Fixtures	$	75,615		$	75,615
Leasehold Improvements		159,607			159,607
Computers		219,300			219,300
Machinery and Equipment		762,987			762,987
		1,217,509			1,217,509
Less: Accumulated depreciation		(964,442	)		(949,915	)
Net	$	253,067		$	267,594

Depreciation expense for the years three months ended March 31, 2009 and 2008 was $14,527 and $20,272, respectively.

Note 7 - Convertible Debentures

Based on the guidance in SFAS133 and EITF00-19, the Company concluded that the conversion features of its convertible debentures were required to be accounted for as derivatives. The imbedded derivative feature was bi-furcated and the fair market value was determined using a convertible bond valuation model. The derivative instruments are recorded at fair market value with changes in value recognized during the period of change.

On May 16, 2008 convertible debentures in the net amount of $5,832,483 were satisfied.

On May 16, 2008, the Company issued sixteen convertible notes for an aggregate amount of $14,165,899. The debentures are collateralized by substantially all of the Company's assets. The debentures accrue interest at the rate of 6% per annum.

The holders have the right to convert the principal amount plus accrued interest into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be an amount equal to 26% of the mean average price of the common stock for the ten trading days prior to notice of conversion.

We recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $10,000 was recorded as a debt discount and was expensed in 2008. The fair market value of the conversion feature is also shown as a derivative liability on the Company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of income.

On January 8, 2009, the Company issued five convertible notes for an aggregate amount of $50,000. The debentures are collateralized by substantially all of the Company's assets. The debentures accrue interest at the rate of 12% per annum.

We recorded a derivative liability related to this convertible debenture. The fair market value of the conversion feature in the amount of $55,538 is shown as a derivative liability on the Company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of income. The initial fair market value of the conversion option in the amount of $50,000 was recorded as a debt discount and a loss is recognized in the amount of $5,538.

Note 8 - Commitments and Contingencies

Operating Lease

CGM-AST leases one facility in Staten Island, New York under non-cancelable lease agreements that end in December 2008. The Company still occupies the space on a month to month basis.

On June 1, 2007 the offices of Allied Security Innovations, Inc. and the Somerset office of CGM-AST Applied Security Technologies, Inc. were combined into a new office located in Farmingdale, NJ in a 6,000 square foot combination warehouse /office space. The reason for this was cost savings and improved operational efficiencies. The lease is a 5 year lease ending May 12, 2012 with a 5 year renewal option. The company is required to pay utilities, insurance and other costs relating to the lease facility. The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2008:

	Per Year
2009	$	56,824
2010		58,529
2011		60,285
2012		30,588

Employment Agreements

Anthony R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was re-appointed as Chairman, President and Chief Executive Officer effective February, 2005. On February 25, 2005, ASII entered into a five-year employment agreement with Mr. Shupin, which entitled him to a base salary of $227,900 per year, which may at the Board of Directors discretion adjust his base salary (but not below $215,000 per year). Mr. Shupin is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Shupin will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Plan, Mr. Shupin will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of ASII. The Company may grant Mr. Shupin, following the first anniversary of the date hereof and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Shupin will be entitled to 25 vacations days per year at such times as may be mutually agreed with the Board of Directors. ASII will provide Mr. Shupin a monthly car allowance of One Thousand Dollars ($1,000) along with related car expenses.

Michael J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino was appointed as Senior Vice President and Chief Financial Officer effective February 25, 2005. On February 25, 2005, ASII entered into a five-year employment agreement with Mr. Pellegrino, which entitled him to a base salary of $185,500 per year which may at the Board of Directors discretion adjust his base salary (but not below $175,000 per year). Mr. Pellegrino is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Incentive Plan, Mr. Pellegrino will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of ASII. ASII may also grant to the Employee, following the first anniversary of the date of the Agreement and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Pellegrino will be entitled to 25 vacation days per year at such times as may be mutually agreed with the Board of Directors. ASII shall also furnish Mr. Pellegrino with monthly car allowance of One Thousand Dollars ($1,000) and related car expenses.

