UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549










FORM
10-Q





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




or





 ̈
            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: 0-21295





GVI Security Solutions, Inc.


(Exact
name of registrant as specified in its charter)





Delaware
            77-0436410(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer Identification No.)2801
      Trade Center Drive, Suite 120, Carrollton, Texas
            75007(Address
      of principal executive offices)
            (Zip
      code)





(972) 245-7353


(Registrant’s
telephone number, including area code)




(Former
Name or Former Address, if Changed Since Last Report)





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
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.


þ
Yes                       ̈ No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


 ̈
Yes                       ̈ No




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





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x





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


 ̈Yes  þ  No





As of May
13, 2009 there were 28,177,182 shares of the registrant’s common stock
outstanding.





GVI
Security Solutions, Inc.


FORM
10-Q




TABLE
OF CONTENTS




PART
      I. FINANCIAL INFORMATIONItem
      1.  Financial Statements.
                
                3Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                
                16Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                
                21Item
      4T.  Controls and Procedures.
                
                22PART
      II.  OTHER INFORMATION
                
                22Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                
                22Item
      6.  Exhibits.
                
                22




2


PART
I. FINANCIAL INFORMATION





Item
1.  Financial Statements.





GVI
Security Solutions, Inc.


Condensed
Consolidated Balance Sheets




(In
thousands, except share and per share amounts)





March 31,
                2009
              
              
              December 31,
                2008(Unaudited)ASSETS:Current
      AssetsCash
      and equivalents
              
              $
              47
              
              
              $
              46Accounts
      receivable, net of allowances for doubtful accounts of $377 and $426,
      respectively
              
              
              7,277
              
              
              
              7,129Inventory,
      net
              
              
              14,034
              
              
              
              15,249Deferred
      Tax Assets, Current
              
              
              857
              
              
              
              869Prepaid
      and other current assets
              
              
              923
              
              
              
              920Total
      Current Assets
              
              
              23,138
              
              
              
              24,213Property
      and Equipment, net of accumulated depreciation of $1,541 and $1,520
      respectively
              
              
              136
              
              
              
              158Deferred
      tax assets, non-current
              
              
              154
              
              
              
              178Deferred
      loan origination fee, net
              
              
              53
              
              
              
              61Other
      assets
              
              
              58
              
              
              
              51Total
      Assets
              
              
              23,539
              
              
              $
              24,661LIABILITIES
      AND STOCKHOLDERS' EQUITY:Current
      LiabilitiesAccounts
      payable to primary supplier
              
              $
              5,628
              
              
              $
              7,132Other
      trade accounts payable
              
              
              781
              
              
              
              1,105Accrued
      expenses
              
              
              1,674
              
              
              
              1,799Capitalized
      lease obligations, current
              
              
              6
              
              
              
              12Total
      Current Liabilities
              
              
              8,089
              
              
              
              10,048Deferred
      tax liability, non-current
              
              
              739
              
              
              
              739Revolving
      credit facility
              
              
              10,571
              
              
              
              9,862Total
      Liabilities
              
              
              19,399
              
              
              
              20,649Commitments
      and ContingenciesStockholders'
      EquityPreferred
      stock, undesignated, $.001 par value, 3,000,000 shares authorized, none
      issued or outstanding
              
              
              -
              
              
              
              -Common
      stock, $.001 par value, 200,000,000 shares authorized, 28,197,106 shares
      issued at March 31, 2009 and December 31, 2008
              
              
              28
              
              
              
              28Shares
      held in treasury, 19,924 at March 31, 2009
              
              
              (6
              )
              
              
              -Additional
      paid-in capital
              
              
              34,845
              
              
              
              34,826Accumulated
      deficit
              
              
              (30,727
              )
              
              
              (30,842
              )Total
      Stockholders' Equity
              
              
              4,140
              
              
              
              4,012Total
      Liabilities and Stockholders' Equity
              
              $
              23,539
              
              
              $
              24,661





The Notes
to Condensed Consolidated Financial Statements are an integral part of these
statements


3




GVI
Security Solutions, Inc.


Condensed
Consolidated Statements of Operations


(unaudited)


(In
thousands, except per share amounts)




Three Months Ended
                                March 31,2009
                              
                              
                              2008Revenues
                              
                              $
                              10,439
                              
                              
                              $
                              11,347Cost
      of Revenues
                              
                              
                              7,459
                              
                              
                              
                              7,916Gross
      Profit
                              
                              
                              2,980
                              
                              
                              
                              3,431Selling,
      General and Administrative Expenses
                              
                              
                              2,680
                              
                              
                              
                              2,695Operating
      Income
                              
                              
                              300
                              
                              
                              
                              736Interest
      Expense
                              
                              
                              113
                              
                              
                              
                              196Income
      before income taxes
                              
                              
                              187
                              
                              
                              
                              540Income
      Tax Expense
                              
                              
                              71
                              
                              
                              
                              210Net
      Income
                              
                              $
                              116
                              
                              
                              $
                              330Basic
      income per common share:Net
      income per common share
                              
                              $
                              0.00
                              
                              
                              $
                              0.01Weighted average common shares
      outstanding
                              
                              
                              28,182,848
                              
                              
                              
                              28,147,106Diluted
      income per common share:Net
      income per common share
                              
                              $
                              0.00
                              
                              
                              $
                              0.01Weighted
      average common shares outstanding
                              
                              
                              28,726,284
                              
                              
                              
                              33,806,689
  The Notes
to Condensed Consolidated Financial Statements are an integral part of these
statements


4


GVI
Security Solutions, Inc.


Condensed
Consolidated Statements of Cash Flows


(unaudited)


(In
thousands)




Three Months Ending
                                      March 31,2009
                                    
                                    
                                    2008Cash
      Flows Used In Operating ActivitiesNet
      Income
                                    
                                    $
                                    116
                                    
                                    
                                    $
                                    330Adjustments
      to Reconcile Net Income to net cash used In Operating
      Activities:Depreciation
      and amortization
                                    
                                    
                                    22
                                    
                                    
                                    
                                    46Amortization
      of deferred loan origination fee
                                    
                                    
                                    8
                                    
                                    
                                    
                                    8Compensation
      costs and expenses for stock and options issued
                                    
                                    
                                    19
                                    
                                    
                                    
                                    149Changes
      in Assets and LiabilitiesAccounts
      receivable, net
                                    
                                    
                                    (148
                                    )
                                    
                                    
                                    (575
                                    )Inventory
                                    
                                    
                                    1,215
                                    
                                    
                                    
                                    (1,686
                                    )Prepaid
      and other current assets
                                    
                                    
                                    (3
                                    )
                                    
                                    
                                    (332
                                    )Other
      Assets, non-current
                                    
                                    
                                    (7
                                    )
                                    
                                    
                                    -Deferred
      tax assets and liabilities, net
                                    
                                    
                                    34
                                    
                                    
                                    
                                    197Accounts
      payable
                                    
                                    
                                    (1,827
                                    )
                                    
                                    
                                    1,003Accrued
      expenses
                                    
                                    
                                    (125
                                    )
                                    
                                    
                                    (306
                                    )Net
      cash used in operating activities
                                    
                                    
                                    (696
                                    )
                                    
                                    
                                    (1,166
                                    )Cash
      Flows Used In Investing ActivitiesPurchase
      of property and equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (93
                                    )Net
      Cash Used In Investing Activities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (93
                                    )Cash
      Flows Provided by Financing ActivitiesIssuance
      of common stock
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4Payments
      for purchase of treasury stock
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    -Net
      proceeds from revolving credit facility
                                    
                                    
                                    709
                                    
                                    
                                    
                                    1,449Principal
      payments of capitalized lease obligations
                                    
                                    
                                    (6
                                    )
                                    
                                    
                                    (20
                                    )Net
      Cash Provided by Financing Activities
                                    
                                    
                                    697
                                    
                                    
                                    
                                    1,433Net
      increase in cash and equivalents
                                    
                                    
                                    1
                                    
                                    
                                    
                                    174Cash
      and equivalents, beginning of period
                                    
                                    
                                    46
                                    
                                    
                                    
                                    313Cash
      and equivalents, end of period
                                    
                                    $
                                    47
                                    
                                    
                                    $
                                    487SUPPLEMENTARY
      CASH FLOW INFORMATIONCash
      paid for interest
                                    
                                    $
                                    113
                                    
                                    
                                    $
                                    195Cash
      paid for income taxes
                                    
                                    
                                    3
                                    
                                    
                                    
                                    4





The Notes
to Condensed Consolidated Financial Statements are an integral part of these
statements


5


GVI
Security Solutions, Inc.


Notes
to Condensed Consolidated Financial Statements (unaudited)


Three
Months Ended March 31, 2009 and 2008





NOTE
1 ~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature
of Business





GVI
Security Solutions (“GVI” or “Company”) provides video surveillance and security
solutions products, incorporating a complete line of video surveillance and
detection systems, to the homeland security, professional and
business-to-business market segments.  The Company provides a strong
combination of closed circuit televisions (CCTVs), digital video recorders
(DVRs), software systems and networking products that enhance life safety for
both government agencies and the private sector.




The
Company’s customers include distributors and system integrators that specialize
in video surveillance and security products and services, government agencies
and private sector businesses.





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial information and with the requirements of Form 10-Q of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. Interim
results are not necessarily indicative of results for a full year. In the
opinion of management, all adjustments considered necessary for a fair
presentation of the financial position and the results of operations and cash
flows for the interim periods have been included.





These
condensed consolidated financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2008.





Principles
of Consolidation





The
accompanying condensed consolidated financial statements include the accounts of
GVI Security Solutions, Inc., and its wholly-owned subsidiary. All intercompany
transactions, balances and profits have been eliminated.





Revenue
Recognition





The
Company’s primary source of revenue is from sales of its
products.  The Company recognizes revenue when the sales process is
deemed complete and associated revenue has been earned. The Company’s policy is
to recognize revenue when products have been shipped, risk of loss and title to
the product transfers to the customer, the selling price is fixed and
determinable and collectibility is reasonably assured.  Net sales is
comprised of gross revenue less expected returns, trade discounts and customer
allowances, which include costs associated with off-invoice mark downs and other
price reductions, as well as trade promotions. Related incentive costs are
recognized at the later of the date on which the Company recognizes the related
revenue or the date on which the Company offers the incentive.





The
Company allows customers to return defective products when they meet certain
established criteria as outlined in its sales terms and conditions. It is the
Company’s practice to regularly review and revise, when deemed necessary, its
estimates of sales returns, which are based primarily on actual historical
return rates. The Company records estimated sales returns as reductions to
sales, cost of sales, and accounts receivable and an increase to
inventory.  Returned products which are recorded as inventory are
valued based upon the amount the Company expects to realize upon its subsequent
disposition. The Company considers the physical condition and marketability of
the returned products as major factors in estimating realizable value. Actual
returns, as well as realized values on returned products, may differ
significantly, either favorably or unfavorably, from Company estimates if
factors such as customer inventory levels or competitive conditions differ from
estimates and expectations and, in the case of actual returns, if economic
conditions differ significantly from Company estimates and
expectations.




6


At the
time revenue is recognized, the Company also records reductions to revenue for
customer incentive programs in accordance with the provisions of Emerging Issue
Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given from a
Vendor to a Customer (Including a Reseller of the Vendor’s
Products).”  Such incentive programs include cash and volume
discounts, price protection, promotional, cooperative and other advertising
allowances.  For those incentives that require the estimation of sales
volumes or redemption rates, such as for volume rebates, the Company uses
historical experience and internal and customer data to estimate the sales
incentive at the time the revenue is recognized.  In the event that
the actual results of these items differ from the estimates, adjustment to the
sales incentive accruals would be recorded.




Inventory





Inventory
is stated at the lower of cost (first-in, first-out method) or market and
consists of goods held for resale and parts used for repair work. Reserves are
recorded for slow-moving, obsolete, nonsaleable or unusable items based upon a
product-level review, in order to reflect inventory balances at their net
realizable value. Inventory reserve balances at March 31, 2009 and December 31,
2008 were approximately $2,140,000 and $2,251,000, respectively.





Advertising





Advertising
costs are expensed as incurred.  Certain advertising costs, which
included various promotional incentives and trade show participation, for the
three months ended March 31, 2009 and 2008 were reimbursed by Samsung in the
form of marketing incentives and partial reimbursement for trade show
participation. Advertising costs, net of reimbursements, during the three months
ended March 31, 2009 and 2008 were $4,000 and $46,000,
respectively.





Income
Taxes




Income
taxes consist of taxes currently payable plus deferred taxes related primarily
to differences between the basis of property and equipment, inventory, and
accounts receivable for financial and income tax reporting.  Deferred
taxes represent the future tax return consequences of those differences, which
will be taxable or deductible when the assets and liabilities are recovered or
settled.




Deferred
tax liabilities and assets are classified as current or noncurrent based on the
classification of the related asset or liability for financial reporting, or
according to the expected reversal date of temporary differences not related to
an asset or liability for financial reporting.  Also, a valuation
allowance is used, if necessary, to reduce deferred tax assets by the amount of
any tax benefits that are not expected to be realized in the future based on
available evidence.





Credit
Risk Concentration




During
the three months ended March 31, 2009, two customers accounted for $1,612,000
(16%) and $1,197,000 (12%), respectively, of the Company’s sales. During the
three months ended March 31, 2008, two customers accounted for $2,436,000 (21%)
and $1,553,000 (14%), respectively, of the Company’s sales.  The two
significant customers noted above comprised $1,402,000 (19%) and $809,000 (11%),
respectively, of Company’s total outstanding accounts receivable balance at
March 31, 2009. As of December 31, 2008, the two significant customers comprised
$1,772,000 (22%) and $985,000 (12%), respectively, of Company’s total
outstanding accounts receivable balance.





International
sales accounted for approximately 40% and 31% of the Company's sales during the
three months ended March 31, 2009 and 2008, respectively.  All
international sales took place in Latin America and Canada.  During
the three months ended March 31, 2009 and 2008, approximately 21% and 8% of the
Company’s sales took place in Mexico, respectively.





The
Company performs ongoing credit evaluations of its customers and generally
requires no collateral from them.





Use
of Estimates





The
preparation of 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 disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.  Significant estimates include those that relate to the
valuation of inventory, accounts receivable, certain accruals and liabilities
and the useful lives of property and equipment.


7




Earnings
per Share





Statement
of Financial Accounting Standards No. 128, "Earnings per Share", requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS"). Basic earnings (loss) per share is computed by dividing
earnings (loss) available to common stockholders by the weighted average number
of common shares outstanding during the period.