Note 9 - Stock Option and Other Plans

Effective November 13, 2006, Allied Security Innovations, Inc. ("ASII") granted to each of Anthony Shupin, its President and Chief Executive Officer and Michael Pellegrino, its Chief Financial Officer, 10,000 shares of newly created Series A Preferred Stock ("A Preferred") as recognition for services.

The shares will vest in five equal monthly installments and will be issued at the discretion of Mr. Shupin and Mr. Pellegrino. These share have not been issued as of December 31, 2008. Each share of A Preferred is convertible into 480 shares of common stock of the Company starting three years from the date of issuance, provided that the closing bid price of the Company's common stock is then $2.00 per share. The shares of A Preferred may be voted with the Company's common stock on an as converted basis on any matters that the common stock is entitled to vote on as a class.

Unconverted shares of A Preferred will automatically cease to exist, and all rights associated therewith will be terminated upon the earlier of (i) that person's termination of employment with the Company for any reason, or (ii) five years from the date of issuance.

On November 13, 2006, the Company filed with the Secretary of State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock.

The Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant to which the Company reserved 5,000,000 shares of common stock. The options granted have a term of ten years and are issued at or above the fair market value of the underlying shares on the grant date. The Company also maintains the 1996 Director Option Plan (the Director Plan) pursuant to which the Company reserved 200,000 shares of common stock. Options granted under the Director Plan are issued at or above the fair market value of the underlying shares on the grant date. A portion of the first option vests at the six-month anniversary of the date of the grant and continues over a four-year period. Subsequent options vest on the first anniversary of the grant date. The options expire ten years from the date of the grant or 90 days after termination of employment, whichever comes first.

Note 10 - Fair Value Measurements

On January 1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent framework for measuring fair value under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. SFAS 157’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. SFAS 157 classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

Effective this quarter, we implemented Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157, for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis. The adoption of SFAS 157 for our nonfinancial assets and liabilities that are remeasured at fair value on a non-recurring basis did not impact our financial position or results of operations; however, could have an impact in future periods. In addition, we may have additional disclosure requirements in the event we complete an acquisition or incur impairment of our assets in future periods.

The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2009.

Fair Value Measurements on a Recurring Basis as of March 31, 2009

Assets	Level I		Level II		Level III		Total

Assets	$	-		-	$	-	$	-
Total Assets	$	-	$	-	$	-	$	-
Liabilities		-	$	31,441,408		-	$	31,441,408
Total Liabilities	$	-	$	31,441,408	$	-	$	31,441,408

Note 11 – Acquisitions and Note Payable

On March 1, 2005, the Company acquired substantially all of the assets of CGM Security Solutions, Inc., a Florida corporation ("CGM"), for (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the "Note") in the principal amount of $3,500,000, subject to adjustment (the "Acquisition"). The assets of CGM Security Solutions, Inc. were acquired pursuant to an Asset Purchase Agreement among the Company and CGM Security Solutions, Inc. dated as of February 25, 2005. In connection with the acquisition, the Company and CGM-AST each entered into an employment agreement with Erik Hoffer (the "Employment Agreement"). CGM Security Solutions, Inc is a manufacturer and distributor of barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers.

The principal amount of the three year Note is subject to adjustment based upon the average of (i) the gross revenues of CGM-AST for the fiscal year ending December 31, 2008 and (ii) an independent valuation of CGM-AST Sub based upon the audited consolidated financial statements of the Company and CGM-AST Sub for the fiscal years ending December 31, 2007 and 2008. In addition, the Company has granted CGM-AST a secondary security interest in substantially all of its assets and intellectual property. If the Company is unable to fulfill its obligations pursuant to the Asset Purchase Agreement and the Note, there is a likelihood that CGM Security Solutions, Inc. can declare default and attempt to take back the asset. As of March 31, 2009 the Company did not secure sufficient funding but was in negotiations with private investors in an attempt to obtain same.