Diluted
earnings per share reflects the potential dilution, using the treasury stock
method, that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. In computing
diluted earnings per share, the treasury stock method assumes that outstanding
options and warrants are exercised and the proceeds are used to purchase common
stock at the average market price during the period.  Options and
warrants will have a dilutive effect under the treasury stock method only when
the average market price of the common stock during the period exceeds the
exercise price of the options and warrants.





The
following is a reconciliation of the calculation of basic and diluted earnings
per share for the three months ended March 31, 2009 and 2008.





Three Months EndedMarch 31,2009
                      
                      
                      2008NumeratorNet
      income, as reported
                      
                      $
                      116
                      
                      
                      $
                      330DenominatorWeighted
      average common shares outstanding
                      
                      
                      28,183
                      
                      
                      
                      28,147Effect
      of dilutive securities:Warrants
                      
                      
                      398
                      
                      
                      
                      1,498Common
      stock options
                      
                      
                      145
                      
                      
                      
                      4,162Weighted
      average common shares and dilutive securities outstanding
                      
                      
                      28,726
                      
                      
                      
                      33,807Earnings
      per share – basicNet
      income, as reported
                      
                      $
                      0.00
                      
                      
                      $
                      0.01Earnings
      per share – dilutiveNet
      income, as reported
                      
                      $
                      0.00
                      
                      
                      $
                      0.01




Options
and warrants to purchase approximately 659,000 and 885,000 shares, respectively,
of common stock at various prices exceeding $0.29 per share were outstanding
during the three months ended March 31, 2009 but were not included in the
computation of diluted earnings per share for this period because the respective
options' and warrant exercise price were greater than the average market price
of the common shares during this period, and their effect would be anti-dilutive
Options and warrants to purchase approximately 149,000 and 435,000 shares,
respectively, of common stock at various prices exceeding $0.89 per share were
outstanding during the three months ended March 31, 2008 but were not included
in the computation of diluted earnings per share for this period because the
respective options' and warrant exercise price were greater than the average
market price of the common shares during this period, and their effect would be
anti-dilutive.




Stock-Based
Compensation





The
Company periodically issues stock options and warrants to employees and
non-employees in capital raising transactions, for services and for financing
costs.  The Company adopted SFAS No. 123R effective January 1, 2006, and is
using the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No. 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of SFAS No. 123R for all awards granted to employees prior to
the effective date of SFAS No. 123R that remain unvested on the effective
date.  The Company accounts for stock option and warrant grants issued
and vesting to non-employees in accordance with EITF No. 96-18: "Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.




8


The
Company uses the Black-Scholes option pricing model to estimate the fair value
of warrants and option awards with the following weighted average assumptions
for the period indicated:





Three Months Ended
                          March 31,2009
                        
                        
                        2008Dividend
      yield
                        
                        
                        -
                        
                        
                        
                        -Risk-free
      factors
                        
                        
                        4.0
                        %
                        
                        
                        4.0
                        %Volatility
      factors
                        
                        
                        63
                        %
                        
                        
                        63
                        %Option
      Lives in Years
                        
                        
                        6.0
                        
                        
                        
                        6.0





Recent
Accounting Pronouncements





In
December 2007, the FASB issued Statement 141R, “Business Combinations” (“SFAS
141R”). SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a
business to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at fair
value. SFAS 141R also requires transactions costs related to the business
combination to be expensed as incurred. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The effective date, as well as the adoption date for the Company was
January 1, 2009. Although SFAS 141R may impact the Company’s reporting in future
financial periods, the Company has have determined that the standard will not
have any impact on the Company’s historical consolidated financial statements at
the time of adoption.





In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”), which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142. This pronouncement
requires enhanced disclosures concerning a company’s treatment of costs incurred
to renew or extend the term of a recognized intangible asset. FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The Company has determined that the standard will not have a
material impact on our consolidated financial statements.





In March
2008, the FASB issued statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133”   (“SFAS 161”). SFAS 161 requires entities that use
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives.  SFAS 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of SFAS 133 have been applied, and the
impact that hedges have on an entity’s financial position, financial
performance, and cash flows.  The Company adopted the provisions of
SFAS 161 effective January 1, 2009.  Such adoption has  not
required  any additional disclosure by the Company.





In
January 2009, the FASB released Proposed Staff Position SFAS 107-b and
Accounting Principles Board Opinion No. 28-a, “Interim Disclosures about Fair
Value of Financial Instruments” (“SFAS 107-b” and “APB 28-a”).  The
proposal amends FASB Statement No. 107, “Disclosures about Fair Values of
Financial Instruments,” to require disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements.  The proposal also amends APB Opinion No. 28, “Interim
Financial Reporting,” to require those disclosures in all interim financial
statements.  This proposal is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009.   The Company plans to adopt SFAS 107-b and
APB 28-a and provide the additional disclosure requirements for the second
quarter of 2009.





In March
2009, the FASB released Proposed Staff Position SFAS 157-e, “Determining Whether
a Market Is Not Active and a Transaction Is Not Distressed” (“SFAS
157-e”).  This proposal provides additional guidance in determining
whether a market for a financial asset is not active and a transaction is not
distressed for fair value measurement purposes as defined in SFAS 157, “Fair
Value Measurements.”  SFAS 157-e is effective for interim periods
ending after June 15, 2009, but early adoption is permitted for interim periods
ending after March 15, 2009.  The Company plans to adopt the
provisions of SFAS 157-e during the second quarter of 2009, but does not believe
this guidance will have a significant impact on the Company’s financial
position, cash flows, or disclosures.




9


In March
2009, the FASB issued Proposed Staff Position SFAS 115-a, SFAS 124-a, and EITF
99-20-b, “Recognition and Presentation of Other-Than-Temporary
Impairments.”  This proposal provides guidance in determining whether
impairments in debt securities are other than temporary, and modifies the
presentation and disclosures surrounding such instruments.  This
Proposed Staff Position is effective for interim periods ending after June 15,
2009, but early adoption is permitted for interim periods ending after March 15,
2009.  The Company plans to adopt the provisions of this Proposed
Staff Position during the second quarter of 2009, but does not believe this
guidance will have a significant impact on the Company’s financial position,
cash flows, or disclosures.




Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.




NOTE
2 ~ CREDIT FACILITY





On
November 20, 2007, the Company entered into a Credit and Security Agreement with
Wells Fargo Bank, National Association under which the Company was provided with
a $15 million revolving credit facility. Borrowings under the credit facility
are secured by all of the Company’s assets.  Outstanding loans under the
credit facility will become due on November 20, 2010. The Company’s
borrowings under the credit facility as of March 31, 2009 and December 31, 2008,
were approximately $10.6 million and $9.9 million, respectively.  The
Company has classified the note as a long-term liability based upon management’s
current projections of available borrowing base and utilization.




Pursuant
to the Credit and Security Agreement, among other things:




·
            Interest
      currently accrues on outstanding loans under the credit facility, at the
      Company’s option, at a per annum rate equal to the prime rate from time to
      time in effect (3.25% at March 31, 2009) plus .25% percent, or a LIBOR
      rate selected by the Company, plus 2.75%.   Because the
      Company achieved Net Income (as defined in the Credit Agreement), in
      excess of $1,000,000 in the year ending December 31, 2008, the current
      interest rate reflects a reduction by .50% per annum from the original
      interest rate provided for under the Credit and Security
      Agreement.





·
            The
      Company pays Wells Fargo an annual fee equal to .25% of the average daily
      unused portion of the credit
facility.





·
            Aggregate
      loans (plus the face amount of letters of credit) outstanding under the
      credit facility at any time may not exceed the lesser of $15 million or a
      borrowing base equal to the sum of 85% of “Eligible Accounts” plus the
      lesser of (i) 60% of “Eligible Inventory” (valued at the lower of cost or
      market), (ii) 85% of the “Net Orderly Liquidation Value of Eligible
      Inventory,” and (iii) $8.5 million. As of March 31, 2009, the Company’s
      borrowing base supported approximately $13.8 million of
      borrowings.





·
            The
      Company will be required to pay a prepayment fee to Wells Fargo if the
      credit facility is terminated prior to maturity. Such fee is $150,000 if
      the credit facility is terminated prior to November 20, 2009 and $37,500
      if the credit facility is terminated after November 20,
    2009.





·
            The
      Company is required to comply with a number of affirmative, negative and
      financial covenants. Among other things, these covenants restrict the
      Company’s ability to pay dividends, requires the Company to achieve
      minimum quarterly Net Income as set forth in the Credit Agreement, and
      requires the Company to maintain a minimum Debt Service Coverage Ratio (as
      defined in the Credit Agreement) as of the last day of each quarter of not
      less than 1.25 to 1.0.  As of March 31, 2009, the Company was in
      compliance with all such covenants.




10


NOTE
3 ~CAPITALIZED LEASES





The
Company has entered into separate capital lease obligations in conjunction with
the acquisition of warehouse racking and office furniture. These assets have
original capitalized values of $519,000, and have payment terms ranging from 48
to 60 months.





Future
minimum lease payments under noncancelable capital lease obligations at March
31, 2009 were as follows ($ in thousands):




2009
                    
                    
                    6Total
      payments
                    
                    
                    6Less
      amounts relating to interest
                    
                    
                    -Total
      capital lease obligations
                    
                    
                    6Less
      current portion
                    
                    
                    6Capital
      lease obligations, noncurrent
                    
                    $
                    -





NOTE
4 ~ INCOME TAXES





The
reconciliation of the federal statutory rate to the effective income tax rate
applicable to income (loss) from continuing operations is as
follows:





Three Months Ended
                    March 31:2009
                  
                  
                  2008US
      Statutory tax rate – provision (benefit)
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %Increases
      (decreases) resulting from:State
      income taxes
                  
                  
                  3.1
                  
                  
                  
                  1.5Changes
      in A/R & inventory reserves
                  
                  
                  0.0
                  
                  
                  
                  0.0Change
      in Valuation Allowance
                  
                  
                  (2.5
                  )
                  
                  
                  0.6Other
      – net
                  
                  
                  3.6
                  
                  
                  
                  2.9Effective
      income tax rate
                  
                  
                  38.2
                  %
                  
                  
                  39.0
                  %





The
Company records income taxes using the asset and liability approach, whereby
deferred tax assets, net of valuation allowances, and liabilities are recorded
for the future tax consequences of temporary differences between financial
statement and tax bases of assets and liabilities and for the benefit of net
operating loss carry forwards.





The
Company incurred significant operating losses during the three years prior to
2007, which generated net operating loss carry-forwards which may be available
for future utilization. Internal Revenue Code Section 382 places a limitation on
the utilization of Federal net operating loss and other credit carry-forwards
when an ownership change, as defined by the tax law,
occurs.  Generally, this occurs when a greater than 50 percentage
point change in ownership occurs. In October 2006, as a result of the completion
of the Company’s private placement transaction, the investors in the private
placement as a group became the beneficial owners of approximately 96% of the
Company’s outstanding shares, after consideration of the conversion of
convertible promissory notes issued to those investors in conjunction with the
transaction. Accordingly, the actual utilization of net operating loss
carry-forwards and other deferred tax assets for tax purposes will be limited
annually under Code Section 382 to a percentage of the fair market value of the
Company at the date of this ownership change, and this effect has reduced the
amount of these loss carry-forwards which the Company will be able to utilize to
offset against future taxable income. As a result, at December 31, 2008,
the Company has a federal net operating loss carry-forward of approximately $2.1
million expiring 2026.  Approximately $0.6 million of the federal net
operating loss carry-forward is available for utilization in
2009.  The remaining $1.5 million can be utilized at a rate of
approximately $89,000 annually over the following 17 years ending
2026.  A partial valuation allowance has been provided against the net
deferred tax assets, due to the uncertainty of the Company’s ability to generate
long-term taxable income, particularly as it relates to the current economic
environment.  The company expects to reduce its valuation allowance if
and when it believes that it is more likely than not that it will be
realized.




11


Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”)
—an interpretation of FASB Statement No. 109, Accounting for Income Taxes.” The
Interpretation addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures. At the date of adoption, and as of December 31,
2008, the Company does not have a liability for unrecognized tax
benefits.





The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for five years after 2002. During the periods open to
examination, the Company has net operating loss and tax credit carry forwards
for U.S. federal and state tax purposes that have attributes from closed
periods. Since these NOLs and tax credit carry forwards may be utilized in
future periods, they remain subject to examination.





The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. As of March  31, 2009, the Company had no
accrued interest or penalties related to uncertain tax positions.





NOTE
5 ~ COMMITMENTS & CONTINGENCIES





General





Sales to
certain consumers of video surveillance and other security products may be
subject to sales tax requirements and possible audits by state taxing
authorities.  The Company records its estimated sales tax liability
and includes that amount as an accrued obligation until paid.





The
Company is also party to other disputes in the normal course of business.
Management believes the ultimate resolution of such disputes will not have a
material effect on the financial statements.





Lease
and Rents





The
Company leases warehouse and office space under an operating lease agreement
which expires on September 30, 2009. Under the terms of the lease, the Company
paid no rent for six months, and then pays monthly rent of $25,704 for the
remainder of the sixty-six month lease. The Company records rent on a
straight-line basis over the life of the lease and records the difference
between amounts paid and expense recorded as a deferred lease
liability.





The
minimum annual rentals under the non-cancelable lease for the periods subsequent
to March 31, 2009 are as follows ($ in thousands):





Years
      Ending December 31:
                    
                    Amount2009
                    
                    
                    154$
                    154





Vendor
Agreement





On
October 2, 2006, the Company entered into a Distribution Agreement (“Agreement”)
with Samsung, under which the Company was granted the right to distribute
Samsung’s complete line of professional video surveillance and security products
in North, Central and South America (“Territory”) through December 31, 2010.
Pursuant to the Agreement, Samsung has agreed to a limited non-compete in the
Territory. In November 2008, the Distribution Agreement was amended to lower the
minimum amounts the Company is  required to purchase from
Samsung.  As amended, the Agreement provides for minimum annual
purchase amounts of $27 million, $25 million, $32.4 million, and $42 million for
the years ending December 31, 2007, 2008, 2009, and 2010, respectively. Samsung
may terminate the Agreement at any time if the Company does not achieve the
annual minimum purchase amounts, as well as upon the Company’s breach of any of
its other obligations thereunder. For the years ended December 31, 2007, and
December 31, 2008, the Company exceeded its minimum purchasing commitment under
the agreement. For the years ended December 31, 2007 and December 31, 2008, the
Company purchased approximately $28 million and $26 million respectively under
the Distributorship Agreement with Samsung.  During the three months
ended March 31, 2009, the Company had purchased approximately $5.7 million under
the Distributor Agreement with Samsung.   The Company does not
currently expect to meet its minimum purchase commitment under the agreement for
the year ending December 31, 2009, and there is no assurance that Samsung will
amend the agreement to enable the Company to meet such commitment as it has in
the past.