In connection with the Acquisition, the Company entered into a letter agreement with certain of its investors (the "Investors") which extended the maturity date of debt instruments issued on November 30, 2004 until September 1, 2008, and amended the conversion price of the debt that is held by the Investors to the lower of (i) $0.0005 or (ii) 40% of the average of the three lowest intraday trading prices for the Company's common stock during the 20 trading days before, but not including, the conversion date. In addition, the exercise price of the warrants held by the Investors was amended to $.001 per share.

Whereas the Company did not have sufficient funds to satisfy this obligation and was not able to raise the required payment when due the Company came to an agreement to pay CGM Security Solutions, Inc. and it’s owner Mr. Erik Hoffer Five Hundred Thousand Dollars ($500,000) and signed a new note with him raising the purchase price by One Million Dollars ($1,000,000). The new note for Four Million Dollars is a three year note payable on March 1, 2011 carrying an annual interest rate of 7% of which the interest is due quarterly.

Note 12 - Going Concern

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has sustained recurring losses and has accumulated a significant deficit as of March 31, 2009. These factors raise substantial doubt about its ability to continue as a going concern.

Management has formulated and is in the process of implementing its business plan intended to develop steady revenues and income, as well as reducing expenses in the areas of operations. This plan includes the following management objectives:

· Soliciting new customers in the U.S.

· Expanding sales in the international market

· Expanding sales through E-commerce

· Adding new distributor both in the U.S and internationally

· The introduction of new products into the market

· Seeking out possible merger candidates

Presently, the Company cannot ascertain the eventual success of management’s plan with any degree of certainty. Each objective is contingent upon a number of factors and the Company does not represent that any or all of these objectives will occur. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the eventual outcome of the risks and uncertainties described above.

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

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THREE MONTHS ENDED MARCH 31, 2008

Revenues for the three months ended March 31, 2009 were $1,138,882 compared to $994,054 for the three months ended March 31, 2008, an increase of $144,828 or 14.6%. ASII generates its revenues through software licenses, hardware, post customer support arrangements and other services. CGM-AST generates its revenue through the manufacture and distribution of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products.

Cost of revenue for the three months ended March 31, 2009 was $411,329 compared to $305,432 for the three months ended March 31, 2008 an increase of $105,897 or 34.7%. Cost of revenue sold as a percentage of revenue for the three months ended March 31, 2009 was 36% of total revenues.

Operating expenses for the three months ended March 31, 2009 were $685,719 compared to $765,310 for the three months ended March 31, 2008, a decrease of $79,591 or 10%. This decrease was mainly attributable to a decrease in payroll because of an officer’s resignation in April 2008. The officer was not replaced.

General and Administrative expenses for the three months ended March 31, 2009 were $534,220 compared to $647,311 for the three months ended March 31, 2008 for a decrease of $113,091 or 17%. This decrease was mainly attributable to an adjustment to bad debt and a decrease in officers payroll.

Sales and Marketing expenses for the three months ended March 31, 2009 were $130,028 compared $95,301 for the three months ended March 31, 2008 for an increase of $34,727 or 36%. Two new salespersons were hired in August 2008.

Research and development expenses for the three months ended March 31, 2009 were $21,471 compared to $22,698 for the three months ended March 31, 2008 for a decrease of $1,227.

ASII had a net loss for the three months ended March 31, 2009 of $(249,956) and a net income for the three months ended March 31, 2008 of $7,550,887. This is a decrease in net income of $(7,800,843) . This was primarily due to the change fair value of derivative liability.

Net cash provided by (used in) operating activities for the three months ended March 31, 2009 and the three months ended March 31, 2008 was $51,898 and $(110,362), respectively. The increase in cash provided by operating activities for the three months ended March 31, 2009 was $162,260.

Net cash used in investing activities was $0 and $10,526 for the three months ended March 31, 2009 and the three months ended March 31, 2008 respectively.