12


Samsung
has established a credit limit, currently in the amount of approximately $10
million, under which the Company purchases products.  The Company must
pay in advance of shipment when the credit limit has been met or
exceeded.  As of March 31, 2009, $5.7 million was due to Samsung under
this agreement.




NOTE
6 ~ 2004 STOCK INCENTIVE PLAN





In
February 2004, the Company adopted its 2004 Long-Term Stock Plan and reserved
118,798 shares of common stock for issuance thereunder.  In September
2006 the shares available under this Plan increased from 118,798 to 200,000, in
October 2006 the shares available were increased under this Plan to
5,900,000.  In July 2008, the Company adopted its 2008 Long-Term Stock
Plan and reserved 1,000,000 shares of common stock for issuance
thereunder.





A summary
of the status and activity of the Company’s stock options for the three months
ended March 31, 2009 is presented below:




Three
      Months EndedMarch 31, 2009Shares
                  
                  
                  WeightedAveExercisePriceOutstanding
      at January 1, 2009:
                  
                  
                  6,042,218
                  
                  
                  $
                  1.06Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  100,000
                  
                  
                  $
                  0.80Outstanding
      at March 31, 2009:
                  
                  
                  5,942,218
                  
                  
                  $
                  1.07Options
      Exercisable at March 31, 2009:
                  
                  
                  4,685,229
                  
                  
                  $
                  1.27





The
aggregate intrinsic values of outstanding and exercisable stock options at March
31, 2009 were approximately $475,523 and $386,363 respectively.





The
following table summarizes information about stock options outstanding as of
March 31, 2009:




Outstanding
      Options
                  
                  Exercisable
      OptionsExercise
                    Prices
                  
                  Shares
                    Outstanding
                    at
      March 31,
                    2009
                  
                  Weighted-average
                    Remaining
                    Contractual
      Life
                  
                  Number
                    Outstanding
      at
                    March
      31, 2009$
                  0.20
                  
                  
                  5,283,590
                  
                  7.6
      years
                  
                  
                  4,292,917.46
                  
                  
                  110,000
                  
                  4.3
      years
                  
                  
                  36,667.60
                  
                  
                  300,000
                  
                  2.9
      years
                  
                  
                  231,249.80
                  
                  
                  100,000
                  
                  8.8
      years
                  
                  
                  24,509.95
                  
                  
                  100,000
                  
                  8.8
      years
                  
                  
                  51,25915.93
                  
                  
                  4,637
                  
                  4.3
      years
                  
                  
                  4,63742.50
                  
                  
                  2,000
                  
                  6.0
      years
                  
                  
                  2,00075.00
                  
                  
                  13,366
                  
                  5.8
      years
                  
                  
                  13,366>
      130.00
                  
                  
                  28,625
                  
                  4.9
      years
                  
                  
                  28,6255,942,218
                  
                  7.2
      years
                  
                  
                  4,685,229




13







There
were no stock options exercised during the three months ended March 31, 2009.
The Company recognized compensation expense from the vesting of issued stock
options of approximately $19,000 for the three months ended March 31, 2009, and
had estimated future compensation expense from these stock options of
approximately $110,000 at March 31, 2009 which will be recognized over the
remaining estimated weighted useful life of 13 months.





NOTE
7 ~ WARRANTS





A summary
of the activity and status of the Company’s warrants for the three months ended
March 31, 2009 is presented below.





Three
      Months Ended
                        March
      31, 2009Shares
                      
                      
                      Weighted
                        Ave
                        Exercise
                        PriceOutstanding
      at January 1, 2009:
                      
                      
                      2,709,592
                      
                      
                      $
                      4.67Granted
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at March 31, 2009
                      
                      
                      2,709,592
                      
                      
                      $
                      4.67Exercisable
      at March 31, 2009:
                      
                      
                      2,634,592
                      
                      
                      $
                      4.78





The
aggregate intrinsic value of outstanding warrants at March 31, 2009 was
approximately $164,000.





A summary
of the Company’s outstanding warrants at March 31, 2009 is as
follows:





Description
                                            
                                            Shares
                                            
                                            
                                            Approx.
                                              Remaining
                                              Term
                                              (Years)
                                            
                                            
                                            Exercise PriceLaurus
      Master Fund
                                            
                                            
                                            26,800
                                            
                                            
                                            
                                            2.3
                                            
                                            
                                            $30.00Laurus
      finder’s fee
                                            
                                            
                                            1,880
                                            
                                            
                                            
                                            2.2
                                            
                                            
                                            $175.00ESI
                                            
                                            
                                            60,000
                                            
                                            
                                            
                                            2.6
                                            
                                            
                                            $75.00Rapor
      shareholders
                                            
                                            
                                            27,079
                                            
                                            
                                            
                                            2.6
                                            
                                            
                                            $152.00Oct.
      2004 bridge financing
                                            
                                            
                                            15,333
                                            
                                            
                                            
                                            0.6
                                            
                                            
                                            $75.00Consultant
                                            
                                            
                                            3,500
                                            
                                            
                                            
                                            0.6
                                            
                                            
                                            $175.00
      – $ 250.00Consulting
      fee paid to director
                                            
                                            
                                            1,825,000
                                            
                                            
                                            
                                            0.5
                                            
                                            
                                            $0.20Consultant
                                            
                                            
                                            100,000
                                            
                                            
                                            
                                            3.0
                                            
                                            
                                            $0.60Consultant
                                            
                                            
                                            150,000
                                            
                                            
                                            
                                            3.5
                                            
                                            
                                            $0.82Consultant
                                            
                                            
                                            300,000
                                            
                                            
                                            
                                            1.8
                                            
                                            
                                            $1.15Consultant
                                            
                                            
                                            50,000
                                            
                                            
                                            
                                            4.3
                                            
                                            
                                            $0.60Consultant
                                            
                                            
                                            150,000
                                            
                                            
                                            
                                            4.4
                                            
                                            
                                            $0.852,709,592




14




NOTE
8 ~ STOCK REPURCHASE PLAN





On
December 3, 2008, the Company  announced that its Board of Directors
had authorized a share repurchase program for the repurchase of up to $1 million
of common stock.  The Company’s senior lender has provided its consent
to the repurchase of up to $250,000 of common stock.  During the first
quarter of 2009, the Company repurchased 19,924 shares of common stock at a cost
of approximately $5,600.  At March 31, 2009, the Company had remaining
Board authorization to repurchase up to approximately $994,400 of common
stock.




15




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





Statements
contained in this Quarterly Report on Form 10-Q, other than the historical
financial information, constitute “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. All such
forward-looking statements involve known and unknown risks, uncertainties or
other factors which may cause actual results, performance or achievement of the
Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Primary
risk factors include, but are not limited to: reliance on primary supplier;
reliance on two key customers; changes in the overall economy; credit limits
imposed by primary supplier; outstanding indebtedness; rapid change in
technology; the number and size of competitors in its markets; effective
integration of recently acquired operations and personnel; expansion risks;
effective internal processes and systems; the ability to attract and retain high
quality employees; law and regulatory policy; the mix of products and services
offered in the Company's target markets; and other risks described herein and in
the Company’s 2008 Annual Report on Form 10-K.




The following discussion of results of
operations and financial condition is based upon, and should be read in
conjunction with, our consolidated condensed financial statements and
accompanying notes thereto included elsewhere herein.





Summary
of Our Business





We
provide video surveillance products and systems for a variety of applications
and for use in numerous markets including educational institutions, retail
stores and warehouses, gaming establishments, theme parks, public works
projects, bank branches and offices, and many other homeland security
applications.





Our
product line includes cameras designed for specific applications, recording
systems, displays, management software and other necessary ancillary
products.  These products can be configured as a system that is
scalable as customer needs expand or become more complex in nature.





We
primarily target the middle market where a typical customer’s need is for a
system that incorporates from four cameras to ninety-four cameras in any one
location.  We offer a premium brand and a wide product range with an
attractive product feature set that is backed by a strong service and support
platform.  Our customers include distributors and system integrators
that specialize in the supply and/or installation of video surveillance and
other physical security products, such as access control and intrusion
detection.





We
represent Samsung Electronics as the primary distributor of their branded
security and surveillance products in the Americas. We also sell a line of
complementary products under the GVI brand in those
territories.  Samsung Electronics has been and continues to be our
primary supplier of the video security products that we distribute. In October
2006, we entered into a new agreement with Samsung under which we have been
granted the right to distribute Samsung’s complete line of professional video
surveillance and security products in North, Central and South America through
December 31, 2010. Samsung has agreed to a limited non-compete in these
territories.





In order
to serve our customers with timely delivery and after sales service, we operate
sales and distribution centers in Dallas, Texas, Mexico City, Mexico, Sao Paulo,
Brazil and Bogotá, Colombia.  We also operate a customer call center
in Dallas Texas.





Our
Products





Our suite
of video surveillance and integrated security solutions includes a full line of
cameras, which include motion detection, low-light and Infrared illuminated,
day/night and high resolution, waterproof and weather-resistant cameras, vandal
resistant domes; high-speed, remote-controlled dome cameras and casings; as well
as a complete range of lenses; all of which can be fully integrated into
existing security systems. Our full product line includes a range of displays;
real-time and time-lapse DVR’s, video transmission equipment; digital video
processors, switchers and video management systems; digital video recording
software; and hardware and software that enable intelligent video
surveillance.





16





Strategies





Our
objective is to provide our customers and partners with a wide range of security
products designed to install, operate and service with relative ease while
meeting the needs of the end user. Our goal is to provide our customers with
excellent service and superior technology at competitive prices.





We
believe that by delivering the highest levels of customer service along with
effective solutions for the markets that we address, we can strengthen our
reputation as a reliable and cost-effective provider in the electronic security
systems industry and develop customer loyalty. We strive to anticipate and meet
our customers’ needs by increasing the range of products and services we offer,
by entering into new business alliances and by pursuing acquisitions of
complementary businesses enabling us to offer new products and services. Our
goals include further developing our expertise and products in the security
video sector, as well as developing other security or ancillary products to
supplement and complement our existing product line.  However, there
can be no assurance that we will consummate any additional acquisitions or that
any business we acquire will be successful. In addition, the acquisition of a
business through the issuance of our securities will result in dilution to our
existing stockholders.





Distribution
and Marketing





We offer
our products and services through local, regional and national system
integrators and distributors who resell our products to professional security
providers. System integrators utilize our products to develop and install a
fully integrated security suite for end users. We also utilize regional sales
executives who often support sales across all of our product offerings. We use a
combination of our internal sales force and independent representatives to sell
our products to our customers.





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




NET
REVENUES





Net
revenues decreased approximately $908,000, or 8% to approximately $10.4 million
in the three months ended March 31, 2009 from approximately $11.3 million in the
three months ended March 31, 2008. The decrease in revenue reflects decreased
sales to distributors, integrators and installers of a variety of products
manufactured by Samsung Electronics as well as other manufacturers, generally as
a result of weakening economic conditions.





COST
OF GOODS SOLD





Totalcost of goods sold
decreased approximately $457,000 or 6% to approximately $7.4 million for the
three months ended March 31, 2009, from approximately $7.9 million in the three
months ended March 31, 2008. This decrease was primarily due to lower net
revenues.





As a
result of the changes described above in revenues and cost of goods sold, gross
profit for the three months ended March 31, 2009 decreased approximately
$451,000 to approximately $3.0 million from approximately $3.4 million for
the three months ended March 31, 2008, and gross profit as a percentage of
revenues decreased to approximately 28.5% for the three months ended March 31,
2009 compared with approximately 30.2% for the three months ended March 31,
2008.





SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES





Selling,
general, and administrative expenses decreased approximately $15,000, or 1%, to
approximately $2.7 million in the three months ended March 31, 2009 from
approximately $2.7 million in the three months ended March 31, 2008, as
follows:





Sales and Marketing.Sales and
marketing expenses increased approximately $68,000, or 3%, to approximately $1.5
million in the three months ended March 31, 2009 from approximately $1.4 million
in the three months ended March 31, 2008. The increase was primarily due to
increased personnel expense and an increase in expenses to operate international
offices.





General and Administrative.General and administrative expenses decreased approximately $83,000
during the three months ended March 31 2009 compared with the three months ended
March 31, 2008. The decrease was primarily due to expense for warrants issued to
a consulting firm during the three months ended March 31, 2008, with no similar
expense in the three months ended March 31, 2009.




17




INTEREST
EXPENSE





Net
interest expense for the three months ended March 31, 2009 decreased 42% to
approximately $113,000 from approximately $196,000 in the three months ended
March 31, 2008.  The decrease was primarily a result of lower interest
rate on the Wells Fargo credit facility for the three months ended March 31,
2009 as compared to the three months ended March 31, 2008.





INCOME
TAX EXPENSE





We
reflected a provision for federal, state and local income tax of approximately
$73,000 for the three months ended March 31, 2009, as compared to recording an
expense of approximately $210,000 for the three months ended March 31, 2008.
Provisions for tax recorded relates to both federal income taxes and state
franchise taxes that were estimated to be due in various states in which we are
licensed and transact business.  The company’s estimated effective tax
rate for the three months ended March 31, 2009 and March 31, 2008 was 38% and
39%, respectively.





NET
INCOME





As a
result of the items discussed above, we earned net income of approximately
$116,000 for the three months ended March 31, 2009 compared with net income of
approximately $330,000 for the three months ended March 31, 2008.





LIQUIDITY
AND CAPITAL RESOURCES




At March
31, 2009, we had cash and equivalents of approximately $47,000, a working
capital surplus of approximately $15.2 million, and an outstanding balance of
$10.6 million under the Wells Fargo revolving credit facility. In comparison, at
December 31, 2008, we had cash and equivalents of approximately $46,000, a
working capital surplus of approximately $14.2 million, and an outstanding
balance under the Wells Fargo revolving credit facility of approximately $9.9
million. Additionally, we had borrowing availability under the credit facility
of approximately $3.2 million at March 31, 2009, as compared with borrowing
availability of $4.7 million at December 31, 2008.




Cash
increased from $46,000 at December 31, 2008 to $47,000 at March 31, 2009
primarily as a result of (i) net borrowings under our revolving credit facility
of $887,000, (ii) net income of approximately $92,000, and (iii) a decrease of
approximately $1.0 million in inventory; offset by (i) a reduction of accounts
payable of approximately $1.5 million, and (ii) an increase in accounts
receivable of approximately $148,000.




Management
believe that cash generated from operations, together with borrowings available
under the credit agreement with Wells Fargo, will provide us with adequate
financing to fund operations and meet our cash requirements through the end of
2009.