Net cash provided by financing activities was $50,000 and $0 for the three months ended March 31, 2009 and the three months ended March 31, 2008, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company's revenues have been insufficient to cover the cost of revenues and operating expenses. Therefore, the Company has been dependent on private placements of its Common Stock and issuance of convertible notes in order to sustain operations. In addition, there can be no assurances that the proceeds from private placements or other capital will continue to be available, or that revenues will increase to meet the Company's cash needs, or that a sufficient amount of the Company's Common Stock or other securities can or will be sold or that any Common Stock purchase options/warrants will be exercised to fund the operating needs of the Company.

Over the next twelve months, management is hopeful that sufficient working capital may be obtained from operations and external financing to meet ASII's liabilities and commitments as they become payable. ASII has in the past relied on private placements of common stock securities, and loans from private investors to sustain operations. However, if ASII is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations. At March 31, 2009, ASII had assets of $3,449,834 compared to $3,471,662 on December 31, 2008 a decrease of $21,828 and shareholder (deficit) of $ (33,491,894) on March 31, 2009 compared to shareholder (deficit) of $(33,271,043) on December 31, 2008, an increase of $220,851. This increase in shareholder (deficit) for the three months ended March 31, 2009 resulted from the net income for the three months ended March 31, 2009.

The Company had net (loss) of ($249,956) and net income of $7,550,887 during the three months ended March 31, 2009 and 2008, respectively. As of March 31, 2009, we had a cash balance in the amount of $315,411 and current liabilities of $18,924,350. The total amount of notes payable and debentures is $18,053,885. We may not have sufficient cash or other assets to meet our current liabilities. In order to meet these obligations, we may need to raise cash from the sale of securities or from borrowings.

The Company has contractual obligations of $19,542,921as of March 31, 2009. These contractual obligations, along with the dates on which such payments are due are described below:

Contractual Obligations	Total		One Year or Less		More Than One Year
Due to Related Parties	$	0	$	0	$	0
Accounts Payable and Accrued Expenses		570,339		570,339		0
Accrued interest on loans		918,697		918,697		0
Note payable		4,000,000		0		4,000,000
Convertible Debentures		14,053,885		36,507		14,017,378
Total Contractual Obligations	$	19,542,921	$	1,525,543	$	18,017,378

The Company is currently in default on several of the convertible debentures that are included in current liabilities.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements as of March 31, 2009 or as of the date of this report.

Plan of Operations

The short-term objective of ASII is the following:

o The short-term objective of ASII is to increase the market penetration of the product line of its CGM-AST subsidiary as the Company believes this is the area where the greatest revenue growth exists.

o Additionally, ASII plans to execute an acquisition strategy based upon fund availability.

ASII's long-term objective is as follows:

o To seek additional products to sell into its basic business market - Criminal Justice - so that ASII can generate sales adequate enough to allow for profits.

ASII believes that it will not reach profitability in the foreseeable future. Over the next twelve months, management is of the opinion that sufficient working capital will be obtained from operations and external financing to meet ASII's liabilities and commitments as they become payable. ASII has in the past successfully relied on private placements of common stock securities, bank debt, loans from private investors and the exercise of common stock warrants in order to sustain operations. If ASII is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations.

ASII is doing the following in its effort to reach profitability:

o Cut costs in areas that add the least value to ASII.

o Concentrate on increasing the sales of the CGM-AST product line.

o Derive funds through investigating business alliances with other companies.

o Acquire and effectively add management support to profitable companies complementary to its broadened target markets

Item 4T. Control and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures at the end of the period covered by this report were effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

Changes in internal controls.

Management of the Company has also evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, any change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

none

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities:

none

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

On October 9, 2007 the companies stock trading moved from the Pink Sheets to NASDAQ Bulletin Board.

Item 6. Exhibits

No.
31.1		Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ALLIED SECURITY INNOVATIONS, INC. (Registrant)

Date: May 13, 2009	By:	/s/ ANTHONY SHUPIN
		Anthony Shupin
		(President, Chief Executive Officer) (Chairman)

Date: May 13, 2009	By:	/s/ MICHAEL J. PELLEGRINO
		Michael J. Pellegrino
		Senior Vice President & CFO (Principal Financial and Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Allied Security Innovations (ADSV) 10-Q2009 Q1 Quarterly report

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