$15
Million Wells Fargo Revolving Credit Facility




On
November 20, 2007, through our wholly-owned subsidiary GVI Security, Inc., we
entered into a Credit and Security Agreement with Wells Fargo Bank, National
Association under which we were provided with a $15 million revolving credit
facility.  Borrowings under the credit facility are secured by all of
our assets. Outstanding loans under the credit facility will become due on
November 20, 2010.




Pursuant
to the Credit and Security Agreement, among other things:




·
            Interest
      accrues on outstanding loans under the credit facility, at our option, at
      a per annum rate equal to the prime rate from time to time in effect
      (3.25% at March 31, 2009) plus .25% percent, or a LIBOR rate selected by
      us, plus 2.75%.   Because we achieved Net Income (as
      defined in the Credit and Security Agreement), in excess of $1,000,000 in
      the year ending December 31, 2008, the current interest rate reflects a
      reduction by .50% per annum from the original interest rate provided for
      under the Credit and Security
Agreement.





·
            We
      also pay Wells Fargo an annual fee equal to .25% of the average daily
      unused portion of the credit
facility.




18




·
            Aggregate
      loans (plus the face amount of letters of credit) outstanding under the
      credit facility at any time may not exceed the lesser of $15 million or a
      borrowing base equal to the sum of 85% of “Eligible Accounts” plus the
      lesser of (i) 60% of “Eligible Inventory” (valued at the lower of cost or
      market), (ii) 85% of the “Net Orderly Liquidation Value of Eligible
      Inventory,” and (iii) $8.5 million. In comparison, our Laurus borrowings
      could not exceed $10 million, with inventory based borrowings limited to
      $3.5 million.  As of March 31, 2009, the Company’s borrowing
      base supported approximately $13.8 million of borrowings, under the line
      of credit agreement, of which approximately $10.6 million was
      outstanding.





·
            We
      will be required to pay a prepayment fee to Wells Fargo if the credit
      facility is terminated prior to maturity. Such fee would be $150,000 if
      the credit facility is terminated prior to November 20, 2009 or $37,500 if
      the credit facility is terminated after November 20,
  2009.





·
            We
      are required to comply with a number of affirmative, negative and
      financial covenants. Among other things, these covenants restrict our
      ability to pay dividends, requires us to achieve minimum quarterly Net
      Income as set forth in the Credit Agreement, and requires us to maintain a
      minimum Debt Service Coverage Ratio (as defined in the Credit Agreement)
      as of the last day of each quarter of not less than 1.25 to
      1.0.  As of March 31, 2009, we were in compliance with all such
      covenants.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES




Our
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. To prepare these financial
statements, we must make estimates and assumptions that affect the reported
amounts of assets and liabilities. These estimates also affect our reported
revenues and expenses. Judgments must be made about the disclosure of contingent
liabilities as well. Actual results could be significantly different from these
estimates. We believe that the following discussion addresses the critical
accounting policies that are necessary to understand and evaluate our reported
financial results.





Revenue
Recognition





The
Company’s primary source of revenue is from sales of its
products.  The Company recognizes revenue when the sales process is
deemed complete and associated revenue has been earned. The Company’s policy is
to recognize revenue when products have been shipped, risk of loss and title to
the product transfers to the customer, the selling price is fixed and
determinable and collectibility is reasonably assured.  Net sales is
comprised of gross revenue less expected returns, trade discounts and customer
allowances, which include costs associated with off-invoice mark downs and other
price reductions, as well as trade promotions. Related incentive costs are
recognized at the later of the date on which the Company recognizes the related
revenue or the date on which the Company offers the incentive.





The
Company allows customers to return defective products when they meet certain
established criteria as outlined in its sales terms and conditions. It is the
Company’s practice to regularly review and revise, when deemed necessary, its
estimates of sales returns, which are based primarily on actual historical
return rates. The Company records estimated sales returns as reductions to
sales, cost of sales, and accounts receivable and an increase to
inventory.  Returned products which are recorded as inventory are
valued based upon the amount the Company expects to realize upon its subsequent
disposition. The Company considers the physical condition and marketability of
the returned products as major factors in estimating realizable value. Actual
returns, as well as realized values on returned products, may differ
significantly, either favorably or unfavorably, from Company estimates if
factors such as customer inventory levels or competitive conditions differ from
estimates and expectations and, in the case of actual returns, if economic
conditions differ significantly from Company estimates and
expectations.





At the
time revenue is recognized, the Company also records reductions to revenue for
customer incentive programs in accordance with the provisions of Emerging Issue
Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given from a
Vendor to a Customer (Including a Reseller of the Vendor’s
Products).”  Such incentive programs include cash and volume
discounts, price protection, promotional, cooperative and other advertising
allowances.  For those incentives that require the estimation of sales
volumes or redemption rates, such as for volume rebates, the Company uses
historical experience and internal and customer data to estimate the sales
incentive at the time the revenue is recognized.  In the event that
the actual results of these items differ from the estimates, adjustment to the
sales incentive accruals would be recorded.




19




Inventory





Inventory
is stated at the lower of cost (first-in, first-out method) or market and
consists of goods held for resale and parts used for repair work. Reserves are
recorded for slow-moving, obsolete, nonsaleable or unusable items based upon a
product-level review, in order to reflect inventory balances at their net
realizable value.





Advertising





Advertising
costs are expensed as incurred.  Certain advertising costs, which
includes various promotional incentives and trade show participation, are
reimbursed by Samsung in the form of marketing incentives and partial
reimbursement for trade show participation.





Long-Lived
Assets




The
acquisition of long-lived assets, including furniture and fixtures, office
equipment, plant equipment, leasehold improvements, computer hardware and
software and in-store fixtures, is recorded at cost and this cost is depreciated
over the asset’s estimated useful life. We continually evaluate whether events
and circumstances have occurred that indicate the remaining estimated useful
life of long-lived assets may warrant revision or that the remaining balance may
not be recoverable. These factors may include a significant deterioration of
operating results, changes in business plans or changes in anticipated cash
flows. When factors indicate that an asset should be evaluated for possible
impairment, we review long-lived assets to assess recoverability from future
operations using undiscounted cash flows. Impairments are recognized in earnings
to the extent that the carrying value exceeds fair value.




Income
Taxes




We
estimate and record a quarterly income tax provision in accordance with the
expected effective annual tax rate. As the year progresses, we continually
refine our estimate based upon actual events and earnings during the year. This
process may result in a change to our expected effective tax rate for the year.
When this occurs, we adjust income tax expense during the quarter in which the
change in estimate occurs so that the year-to-date provision equals the expected
effective annual tax rate.




For the
three month periods ended March 31, 2009 and 2008, income tax expense relates to
federal income tax along with state and local franchise taxes that are due to
various states and municipalities in which the Company is licensed and transacts
business.




Stock-Based
Compensation




In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 123R, “Share-Based Payment”.  This
statement requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. This statement
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership plans.
Effective January 1, 2006, we adopted the fair value recognition provisions
of SFAS 123R, using the modified prospective method. Under this method, the
provisions of SFAS 123R apply to all awards granted or modified after the date
of adoption and all previously granted awards not yet vested as of the date of
adoption.




Determining
the appropriate fair value model and calculating the fair value of stock-based
payment awards require the input of highly subjective assumptions, including the
expected life of the stock-based payment awards and stock price volatility. We
use the Black-Scholes option-pricing model to value compensation expense. The
assumptions used in calculating the fair value of stock-based payment awards
represent management’s best estimates, but the estimates involve inherent
uncertainties and the application of management judgment. As a result, if
factors change and we use different assumptions, our stock-based compensation
expense could be materially different in the future.




New
Accounting Pronouncements


In
December 2007, the FASB issued Statement 141R, “Business Combinations” (“SFAS
141R”). SFAS 141R replaces SFAS 141. SFAS 141R requires the acquirer of a
business to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at fair
value. SFAS 141R also requires transactions costs related to the business
combination to be expensed as incurred. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The effective date, as well as the adoption date for the Company was
January 1, 2009. Although SFAS 141R may impact our reporting in future financial
periods, we have determined that the standard will not have any impact on our
historical consolidated financial statements at the time of
adoption.




20




In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”), which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142. This pronouncement
requires enhanced disclosures concerning a company’s treatment of costs incurred
to renew or extend the term of a recognized intangible asset. FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. We have determined that the standard will not have a material
impact on our consolidated financial statements.





In March
2008, the FASB issued statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133”   (“SFAS 161”). SFAS 161 requires entities that use
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives.  SFAS 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of SFAS 133 have been applied, and the
impact that hedges have on an entity’s financial position, financial
performance, and cash flows.  We have adopted the provisions of SFAS
161 effective January 1, 2009, and no additional disclosures were required as a
result of such adoption.





In
January 2009, the FASB released Proposed Staff Position SFAS 107-b and
Accounting Principles Board (APB) Opinion No. 28-a, “Interim Disclosures about
Fair Value of Financial Instruments” (“SFAS 107-b” and “APB
28-a”).  This proposal amends FASB Statement No. 107, “Disclosures
about Fair Values of Financial Instruments,” to require disclosures about fair
value of financial instruments in interim financial statements as well as in
annual financial statements.  The proposal also amends APB Opinion No.
28, “Interim Financial Reporting,” to require those disclosures in all interim
financial statements.  This proposal is effective for interim periods
ending after June 15, 2009, but early adoption is permitted for interim periods
ending after March 15, 2009.  We plan to adopt SFAS 107-b and APB 28-a
and provide the additional disclosure requirements for the second quarter of
2009.





In March
2009, the FASB released Proposed Staff Position SFAS 157-e, “Determining Whether
a Market Is Not Active and a Transaction Is Not Distressed” (“SFAS
157-e”).  This proposal provides additional guidance in determining
whether a market for a financial asset is not active and a transaction is not
distressed for fair value measurement purposes as defined in SFAS 157, “Fair
Value Measurements.”  SFAS 157-e is effective for interim periods
ending after June 15, 2009, but early adoption is permitted for interim periods
ending after March 15, 2009.  We plan to adopt the provisions of SFAS
157-e during the second quarter of 2009, but do not believe this guidance will
have a significant impact on the Company’s financial position, cash flows, or
disclosures.





In March
2009, the FASB issued Proposed Staff Position SFAS 115-a, SFAS 124-a, and EITF
99-20-b, “Recognition and Presentation of Other-Than-Temporary
Impairments.”  This proposal provides guidance in determining whether
impairments in debt securities are other than temporary, and modifies the
presentation and disclosures surrounding such instruments.  This
Proposed Staff Position is effective for interim periods ending after June 15,
2009, but early adoption is permitted for interim periods ending after March 15,
2009.  We plan to adopt this Proposed Staff Position during the second
quarter of 2009, but do not believe this guidance will have a significant impact
on the Company’s financial position, cash flows, or disclosures.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.




Item
3.  Quantitative and Qualitative Disclosures About Market
Risk




Foreign Currency Exchange
Risk





Our
results of operations and cash flows are not subject in any material
respectto
fluctuations due to changes in foreign currency exchange
rates.   We do not currently have any foreign currency hedging
contracts in place, nor did we enter into any such contracts during the three
months ended March 31, 2009. To date, exchange rate fluctuations have had little
impact on our operating results and cash flows.


21


Interest Rate
Sensitivity




As
disclosed above, our loans with Wells Fargo bear interest at a fluctuating rate
of interest related to the “prime” and LIBOR rates in effect from time to
time.  Accordingly, increases in these rates will increase our
interest expense.   We do not use interest rate hedging contracts
to manage our exposure to changes in interest rates.




Item
4T.  Controls and Procedures.




Our
management has evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.




We do not
expect that our disclosure controls and procedures or internal control over
financial reporting will prevent all errors and all fraud.  A control
system, no matter how well conceived and operated, can provide only reasonable
assurance that the objectives of the system are met and cannot detect all
deviations.  Because of the inherent limitations in all control systems, no
evaluation of control can provide absolute assurance that all control issues and
instances of fraud or deviations, if any, within the Company have been
detected.




There
were no changes in our internal controls over financial reporting that occurred
during our most recently completed fiscal quarter that has materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.




PART
II.  OTHER INFORMATION




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




The
following table provides information about our monthly share repurchases for the
three months ended March 31, 2009:




ISSUER
PURCHASES OF EQUITY SECURITIES


Period
                    
                    Total
      Number of Shares Purchased
                    
                    
                    Average
      Price Paid per Share
                    
                    
                    Total
      Number of Shares Purchased as Part of Publicly Announced Plans or Programs
                    
                    
                    Approximate
      Dollar Value of Shares that May Yet Be Purchased Under the Plans or ProgramsJanuary
      1-31, 2009
                    
                    
                    0
                    
                    
                    
                    N/A
                    
                    
                    
                    0
                    
                    
                    $
                    1,000,000February
      1-28, 2009
                    
                    
                    5,397
                    
                    
                    $
                    .2859
                    
                    
                    
                    5,397
                    
                    
                    $
                    998,500March
      1-31, 2009
                    
                    
                    14,527
                    
                    
                    $
                    .2787
                    
                    
                    
                    14,527
                    
                    
                    $
                    994,000Total
                    
                    
                    19,924
                    
                    
                    $
                    .2807
                    
                    
                    
                    19,924
                    
                    
                    
                    N/A




On
December 3, 2008, we announced that our Board of Directors  authorized
a share repurchase program for the repurchase of up to $1 million of our common
stock.  Our senior lender has provided its consent to our repurchase
of up to $250,000 of common stock.  During the first quarter of 2009,
we repurchased 19,924 shares of common stock at a cost of approximately
$5,600.  At March 31, 2009, we had remaining Board authorization to
repurchase up to approximately $994,400 of common stock.




Item
6.  Exhibits.




Number
                
                Description31.1
                
                Certification
      of Steven Walin, Chief Executive Officer of the Registrant, pursuant to
      Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
      193431.2
                
                Certification
      of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant to
      Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
      193432.1
                
                Certification
      of Steven Walin, Chief Executive Officer of the Registrant, pursuant to
      Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
      193432.2
                
                Certification
      of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant to
      Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
      1934




22




SIGNATURES




Pursuant
to the requirements 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.




GVI
      SECURITY SOLUTIONS, INC.Date:  May
      14, 2009
              By:
              /s/ Joseph RestivoName:  Joseph
      Restivo
                Title:  Chief
      Financial Officer




23




EXHIBIT
INDEX




Number
                
                Description31.1
                
                Certification
      of Steven Walin, Chief Executive Officer of the Registrant, pursuant to
      Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
      193431.2
                
                Certification
      of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant to
      Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
      193432.1
                
                Certification
      of Steven Walin, Chief Executive Officer of the Registrant, pursuant to
      Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
      193432.2
                
                Certification
      of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant to
      Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
      1934





24